Analyst Conference Call Summary

semiconductors

conference date: November 14, 2019 @ 1:30 PM Pacific Time
for quarter ending: October 27, 2019 (fourth quarter, Q4 fiscal 2019)

Forward-looking statements

Overview: Maybe it is just one quarter, but it seems to mark a recovery from a bit of a slump earlier in the year. Results at top end of guidance.

Basic data (GAAP):

Revenues were $3.75 billion, up 5% sequentially from $3.56 billion and flat from $3.76 billion in the year-earlier quarter.

Net income was $698 million, up 22% sequentially from $571 million and down 8% from $757 million year-earlier.

EPS (diluted earnings per share) were $0.75, up 23% sequentially from $0.61 and down 3% from $0.77 year-earlier.

Guidance:

For Q1 fiscal 2020 (January quarter), Applied expects revenue to be $4.10 billion, plus or minus $150 million. Non-GAAP adjusted diluted EPS is expected to be in the range of $0.87 to $0.95.

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials fourth quarter results reflect a healthy uptick in demand for semiconductor equipment, combined with strong execution across the company. The semiconductor industry is increasingly adopting a new playbook for improving chip performance, power, area and cost, and we are investing in unique solutions to enable our customers' success in the AI-Big Data era." But too early to call a definite recovery in memory.

Semiconductor industry is evolving. Calendar Q2 2019 may have been the low point of the down cycle and was not as bad as past cycles. Memory makers are making disciplined investments. Our semi equipment business is outperforming peers. The 5G roadmap is accelerating. Believe overall 2019 semi industry will about the same as 2017. But display is still bouncing along the bottom.

Expects demand to continue to grow of the next decade, driven by the edge, AI, and new types of semiconductor devices. Applied's strategy is aligned to this future vision. Opened the metacenter in New York. Developing integrated materials solutions, which include new categories of products. Etch revenue set a record this year.

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 $744 million, up % sequentially from $692 million, and down 11% from $837 million year-earlier. EPS $0.80, up 8% sequentially from $0.74, and down 6% from $0.85 year-earlier. 43.8% gross margin, down from 45.3% year-earlier. 23.7% operating margin, down from 25.1% year-earlier.

Semiconductor Systems sales were $2.30 billion, up 1% sequentially from $2.27 billion, and up 2% from $2.25 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 58%, DRAM 21%, Flash 21%. Segment operating income was $ million or $652 million non-GAAP, margin was % or 23.8% non-GAAP.

Applied Global Services (AGS) revenue was $977 million, up 5% sequentially from $931 million and flat from $976 million year earlier. Non-GAAP Operating income was $274 million.

Display segment revenue was $457 million, up 35% sequentially from $339 million and down 12% from $520 million year-earlier. Non-GAAP operating income was $99 million, with a 21.7% operating margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $5.32 billion, up sequentially from $4.66 billion. Cash flow from operating activities was $826 million. Capital expenditures were $97 million. $194 million was used for cash dividends. Long-term debt was $4.7 billion. $500 million was used to repurchase stock in the quarter.

Cost of goods sold in Q4 was $2.12 billion, leaving gross profit of $1.63 billion. Operating expenses of $770 million consisted of: research and development $515 million; selling and marketing, $129 million; general and administrative $126 million. Leaving income from operations of $864 million. Interest and other expense net $24 million. Income tax $142 million.

For the full fiscal year revenue was $14.6 billion, down 13%. GAAP net income was $2.71 billion with EPS $2.86. Non-GAAP net income was $2.88 billion with $3.04 EPS.

Q&A summary:

Product positioning? In memory customers are continuing to drive their roadmaps, even on volume reduction. DRAM is moving to more metal gate at the periphery, and we are gaining share in etch and have new patterning technologies. 3D-NAND is going beyond 96 layers, requiring new materials; also doing well in etch and cooptimization of films. So we see strong growth at future nodes.

Services outlook? It is a great growth driver, until lately at about 15% per year, until slump, but still grew. Lack of utilization has been a headwind this year, but could return to stronger growth in 2020.

Display outlook? 2019 played out as expected, down about one-third y/y. We see solid performance of handsets next year, but TV soft. So flat revenue overall.

WFE market share today and going forward? Varies, but low to mid 60s. New products should help drive market shares, but not that much. Big data needs a thousand times improved performance per watt, which can't be done with Moore's law.

Kokusai Electric? Going well. We still have capability for Mergers if we see anything that would work for us.

We do not guide by device type, but next quarter will be a record for foundry and logic segment.

China view? We see it up to $6.5 billion this year, longer term we expect steady growth, not hockey sticks.

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