conference date: August 17, 2017 @ 1:30 PM Pacific Time
for quarter ending: July 30, 2017 (third quarter, Q3 fiscal 2017)
Overview: Record revenue. Applied called it "the best quarter in its 50-year history."
Basic data (GAAP) :
Revenues were $3.74 billion, up 5% sequentially from $3.55 billion and up 33% from $2.82 billion in the year-earlier quarter.
Net income was $925 million, up 12% sequentially from $824 million and up 83% from $505 million year-earlier.
EPS (diluted earnings per share) were $0.85, up 12% sequentially from $0.76 and up 85% from $0.46 year-earlier.
For Q4 fiscal 2017 (October quarter) revenue between $3.85 and $4.0 billion. Non-GAAP EPS $0.86 to $0.94.
14% y/y semiconductor segment growth
17% services segment growth
48% display segment growth.
Q1 2018 semi expected up sequentially and up y/y; display lower sequentially but up y/y.
“Our markets are growing with a broader set of demand drivers, and the breadth of Applied’s technology enables us to play a larger and more valuable role advancing the innovation roadmap in semiconductor and display.” said Gary Dickerson, CEO. "We have tremendous momentum and a very positive outlook for the future." Confident will continue to gain market share.
"We have more opportunities today than at any point in our history." The demand is getting less cyclical as new applications like IoT and AI grow in multiple industries. Applied is the leader in materials engineering. Our R&D has differentiated our product portfolio. Our platform gives us sustainable advantages over the competition. Memory near-term fundamentals remain strong, particularly 3D NAND. Patterning leadership gives opportunities even as UV advances. Etch (up 5x over last 5 years) and CVD are growth leaders. Display outlook has strengthened as Gen 10.5 substrates inflection is underway; 13 new factories are planned for this. OLED also will help grow display.
Believes industry spending will be higher in 2018 than in 2017.
Non-GAAP numbers: net income $927 million, up 8% sequentially from $861 million, and up 69% from $550 million year-earlier. EPS $0.86, up 9% sequentially from $0.79, and up 72% from $0.50 year-earlier. 46.6% gross margin, up from 43.7% year-earlier. 28.7% operating margin, up from 22.8% year-earlier.
Semiconductor Systems [formerly Silicon Systems Group] sales were $2.53 billion, up 5% sequentially from $2.40 billion, and up 41% from $1.79 billion year-earlier. Revenue by type, as % of total: Foundry 39%, DRAM 15%, Flash 38%, logic and other 8%. Segment operating income was $874 million or $920 million non-GAAP, margin was 34.5% or 36.3% non-GAAP. Two thirds of demand growth is driven by smartphones. Largest foundry customer announced it is doubling its 7 nm tape out plans. Predicts overall market share to be up.
Applied Global Services (AGS) revenue was $786 million, up 9% sequentially from $724 million and up 20% from $657 million year earlier. Operating income was $213 million or $215 million non-GAAP. Operating margin 27.1% or 27.4% non-GAAP.
Display segment revenue was $410 million, up 5% sequentially from $391 million and up 31% from $313 million year-earlier. Operating income was $91 million, with a 22.2% gross margin. Expect to grow display at least another 30% in 2018.
Cash and equivalents (including long-term investments) balance ended at $8.34 billion (40% onshore), up sequentially from $7.7 billion. Cash flow from operating activities was $1.37 billion, a record. Capital expenditures were $80 million. $107 million was used for cash dividends. Long-term debt was $5.30 billion. $375 million was used to repurchase stock in the quarter.
Cost of goods sold was $2.04 billion, leaving gross profit of $1.70 billion. Operating expenses of $677 million consisted of: research and development $454 million; selling and marketing, $117 million; general and administrative $106 million. Leaving income from operations of $1.02 billion. Interest and other expense net $45 million. Income tax $53 million.
Sustainability in memory? NAND visibility long term? WFE in 2018 up from 2017. Logic & DRAM higher, foundry and NAND strong. For both NAND and DRAM: they are very profitable; demand is strong; wafer start additions have been moderate. We have gained market share. Bit demand is growing at about 30% per year in smartphones and servers. For last 5 years wafer capacity has been basically flat. They will need to grow wafer starts. So NAND looks pretty good for the foreseeable future.
We are not saying 2018 is problematic after Q1; it looks good overall.
We do have new product introductions planned for 2018.
Large screen LCD, LG statements about large-screen OLED? Our expectations for the total display market next five years have gone up since three months ago. For OLED TVs, it is not the same OLED you have on mobile. Our position is okay there, but it is not as big of an inflection as with OLED for smartphones. Our position is increasing. We are still early in the mobile OLED ramp. Even the non-OLED large TVs are still in their ramp. We have good exposure to all of those changes. We still see mobile upside in 2018, especially outside Korea, which is now less than 50% of orders.
China in 2018, WFE assumptions? China is one of our strongest regions, 2017 was up 2x in semi over 2015. We track the development projects in China, where we have high share. We qualify demand based on leading indictors, believe $1 to $1.5 billion incremental increase in 2018. They are trying to grow % of domestic content. 2018 investments will be in pilot lines, mostly.
Services growth driver? We used to do $2 billion a few years ago, now we are at $3 billion, and 2018 could be better than 2017. WFE market is strong, so that provides something to service. We are up to 22% of the WFE market, and particularly gaining in etch. Instead of selling parts and labor ad hoc, we are selling long-term service contracts.
We earlier predicted that 7 nm would peak out at 250 million wafer starts, now up to 350 million starts, and could stay at the node longer. Capital intensity is up over 90% form the prior node. It will be a big, long node.
We have done a good job lowering services cost. That resulted in the higher margins.
Believes the industry underestimated semi demand for the second half of 2017.
Believes the trend is to more tape outs as more specific devices are needed to meet new demands. This includes a larger variety of memory devices. We are working on new memory technologies and are optimistic about Applied Materials' position in the market.
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