Analyst Conference Call Summary


Applied Materials

conference date: August 16, 2018 @ 1:30 PM Pacific Time
for quarter ending: July 29, 2018 (third quarter, Q3 fiscal 2018)

Forward-looking statements

Overview: Continued strong y/y revenue growth, but guidance for fiscal Q4 is weak.

Basic data (GAAP):

Revenues were $4.46 billion, down 2% sequentially from $4.57 billion and up 19% from $3.74 billion in the year-earlier quarter.

Net income was $1.17 billion, up 4% sequentially from $1.13 million and up 26% from $925 million year-earlier.

EPS (diluted earnings per share) were $1.17, up 7% sequentially from $1.09 and up 38% from $ year-earlier.


Q4 fiscal 2018 (ending October 31) revenue expected between $3.85 and $4.15 billion. Non-GAAP diluted EPS expected between $0.92 and $1.00. At midpoint, $0.96 expected to be the bottom going forward.

That implies full fiscal year 2018 revenue between $17.1 and $17.4 billion, up 19% y/y. Non-GAAP diluted EPS $4.41 to $4.49.

Expects fiscal 2019 to be positive.

Fiscal 2020 model is to earn at least $5.08 per share.

Conference Highlights:

Gary Dickerson, CEO, said "While we have seen some near-term adjustments in customer spending, fiscal 2018 is on track to be another record-setting year for Applied Materials and we expect each of our major businesses to deliver strong double-digit growth. Our future outlook remains positive as the A.I.-Big Data era requires new breakthroughs in technology, from materials to systems, providing Applied with a great opportunity to play a larger and more valuable role in the ecosystem."

We see ongoing strength in our markets as customers make rational, disciplined purchases. We are positive on 2019 wafer fabrication spending. We have made a recent downward revision in foundry purchases, but they are making long-term investments in advanced technology. Supply and demand adjustments are now taking place in memory. High performance DRAM for datacenters is still driving demand, but we expect logic investment to turn higher this year. We have gained 7 points in memory share since 2013 while maintaining logic share. Patterning is still a growth opportunity. Display should remain a powerful long term growth driver. We are confident we can sustain momentum over a variety of end market conditions.

First integrated materials system was launched in June; others will be introduced in 2019. We are collaborating with ARM for new approaches to chips for AI.

Non-GAAP numbers: net income $1.21 billion, down 8% sequentially from $1.27 billion, and up 30% from $927 million year-earlier. EPS $1.20, down 2% sequentially from $1.22, and up 40% from $0.86 year-earlier. 46.4% gross margin, down from 46.4% year-earlier. 29.2% operating margin, up from 28.7% year-earlier.

Semiconductor Systems sales were $2.75 billion, down 8% sequentially from $3.00 billion, and up 9% from $2.53 billion year-earlier. Revenue by type, as % of total: Foundry 28%, DRAM 24%, Flash 36%, logic and other 12%. Segment operating income was $930 billion or $975 billion non-GAAP, margin was 33.8% or 35.5% non-GAAP.

Applied Global Services (AGS) revenue was $954 million, up 1% sequentially from $943 million and up 21% from $786 million year earlier. Operating income was $281 million or $281 million non-GAAP.

Display segment revenue was $741 million, up 24% sequentially from $600 million and up 81% from $410 million year-earlier. Non-GAAP operating income was $218 million, with a 29.4% gross margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $5.59 billion, down sequentially from $6.90 billion. Cash flow from operating activities was $633 million. Capital expenditures were $133 million. $199 million was used for cash dividends. Long-term debt was $5.3 billion. $1.25 billion was used to repurchase stock in the quarter.

Cost of goods sold was $2.44 billion, leaving gross profit of $2.03 billion. Operating expenses of $770 million consisted of: research and development $504 million; selling and marketing, $138 million; general and administrative $128 million. Leaving income from operations of $1.26 billion. Interest and other expense net $18 million. Income tax $66 million.


Recent memory and foundry adjustments? We are now seeing some movement in foundry capital spending, which are included in Q4 guidance. We are seeing continuing investment in trailing nodes. In leading edge the spend is prioritized to long-lead time items. Based on customer conversations, 2019 will be healthy across all device types.

Display in 2019? Our forecast is unchanged, $2.5 billion for 2018, then 2019 down perhaps 15% from that, then 2020 above 2018. This is in part from the new generation of equipment for TV displays.

Confidence in Q4 as a low point for logic? We differentiate between logic and foundry, it is foundry that is down and should rebound after Q4.

NAND? We signalled a quarter ago we could see last half weakness, and we see that playing out. But look at the macro drivers, which are playing out as expected, requiring more memory. Customers are doing a better job of keeping the demand and supply in balance. We see a healthy dynamic in 2019.

Your peers are saying growth into December quarter. Why the difference? It is hard for us to know what competitors were assuming. Our guide reflects everything we see. Our footprint is broader than those of our peers.

Foundry pushout, 7 nm ramp? Foundries do their best to foresee demand. The adjustment is not exclusively from one customer.

China? China is growing, but incrementally, we don't see a hockey stick coming.

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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 2018 William P. Meyers