Analyst Conference Call Summary

semiconductors

conference date: May 16, 2019 @ 1:30 PM Pacific Time
for quarter ending: April 28, 2019 (second quarter, Q2 fiscal 2019)

Forward-looking statements

Overview: Revenue continues to decline, but near top of guidance range. For fiscal Q3 2019 Non-GAAP EPS expected between $0.67 and $0.75. Net sales about $3.525 billion.

Basic data (GAAP):

Revenues were $3.54 billion, down 6% sequentially from $3.75 billion and down 23% from $4.58 billion in the year-earlier quarter.

Net income was $666 million, down 14% sequentially from $771 billion and down 39% from $1.10 billion year-earlier.

EPS (diluted earnings per share) were $0.70, down 12% sequentially from $0.80 and down 34% from $1.06 year-earlier.

Guidance:

Overall outlook has not changed since the February call.

Conference Highlights:

Gary Dickerson, CEO, said "In the second fiscal quarter Applied Materials delivered results toward the top-end of our guidance range, reflecting solid execution across the company in a business environment that remains challenging. Looking ahead, we maintain a positive view of our markets as powerful new demand drivers for semiconductors and displays take shape, creating tremendous opportunities for Applied Materials."

Not yet ready to call the bottom of this cycle. NAND pricing is stabilizing, but DRAM prices are still falling. The fundamentals are healthy, investment in capacity is disciplined. Inventory is expected to normalize as the year progresses. Foundry spending plans are forming up. But overall spend down mid to high teens compared to last year.

New technologies like AI will drive future demand. New materials and techniques will also drive demand.

Managing expenses to current market condition, but not cutting into long-term opportunities. Major new drivers are emerging that will propel industry spend in future years.

Non-GAAP numbers: net income $660 million, down 15% sequentially from $779 million, and down 47% from $1,244 million year-earlier. EPS $0.70, down 14% sequentially from $0.81, and down 41% from $1.19 year-earlier. 43.5% gross margin, down from 45.9% year-earlier. 22.4% operating margin, down from 29.3% year-earlier.

Semiconductor Systems sales were $2.18 billion, down 4% sequentially from $2.27 billion, and down 25% from $2.90 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 58%, DRAM 18%, Flash 24%. Segment operating income was $579 million or $589 million non-GAAP, margin was 26.5% or 27.0% non-GAAP.

Applied Global Services (AGS) revenue was $984 million, up 2% sequentially from $962 million and up 4% from $945 million year earlier. Non-GAAP Operating income was $283 million.

Display segment revenue was $348 million, down 31% sequentially from $507 million but down 52% from $719 million year-earlier. Non-GAAP operating income was $46 million, with a 13.2% gross margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $5.23 billion, down sequentially from $5.30 billion. Cash flow from operating activities was $800 million. Capital expenditures were $118 million. $189 million was used for cash dividends. Long-term debt was $5.3 billion. $625 million was used to repurchase stock in the quarter.

Cost of goods sold was $2.01 billion, leaving gross profit of $1.53 billion. Operating expenses of $754 million consisted of: research and development $508 million; selling and marketing, $133 million; general and administrative $113 million. Leaving income from operations of $776 million. Interest and other expense net $17 million. Income tax $93 million.

Q&A:

Margins going forward? WFE expected down this year, with foundry/logic up slightly but memory down more. We see 2020 as a WFE growth year. We do not see a memory correction this year. Operating margins depend on gross margins and how much we invest in future growth, will vary by quarter for the usual reasons. Moore's law is having challenges. We are investing to lead. We expect to see margin leverage once revenue growth resumes, perhaps in 2020. We are well positioned to gain market share based on new technologies to address power, performance, and cost. We have a strong pipeline of new products, some are already gaining traction.

Display rebound in 2020? We expect display going down in 2019, mainly TV. Then TV to stabilize and OLED mobile to grow with good longer-term opportunities.

China demand, buying patterns? China WFE will be down a small amount in 2019, with domestics flat but multinationals down. We expect to see display there down too. We see a lot of growth coming from domestic companies, though mainly at trailing nodes.

Reluctance to call the bottom? It is a semiconductor comment, not for the overall company. $2.15 billion semi run rate is about flat so far. But services revenue should increase in the second half. Since semi is highest margin, services lowest, it does create a margin headwind. We are not guiding more than one quarter out.

Driver of improved foundry outlook? 5nm, 7nm? Improvement is just incremental in foundry. No one element, seeing capacity adds starting for 5nm and more for 7nm.

Share vs. ASML? 2019 mix is more favorable for us. Automotive, sensors etc. are stonger, we are also in a good position for 5nm. EUV is just one way to drive the roadmap. We have transistor and internet new steps being adopted. We have gained memory share over a 4-5 year period.

Why not be more aggressive with the buyback? Don't read to much into how much stock we buy back in any given quarter. Look at our long-term track record.

Segments leading growth? There are several factors that can drive performance into the AI wave, with capital intensity increasing. New products are targetted to our customers' biggest problems. Etch mask and integrated material solutions are examples. Our new technologies can help improve power and performance without shrinking nodes.

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