Analyst Conference Call Summary


Applied Materials

conference date: May 19, 2016 @ 1:30 PM Pacific Time
for quarter ending: May 1, 2016 (second quarter, Q2 fiscal 2016)

Forward-looking statements

Overview: $3.5 billion in new orders in quarter, a 15 year high. Strong guidance for Q3. Expects a record fiscal 2016.

Basic data (GAAP) :

Revenues were $2.45 billion, up 9% sequentially from $2.26 billion and up slightly from $2.44 billion in the year-earlier quarter.

Net income was $320 million, up 12% sequentially from $286 million and down 12% from $364 million year-earlier.

EPS (diluted earnings per share) were $0.29, up 16% sequentially from $0.25 and flat from $0.29 year-earlier.


Fiscal Q3 revenue expected up 14% to 18% sequentially. Adjusted diluted EPS range between $0.46 and $0.50.

Conference Highlights:

“In our second quarter we booked our highest orders in 15 years and we expect to deliver record earnings in fiscal 2016,” said Gary Dickerson, president and CEO. “We are making significant progress with our strategy in semiconductor, display and service, and have a great pipeline of differentiated products that will fuel future growth.”

Applied is well positioned in China both with Chinese and international companies. The quarter marked an all-time high for revenue from China.

Customers are making inflection-point driven investments. More than half of 2016 foundry spending is expected to be on 7 nm and 10 nm. Several technologies are transitioning from pilot programs to full deployment. But sees DRAM investment down in 2016 off a strong 2015. NAND, however, is expected up, as is moving to 3D which requires more equipment to make.

New order total was $3.45 billion, up 52% sequentially from $2.28 billion and up 37% from $2.52 billion year-earlier.

Non-GAAP numbers: net income $376 million, up 25% sequentially from $302 million, and up 4% from $362 million year-earlier. EPS $0.34, up 31% sequentially from $0.26, and up 17% from $0.29 year-earlier. 42.7% gross margin. 19.2% operating margin.

The backlog was $4.17 billion, up 34% sequentially from $3.11 billion. 49% was in Silicon Systems, 23% in Services, 25% in Display, and 3% in Solar. Silicon Systems backlog is the highest in 9 years.

GAAP gross margin was 41.0%, operating margin was 17.3%.

Silicon Systems Group (SSG) segment sales were $1.59 billion, up 16% sequentially from $1.37 billion, and up 2% from $1.56 billion year-earlier. Orders were $1.97 billion, up 16% from $1.70 billion year earlier. Orders by type: Foundry 23%, DRAM 17%, Flash 49%, Logic and other 11%.

Applied Global Services (AGS) revenue was $648 million, up sequentially from $626 million and up from $646 million year earlier. Orders were $677 million.

Display segment revenue was $167 million, down sequentially from $213 million but up from $163 million year-earlier. New orders were $700 million, a record. Moving to OLED. Thin film encapsulation is a difficult technology that Applied Materials leads in. Expects display orders to continue strong for rest of year.

Energy and Environmental Solutions (EES) [solar] revenue was $48 million, up sequentially from $45 million and down from $73 million year-earlier. New orders were $108 million.

Cash and equivalents (including long-term investments) balance ended at $3.57 billion, down sequentially from $4.1 billion. Cash flow from operating activities was $481 million. Capital expenditures were $47 million. $113 million was used for cash dividends. Long-term debt was $3.34 billion. $900 million was used to repurchase stock in the quarter. Non-cash share-based compensation was $48 million.

Cost of goods sold was $1.45 billion, leaving gross margin of $1.00 billion. Operating expenses of $579 million consisted of: research and development $386 million; selling and marketing, $102 million; general and administrative $91 million. Leaving income from operations of $425 million. Interest and other expense net $30 million. Income tax $75 million.

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

Believes can meet or exceed goals for 2018. Will increase R&D to support customer requests, notably in Display segment.


3x TAM in display expansion? The overall display market is growing and our share is growing. We think our TAM will continue to increase.

NAND share? We have a strong pull from customers. The move from litho to materials is to our advantage. We are seeing etch share gain, CVD gain, Epi, CMP share gains too.

Silicon upside? We agree the global outlook for the industry is flat y/y. But we are gaining in DRAM, NAND, foundry and logic. The NAND strength should go on for another few years. 3D NAND conductor etch is a particular area of strength for Applied.

The selective material removal business is also growing strongly for us.

First OLED Gen8 orders timing? Over 70% of orders are for mobile. The OLED inflection for TVs is not in the immediate future.

Visibility of display orders? These are not one-quarter events. The big inflections will go on for a number of years. We believe the display order rate will remain strong in the second half of the year.

How much can China add to global demand? China is talking about spending $4 billion to $5 billion per year for the next few years. China is now our strongest region, the momentum just keeps building, our revenue there has doubled over the past two years. We were particularly strong in semiconductor this quarter, not so strong in TVs.

Stock buy backs? We will talk about that at the board of directors meeting. We are very committed to returning cash to shareholders. But we returned 350% of free cash flow to investors this last year, we can't keep up that rate, and we are already near our 2018 goals for share count.

We think the operating margins for display should improve because we are currently ramping new products. Margins should approach those for the company as a whole.

Between 2012 and 2016 the NAND market went from $4.2 billion to $9.2 billion. AMAT's share went from just under 15% to about 20%. So we will be up to near $2 billion this year for NAND. We would be up even more if more of the spend was on 3D rather than adding to planar capacity.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. What we put in these notes may not be what you would note.

Copyright 2016 William P. Meyers