Analyst Conference Call Summary

semiconductors

conference date: February 14, 2019 @ 1:30 PM Pacific Time
for quarter ending: January 31, 2019 (first quarter, Q1 fiscal 2019)

Forward-looking statements

Overview: Weak quarter, as expected. Weak April quarter expected too.

Basic data (GAAP):

Revenues were $3.75 billion, down 6% sequentially from $4.01 billion and down 11% from $4.21 billion in the year-earlier quarter.

Net income was $771 million, down 12% sequentially from $876 billion and up 431% from $165 million year-earlier.

EPS (diluted earnings per share) were $0.80, down 10% sequentially from $0.89 and up 433% from $0.15 year-earlier.

Guidance:

For Q2 fiscal 2019, Applied expects net sales between $3.33 and $3.63 billion. Non-GAAP diluted EPS is expected between of $0.62 and $0.70.

Conference Highlights:

Gary Dickerson, CEO, said "As we navigate the current market dynamics, we remain highly optimistic about the long term and are investing in new technology, products and capabilities that position the company to play a bigger and broader role in the industry's future." Is increasingly cautious about short term macroeconomic risk, as are customers. Continues to invest to play a broader role in the industry in the future.

Results were above the midpoint of guidance.

Smart phone demand has fallen, particularly for high-end models. Memory demand is still fundamentally healthy. Developing economies are weak. In past few years smartphones had been the demand drivers. That is now shifting to other device types. NAND bit demand is expected to grow faster than DRAM, and investments by memory customers will slow during 2019. Believes wafer fab equipment spending will be down mid to high single digits in 2019. Expects display revenue to drop by a third in 2019, but do better longer run as technology changes. Simply shrinking transistors is no longer enough to drive designs forward. Materials engineering is becoming much more important, giveing Applied Materials a competitive advantage.

Expects recovery to be shallow and gradual. Cannot yet call the bottom. But revenues are much higher than a few years ago and can continue to return cash to shareholders.

Non-GAAP numbers: net income $779 million, down 19% sequentially from $956 million, and down 33% from $1,165 million year-earlier. EPS $0.81, down 16% sequentially from $0.97, and down % from $1.08 year-earlier. 44.6% gross margin, down from 47.2% year-earlier. 24.6% operating margin, down from 30.1% year-earlier.

Semiconductor Systems sales were $2.27 billion, down 2% sequentially from $2.31 billion, and down 20% from $2.85 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 44%, DRAM 21%, Flash 35%. Segment operating income was $631 million or $642 million non-GAAP, margin was 27.8% or 28.3% non-GAAP.

Applied Global Services (AGS) revenue was $962 million, down 2% sequentially from $977 million and up 9% from $881 million year earlier. Non-GAAP Operating income was $285 million.

Display segment revenue was $507 million, down 28% sequentially from $702 million and up 14% from $443 million year-earlier. Non-GAAP operating income was $118 million, with a 23.3% gross margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $5.30 billion, down sequentially from $5.60 billion. Cash flow from operating activities was $834 million. Capital expenditures were $133 million. $192 million was used for cash dividends. Long-term debt was $5.31 billion. $750 million was used to repurchase stock in the quarter.

Cost of goods sold was $2.09 billion, leaving gross profit of $1.67 billion. Operating expenses of $757 million consisted of: research and development $516 million; selling and marketing, $131 million; general and administrative $110 million. Leaving income from operations of $908 million. Interest and other expense net $20 million. Income tax $117 million.

Q&A:

Gross margin trajectory in 2019? In later part of fiscal 2019 margins should improve gradually. We are not guiding revenue for the rest of the year yet.

LCD v. OLED mix in 2019? Market has weakened since the last call. We are seeing delays in TV investments. Still compelling to go to Gen 10.5, but timing is being pushed out. Believe should see a small improvement in 2020 and general technology trends in display.

EUV, how long will headwind last? Will see third party data in about one month. Spending has shifted towards litho in areas where we don't compete. But shifting to technologies where we do well. When NAND spending resumes that is materials spending more than litho spending. The industry needs to scale beyond 2D, we can lead that.

We grew market share in memory significantly in the past 5 years, including etch share. We expect to continue to grow share.

We see semi systems group flatish off the Q2 run rate.

EUV replaces several etch steps, but they are not Applied's steps. Material innovation becomes more important like epi and advanced metals. Process control solutions will also ramp.

China business? It feels mostly like business as usual in China. Our relationships are deep. We expect wafer fab equipment spending to be down there in 2019. The display business in China will be down in line with the rest of that segment.

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