Analyst Conference Call Summary

semiconductors

conference date: February 18, 2016 @ 1:30 PM Pacific Time
for quarter ending: January 31, 2016 (first quarter, Q1 fiscal 2016)

Forward-looking statements

Overview: No revenue growth, but optimistic about 2016. Guidance for Q2 is strong.

Basic data (GAAP) :

Revenues were $2.26 billion, down 5% sequentially from $2.37 billion and down 4% from $2.36 billion in the year-earlier quarter.

Net income was $286 million, down 15% sequentially from $336 million and down 18% from $348 million year-earlier.

EPS (diluted earnings per share) were $0.25, down 11% sequentially from $0.28 and down 11% from $0.28 year-earlier.

Guidance:

For the second quarter of fiscal 2016, Applied expects net sales to be up 5 percent to 10 percent sequentially with a non-GAAP adjusted diluted EPS range of $0.30 to $0.34. To be led be 11% to 17% increase in silicon systems sales.

This outlook excludes known charges related to completed acquisitions of $0.04 per share.

Conference Highlights:

Dramatic technology changes are taking place in silicon and display, creating great opportunities for materials innovation for Applied. The investments in new products are turning into profitable growth. In EPI, PVD, RTP, and implant, Applied is leading. Etch and PVD are in a high growth mode.

Results in Q1 were slightly above expectations.

Believes 2016 wafer fab spending levels will be similar to 2015, but focused on the 10 nm inflection, particularly in the second half of the year. Mix shifts may favor Applied. NAND investment expected up 25%. DRAM investment expected down about 20% off the very high 2015 rate. China is a significant opportunity in 2016.

Believes 40% of 2016 revenue will come from new products, launched in last 3 years.

New order total was $2.28 billion, down 6% sequentially from $2.42 billion and flat from $2.27 billion year-earlier.

Shift to OLED displays should help Applied in that segment; expects y/y growth in 2016.

Non-GAAP numbers: net income $302 million, down 13% sequentially from $347 million, and down 11% from $338 million year-earlier. EPS $0.26, down 10% sequentially from $0.29, and down 4% from $0.27 year-earlier. 42.4% gross margin. 17.8% operating margin.

The backlog was $3.11 billion, down 1% sequentially from $3.14 billion. 51% was in Silicon Systems, 30% in Services, 16% in Display, and 3% in Solar.

GAAP gross margin was 40.6%, operating margin was 15.7%.

Silicon Systems Group (SSG) segment sales were $1.37 billion, down sequentially from $1.49 billion, and down from $1.45 billion year-earlier. Orders were $1.28 billion, down from $1.43 billion year earlier. Orders by type: Foundry 38%, DRAM 29%, Flash 22%, Logic and other 11%.

Applied Global Services (AGS) revenue was $626 million, down sequentially from $637 million but up from $583 million year earlier. Orders were $773 million.

Display segment revenue was $213 million, up sequentially from $191 million but down from $275 million year-earlier. New orders were $183 million.

Energy and Environmental Solutions (EES) [solar] revenue was $45 million, down sequentially from $46 million and down from $50 million year-earlier. New orders were $44 million.

Cash and equivalents (including long-term investments) balance ended at $5.1 billion, down sequentially from $5.95 billion. Cash flow from operating activities was $207 million. Capital expenditures were $68 million. $115 million was used for cash dividends. $1.2 billion was used to repay debt. Long-term debt was $3.3 billion. $625 million was used to repurchase stock in the quarter. Non-cash share-based compensation was $54 million.

Cost of goods sold was $1.34 billion, leaving gross margin of $916 million. Operating expenses of $562 million consisted of: research and development $374 million; selling and marketing, $106 million; general and administrative $82 million. Leaving income from operations of $354 million. Interest and other expense net $40 million. Income tax $28 million.

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

Q&A:

Orders up for silicon systems in April quarter? We don't give specific orders guidance, but H2 should be stronger than H1.

Gross margin guidance? We did a bit better than guidance in Q1 and should be about the same in Q2, with H2 still higher than H1.

Memory capital expense by customer? We see our share flattish with last year, 31% to 32%. But the mix within is good for us. DRAM down 20% and Flash up 25% will be good for us because the Flash will be VNAND, which requires more tools.

Display order trends from China, Korea? OLED adds steps, and so the total available market goes up by about a factor of 3 for us. We seem to be on track to hit our 2018 model for display.

Duration of client investment in VNAND? We think it will sustain for a few years.

Service revenue not catching up with orders? Contracts are a good leading indicator of revenue. In the quarter we had the Chinese new year. We book contracts in Q1, but not so much revenue.

M&A overview? We like our current strategy in transistor and interconnect, etch, deposition. We continue to look for good M&A opportunities, and are very selective. We are looking for opportunities for leadership in a segment, "but we are not needy relative to M&A."

What is driving growth in China? Both multinational and domestic companies are investing, and we have good relationships with them. It should go well beyond 2016.

OLED revenue as a % of display revenue? For small screens last year we mainly sold OLED tools. This year about 60% of revenue should be small screen. But there will be a delay before hitting the revenue line because the tools take about 9 months to build.

In China we are seeing most activity from existing players, not new entrants.

EUV discussions with customers? We have deep engagements with patterning customers. Yield and cost are big concerns. We see this as a tremendous opportunities, but they are further out.

A lot of customers skipped 20 nm since it was planar. We expect that while 10 nm will be strong, we still have a lot of movement to keep filling in at 16 nm.

We have enough U.S. cash to continue the buy backs for now.

Inspection segment competition? We are optimistic for 2016. We received first revenue for e-beam review last quarter.

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