Analyst Conference Call Summary

semiconductors

conference date: August 15, 2019 @ 1:30 PM Pacific Time
for quarter ending: July 28, 2019 (third quarter, Q3 fiscal 2019)

Forward-looking statements

Overview: Solid quarter given the trade situation.

Basic data (GAAP):

Revenues were $3.56 billion, up 0.6% sequentially from $3.54 billion and down 14% from $4.16 billion in the year-earlier quarter.

Net income was $571 million, down 14% sequentially from $666 million and down 44% from $1.02 billion year-earlier.

EPS (diluted earnings per share) were $0.61, down 13% sequentially from $0.70 and down 40% from $1.01 year-earlier.

Guidance:

In Q4 fiscal 2019 expects revenue near $3.685 billion, plus or minus $150 million. Non-GAAP diluted EPS expected range of $0.72 to $0.80.

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials is delivering solid financial performance in a market environment that remains challenging for the time being. Overall our view of 2019 is consistent with what we previously communicated." The industry is in a downcycle, but Applied is positioning for the future. We still see customers making essential investments. Believes NAND investment will recover ahead of DRAM. View of 2019 unchanged, but sees recovery in 2020. Classic Moore's Law scaling is running out of gas, requiring a host of new technologies. MRAM requires 30 layers, for instance.

Prudent with spending, but continuing to fund R&D for future growth.

New technologies like AI will drive future demand. 700 attendees at Applied's AI Design Forum in August 2015. 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 $692 million, up 5% sequentially from $660 million, and down 34% from $1.05 billion year-earlier. EPS $0.74, up 6% sequentially from $0.70, and down 29% from $1.04 year-earlier. 44.0% gross margin, down from 45.9% year-earlier. 23.0% operating margin, down from 27.4% year-earlier.

Semiconductor Systems sales were $2.27 billion, up 4% sequentially from $2.18 billion, and down 12% from $2.58 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 49%, DRAM 27%, Flash 24%. Segment operating income was $613 million or $624 million non-GAAP, margin was 27.0% or 27.5% non-GAAP.

Applied Global Services (AGS) revenue was $931 million, down 5% sequentially from $984 million and down 2% from $952 million year earlier. Non-GAAP Operating income was $259 million.

Display segment revenue was $339 million, down 3% sequentially from $348 million and down 45% from $616 million year-earlier. Non-GAAP operating income was $44 million, with a 13.0% operating margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $4.66 billion, down sequentially from $5.23 billion. Cash flow from operating activities was $787 million. Capital expenditures were $93 million. $196 million was used for cash dividends. Long-term debt was $5.3 billion. $528 million was used to repurchase stock in the quarter.

Applied has $2.4 billion remaining authorized for stock buy backs.

Cost of goods sold was $2.01 billion, leaving gross profit of $`1.56 billion. Operating expenses of $755 million consisted of: research and development $515 million; selling and marketing, $128 million; general and administrative $112 million. Leaving income from operations of $802 million. Interest and other expense net $20 million. Income tax $211 million.

Q&A:

NAND sooner than DRAM recovery details? Memory market in general not expected to recover until 2020. Believes currently undershipping end market demand, reducing capacity surplus. We see a data explosion that will require more memory and new forms of memory post 2020. Has gained market share in memory, particularly NAND, believe that will continue. Customers are interested in new materials and products. Winning new etch in NAND.

China? No major spending inflection expected. Domestic China view is a little stronger lately, and foundry/logic looks positive, but display down.

Last year was the only one lately where we lost share, and it was a mix issue. This year the mix is more favorable to us. Manufacturers are struggling to deliver power, performance, and cost. Everyone wants better materials and technologies.

Reuse of older nodes? 28 nm footprint has continued to increase the past few years. In the past there was a big gulp when a new node was introduced, then a fall off. We see this as positive for the industry.

We are very displined about op ex spend. We aim to increase margins over time, but we are spending more on R&D because of the opportunities ahead of us.

And on and on.

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