Analyst Conference Call Summary

semiconductors

conference date: February 12, 2020 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2019 (first quarter, Q1 fiscal 2020)

Forward-looking statements

Overview: Strong quarter.

Basic data (GAAP):

Revenues were $4.16 billion, up 11% sequentially from $3.75 billion and also up 11% from $3.75 billion in the year-earlier quarter.

Net income was $892 million, up 28% sequentially from $698 million and up 16% from $771 million year-earlier.

EPS (diluted earnings per share) were $0.96, up 28% sequentially from $0.75 and up 20% from $0.80 year-earlier.

Guidance:

For Q2 fiscal 2020, expects net sales to be approximately $4.34 billion, plus or minus $200 million. Non-GAAP adjusted diluted EPS in the range of $0.98 to $1.10. Generally very positive outlook for FY 2020 details below.

Conference Highlights:

Gary Dickerson, CEO, said "First quarter earnings exceeded the top-end of our guidance, giving us great momentum entering 2020. We believe we can deliver strong double-digit growth in our semiconductor business this year as our unique solutions accelerate our customers’ success in the AI-Big Data era. We believe we outperformed both the market and our peers in 2019." But expects to limit stock buy backs while repaying loans used for acquisition of Kokusai Electric.

Coronavirus top priority is health and safety of our employees, but we are doing all we can to keep our customers supplied. Believes overall impact to fiscal 2020 will be minimal, but may change timing of revenue.

Low point of this cycle was in calendar Q2 2019. The drop from peak revenue was only 17%, far less than in past cycles. Applied's volatility is less than peers.

Sees robust foundry logic demand continuing. Also healthy spending for specialty nodes. NAND appears to be in the early stage of recovery. DRAM is set up to recover, with prices appearing to have bottomed. FY 2020 display revenues are expected to be similar to FY 2019. AI will require novel materials, designs, and interconnects, which Applied is addressing. Process diagnostics and conrols system generated record revenue in the quarter. Packaging too.

Non-GAAP numbers: net income $904 million, up 22% sequentially from $744 million, and up 16% from $ million year-earlier. EPS $0.98, up 23% sequentially from $0.80, and up 21% from $0.81 year-earlier. 44.9% gross margin, up from 44.6% year-earlier. 25.7% operating margin, up from 24.6% year-earlier.

Semiconductor Systems sales were $2.81 billion, up 22% sequentially from $2.30 billion, and up 24% from $2.27 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 68%, DRAM 15%, Flash 17%. Segment operating income was $915 million or $925 million non-GAAP, margin was 32.5% or 32.9% non-GAAP.

Applied Global Services (AGS) revenue was $997 million, up 2% sequentially from $977 million and up 4% from $962 million year earlier. Non-GAAP Operating income was $278 million.

Display segment revenue was $332 million, down 27% sequentially from $457 million and down 36% from $507 million year-earlier. Non-GAAP operating income was $41 million, with a 12.3% operating margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $5.67 billion, up sequentially from $5.32 billion. Cash flow from operating activities was $987 million. Capital expenditures were $102 million. $192 million was used for cash dividends. Long-term debt was $4.71 billion. $200 million was used to repurchase stock in the quarter.

Cost of goods sold in Q4 was $2.30 billion, leaving gross profit of $1.86 billion. Operating expenses of $816 million consisted of: research and development $552 million; selling and marketing, $135 million; general and administrative $129 million. Leaving income from operations of $1.04 billion. Interest and other expense net $37 million. Income tax $113 million.

Q&A summary:

Gross margin going forward? Look at evolution of business over time, more diversified than in the past. Going forward foundry logic will trend up. Within that specialty nodes and technologies, which drive strong margins. Services is growing. For the rest of the year the semi systems business looks linear, with services and display to grow well into 2021. Margins should be steady with the growth.

Improved memory visibility? We are seeing early signs of memory recovery, depends on magnitude of that later in year.

Display market? We see it as an attractive adjacent market, despite being down a little bit this year, and the coronavirus impact. We see it growing into 2021, with the capital intensity rising. We are focussed on enablign customer roadmaps, including with new materials.

R&D as a percent of op ex is higher than in the past, but we are making investments to drive shareholder value. We believe the overall business will be bigger, with a new playbook for AI and data as classic Moore's law is slowing.

Importance of China to 2020 growth? $6.5 billion market in 2019, growth in 2020 will be significant, $2 billion to $3 billion. That is modest capacity addition, as a full scale memory factory can now cost $6 billion.

Our customers are spending a lot on WFE, but they are making a lot of money on their investment. The industry is experiencing increased capital intensity. The opportunities in front of us have never looked as good as they do today.

Deferred revenue driver? Actions China is taking for coronavirus led to travel restrictions. But we are now seeing some early signs of a return to normalcy in China.

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