Analyst Conference Call Summary


Applied Materials

conference date: May 18, 2017 @ 1:30 PM Pacific Time
for quarter ending: April 30, 2017 (second quarter, Q2 fiscal 2017)

Forward-looking statements

Overview: Another record quarter, and expects record margins in 2017.

Basic data (GAAP) :

Revenues were $3.55 billion, up 8% sequentially from $3.28 billion and up 45% from $2.45 billion in the year-earlier quarter.

Net income was $824 million, up 17% sequentially from $703 million and up 158% from $320 million year-earlier.

EPS (diluted earnings per share) were $0.76, up 17% sequentially from $0.65 and up 162% from $0.29 year-earlier.


Q3 fiscal 2017 (July quarter) revenue expected between $3.6 and $3.75 billion. Non-GAAP EPS range $0.79 to $0.87, which excludes known charges related to acquisitions of $0.04 per share.

Expects the highest non-GAAP operating margin for 2017 to be the highest in 20 years.

Conference Highlights:

"Across the company we have tremendous momentum as our markets are strong and getting stronger, and we’re sustainably growing faster than these markets by expanding our served opportunity and gaining share,” said Gary Dickerson, CEO. "Our innovation process sets us apart from competitors."

"Raising the ceiling for our performance and potential."

Markets are growing and Applied Materials is gaining market share in key markets. Cost per bit is falling, opening up new markets for solid state drives. The industry needs more wafer starts. 60% of total foundry spending in 2017 will be for cutting-edge nodes. Most layers will move to multi-patterning, not EUV. Wafer fab equipment spending for calendar 2017 expected up 15% over 2016.

Large format TVs continue to drive increases in display equipment sales. Also, OLED displays are rapidly gaining share for smartphones. Believes spending in China will accelerate in 2018.

No longer reports new orders each quarter.

Non-GAAP numbers: net income $861 million, up 18% sequentially from $732 million, and up 129% from $376 million year-earlier. EPS $0.79, up 18% sequentially from $0.67, and up 132% from $0.34 year-earlier. 46.3% gross margin, up from 42.7% year-earlier. 27.8% operating margin, up from 19.2% year-earlier. $53 million share-based compensation.

The backlog was

Semiconductor Systems [formerly Silicon Systems Group] Fiscal Q2 sales were $2.40 billion, up 12% sequentially from $2.15 billion, and up 51% from $1.59 billion year-earlier. Revenue by type, as % of total: Foundry 41%, DRAM 19%, Flash 33%, logic and other 33%. Segment operating income was $808 million or $854 million non-GAAP, margin was 33.6% or 35.5% non-GAAP.

Applied Global Services (AGS) revenue was $724 million, up 7% sequentially from $676 million and up 14% from $633 million year earlier. Operating income was $194 million or $195 million non-GAAP. Operating margin 26.8% or 26.9% non-GAAP.

Display segment revenue was $391 million, down 7% sequentially from $422 million and up 109% from $187 million year-earlier. Operating income was $84 million, with a 21.5% gross margin. On track to book over $2 billion in orders this year.

Cash and equivalents (including long-term investments) balance ended at $7.7 billion, up sequentially from $5.1 billion. Includes proceeds from $2.2 billion in debt raised in March. Cash flow from operating activities was $898 million. Capital expenditures were $77 million. $108 million was used for cash dividends. Long-term debt was $5.3 billion. $282 million was used to repurchase stock in the quarter.

Cost of goods sold was $1.95 billion, leaving gross profit of $1.60 billion. Operating expenses of $660 million consisted of: research and development $437 million; selling and marketing, $116 million; general and administrative $107 million. Leaving income from operations of $940 million. Interest and other expense net $32 million. Income tax $84 million.


WFE sustainability? We are up across the board about 15%. We see high fab utilization, strength across customers and device types. We are seeing higher content in phones. I see more root cause drivers for growth long term, and I think it is sustainable. The inflections we are seeing create more sustainability in our markets.

2018 pipeline visibility for memory programs in China? China is one of our strongest regions, we have deep connections. In 2017 we are seeing 2x growth in semiconductors, 50% growth in both display and service. In 2018 we see an additional expansion in China.

Debt raise, capital return? The raise was opportunistic. We raised $2.2 billion and paid off $0.2 billion. Rate average 3.8%. If tax policy changes, cash could be returned from oversees, but if not, raise will allow us to return more cash to investors. We are shrinking the share count.

SSG in back half of year? Implied down in 2H? Our fiscal 2017 revenue will be strong, and we believe it will get stronger in 2H, and we will gain share.

AI impact? We see new logic AI chips announced every week, and they go to the limit of semi capability.

Display TAM expansion? We have relationships with all the leading display companies. New display technology increases our TAM. We are focused on our customers' deepest technology challenges. We will announce specific opportunities later this year.

WFE 3-D NAND demand? It is up this year after being up last year. There is still some capacity converting from 2-D to 3-D. Demand for memory and NAND is going up, and 3-D is the choice.

What customer type is driving WFE spending? Across the board except logic is kind of flattish. The root causes have broadened. Driven by more applications for the PC and datacenter. $40 billion total industry this year is a good number, $40 plus maybe, more in 2018.

Display sequentially down? We feel good about our prediction for a strong 2017 in display. Our product cycle will help later in the year. Don't read too much into the quarter number.

DRAM and NAND pricing is good, there is still some DRAM upside, they are selling all the 3-D NAND they can make. Content and the need to store and process data is what is driving semi command.

LCD, large TV trend, is that one-year or sustainable? We are just starting to ship to new fabs, where Gen 10 creates much more revenue than Gen 8.5. So it should last for a while.

We see NAND bit growth in the high 30s, in phones last year it was 57%. 750,000 wafer starts by the end of this year. We see total spending for a number of years on a similar level to this year.

We are increasing our R&D spend because we grew to 22% of WFE, from 18%, and expect to continue to grow. Customers are coming to us to solve their problems, which requires developing new products. There is some risk to margins, but the upside risk is better than the downside risks. The large AI chips at 10 nm are challenging to etch and deposition and need innovative new materials.

Free cash flow as % of revenue keeps rising, why not raise the dividend, which has been flat for a number of years? We will continue to have a strong cash return to shareholders, and the tendency would be to morph that towards dividends. But would like to see clarity on the tax policy, and repatriation of cash, before making a commitment.

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Copyright 2017 William P. Meyers