Analyst Conference Call Summary

semiconductors

conference date: February 14, 2018 @ 1:30 PM Pacific Time
for quarter ending: January 28, 2018 (first quarter, Q1 fiscal 2018)

Forward-looking statements

Overview: Continued strong growth. Tax changes hit GAAP profits, but non-GAAP profits hit a record. Doubled dividend and added to share repurchase authorization.

Basic data (GAAP) :

Revenues were $4.20 billion, up 6% sequentially from $3.97 billion and up 28% from $3.28 billion in the year-earlier quarter.

Net income was $135 million, down 86% sequentially from $982 million and down 81% from $703 million year-earlier.

EPS (diluted earnings per share) were $0.13, down 86% sequentially from $0.91 and down 80% from $0.65 year-earlier.

Guidance:

Fiscal Q2 2018 revenue expected between $4.35 and $4.55 billion (the midpoint is up 26% y/y). Non-GAAP diluted EPS between $1.10 to $1.18. Excludes $0.04 per share in charges for completed acquisitions. 23% y/y increase in Semiconductor and Service segments, and 48% increase in display revenue.

Conference Highlights:

Gary Dickerson, CEO, said "Our broad portfolio of capabilities and products puts us in a great position to outperform our markets and we’re confident that each of our three major business segments can deliver strong double-digit growth in 2018, which already looks like another great year." More industries are being disrupted by new technology, driving the overall market for electronics. Applied can grow faster than its markets as AI technologies like voice assistance and self-driving cars scale.

The dividend was doubled to $0.20 per share per quarter. However, the previously declared dividend for shareholders of record on February 21 will remain $0.10.

An additional $6 billion was authorized to repurchase shares.

Non-GAAP numbers: net income $1.14 billion, up 13% sequentially from $1.01 billion, and up 55% from $732 million year-earlier. EPS $1.06, up 14% sequentially from $0.93, and up 58% from $0.67 year-earlier. 46.7% gross margin, up from 45.4% year-earlier. 29.6% operating margin, up from 26.0% year-earlier.

Semiconductor Systems sales were $2.85 billion, up 17% sequentially from $2.43 billion, and up 32% from $2.15 billion year-earlier. Revenue by type, as % of total: Foundry 25%, DRAM 25%, Flash 37%, logic and other 13%. Segment operating income was $995 million or $1.04 billion non-GAAP, margin was 34.9% or 36.6% non-GAAP.

Nand expected to grow to 30% of the total storage market in the next few years. Expects DRAM and logic spending to grow y/y in 2018. New materials technologies like patterning, inspection and metrology are driving Applied's growth. Believe equipment spending will be less cyclical than in the past.

Applied Global Services (AGS) revenue was $880 million, up 6% sequentially from $831 million and up 30% from $676 million year earlier. Operating income was $254 million or $255 million non-GAAP. Believes this segment can continue to grow by at least 15% per year.

Display segment revenue was $455 million, down 33% sequentially from $677 million and up 8% from $422 million year-earlier. Non-GAAP operating income was $104 million, with a 22.9% gross margin. Demand being driven by Gen 10.5 and OLED displays. Believes revenue will grow for Applied 30% y/y in 2018.

Cash and equivalents (including long-term investments) balance ended at $8.67 billion, up sequentially from $8.42 billion. Cash flow from operating activities was $1.47 billion. Capital expenditures were $203 million. $106 million was used for cash dividends. Long-term debt was $5.31 billion. $782 million was used to repurchase stock in the quarter.

Total backlog was $ billion, consisting of: Semiconductor $ billion; services $ billion; display $ billion.

Cost of goods sold was $2.28 billion, leaving gross profit of $1.92 billion. Operating expenses of $724 million consisted of: research and development $488 million; selling and marketing, $126 million; general and administrative $110 million. Leaving income from operations of $1,20 billion. Interest and other expense net $34 million. Income tax $1.03 billion.

Capital allocation: organic growth and growth of business where margins are attractive. Maintain robust balance sheet. Return excess cash to shareholders, including possibly increasing the dividend beyond the current doubling; plus opportunistic buy-backs.

Tax reform is beneficial to Applied. Has access to profits generated offshore, so can invest more in the U.S. for R&D. Repatriation tax in Q1 was about $1 billion, payable over 8 years. Using 6.5% tax rate for planning for rest of fiscal 2018. Then will rise to 11% to 12%.

Q&A:

Mix of mobile vs. TV in 2018 revenue outlook? About 50/50 mix. TV screens are getting larger and switching to 10.5. OLED opportunity still strong, now has 10 customers. Transition in compelling.

Capital allocation, nature of buyback? Buy back will be opportunistic. Will be very shareholder friendly with excess free cash flow. Will not be formulaic, like setting a % of free cash flow to return.

Portion of business already from AI and IoT? We are seeing confidence and macro-trends. It is hard to slice up WFE into these end markets.

Our customers are profitable, so they have a lot of money to spend with us.

Opportunities in logic transition to 7 nm? PDC (Process Diagnostics and Control) grew about 10% in 2017. We have increased our share of memory spend about 7% the last few years. We have new PDC capabilities and products to drive growth in 2018. In foundries we have growth in trailing geometries, which are now 40% of the market, including in China. Patterning gained about 19 points of share in the last few years. We could add another $1 billion in revenue in patterning over the next four years. Multipatterning is a great opportunity. 3D scaling is materials enabled. Pattern placement (etch) is a big challenge to customers and a big opportunity for us. Customers are accelerating their roadmaps, driving deeper engagements with Applied.

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