Analyst Conference Call Summary

semiconductors

conference date: November 12, 2015 @ 1:30 PM Pacific Time
for quarter ending: October 25, 2015 (fourth quarter, Q4 fiscal 2015)

Forward-looking statements

Overview: Mediocre quarter, but both orders and revenue were up y/y. Results came in at midpoint of guidance.

Basic data (GAAP) :

Revenues were $2.37 billion, down 5% sequentially from $2.49 billion and up 5% from $2.26 billion in the year-earlier quarter.

Net income was $336 million, up 2% sequentially from $329 million and up 31% from $ million year-earlier.

EPS (diluted earnings per share) were $0.28, up 4% sequentially from $0.27 and up 33% from $0.21 year-earlier.

Guidance:

For Q1 fiscal 2016 revenue expected down 2% to 9% sequentially. Non-GAAP EPS between $0.23 and $0.27. There will be two weeks of scheduled shutdown in the quarter.

Conference Highlights:

CEO Gary Dickerson said "We have positioned the company for sustainable profitable growth and we are winning share, growing our service business and expanding our available market.” Breakthroughs were made this year in etch, atomic layer deposition, and selective materials removal.

Industry-wide wafer fab equipment spending was about flat in 2015 vs. 2014. When the year began the consensus was it would be up 5% to 10%. Investment in memory equipment, however, was the highest in 7 years. 80% of NAND spending will be on 3D. In foundries the big spend item in 2016 will be 10 nm equipment. Believes Applied Materials will continue to gain share in 2016, which should be a healthy-demand year.

Posted first revenue for a new e-beam product.

Non-GAAP numbers: net income $347 million, down 15% sequentially from $410 million, and up 3% from $338 million year-earlier. EPS $0.29, down 12% sequentially from $0.33, and up 7% from $0.27 year-earlier. 42.2% gross margin.

The backlog was $3.14 billion, about flat sequentially from $3.10 billion. 55% was in Silicon Systems, 26% in Services, 16% in Display, and 3% in Solar.

GAAP gross margin was 40.9%, operating margin was 17.5%. The lower margins of new products are presenting challenges.

Silicon Systems Group (SSG) segment sales were $1.49 billion, down sequentially from $1.64 billion, but up from $1.43 billion year-earlier. Orders were $1.44 billion, up from $1.33 billion year earlier. Orders by type: Foundry 35%, DRAM 21%, Flash 31%, Logic and other 13%. Highest full year orders and revenue since 2007.

Applied Global Services (AGS) revenue was $637 million, down sequentially from $665 million but up from $592 million year earlier. Orders were $761 million.

Display segment revenue was $191 million, up sequentially from $151 million and about flat from $190 million year-earlier. New orders were $195 million.

Energy and Environmental Solutions (EES) [solar] revenue was $46 million, up sequentially from $39 million but down from $48 million year-earlier. New orders were $24 million.

Cash and equivalents (including long-term investments) balance ended at $5.95 billion, up sequentially from $3.70 billion. Cash flow from operating activities was $471 million. Capital expenditures were $53 million. $119 million was used for cash dividends. Long-term debt was up to $3.34 billion sequentially from $1.55 billion. $700 million was used to repurchase stock in the quarter. Non-cash share-based compensation was $46 million.

Cost of goods sold was $1.41 billion, leaving gross margin of $959 million. Operating expenses of $536 million consisted of: research and development $363 million; selling and marketing, $96 million; general and administrative $77 million. Leaving income from operations of $423 million. Interest and other expense net $26 million. Income tax $61 million.

Gross margin improvement is a priority for Applied Materials. It should improve in the back half of 2016

Q&A:

Gross margin in back half of 2016? It will result largely from a mix change. Foundry is our highest percentage of WFE, and should be stronger in the second half on the 10 nm transition.We could go up perhaps a couple of points.

Greenfield NAND vs. upgrades in 2016? We see 2015 V-NAND to be $150, in 2016 $350 or even $400. That is a combination of adds and conversions.

China in memory industry? Clearly there is a lot of activity in China, where we have a strong position. We have strong share with both Chinese and International counties. There are a lot of projects in the pipeline there. We've been there 30 years.

When foundry ramps again we have strong positions in transistor and interconnect, also in etch. We are winning at inflections.

M&A? We are very selective. We want to see leadership and financial return. The hurdle for us is very high.

Intel's cap ex statement about spending more in 2016, vs. your logic expectations? We don't have Intel's memory bucket classified in logic. We think logic will grow slightly next year. Smaller players may not spend more like Intel.

Share price down 30% last 12 months, management view on increasing shareholder value? Foundy is down relative to the mix. We have a lot of strengths when Foundry ramps again. The mix this year had more memory, with lower margins. At 10 nm there are big changes vs. 16 nm, so our share will grow. We are going to see growth going forward in many areas, including the service business.

We could be close to $1 billion in display in 2016, partly because some revenue that was in services will be moved to display. Customers are making major changes that we can help with.

What makes you think 2015 was not the new normal for foundry spending? You need to look at nodes. A lot of customers wanted FinFET instead of 20 nm. So equipment could be reused. But the transition to 10 nm involves a lot of interconnect, and 16 nm will be a long node, so won't be moved. Also there are a lot more steps at 10, which benefits us.

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