Analyst Conference Call Summary

semiconductors

conference date: May 14, 2020 @ 1:30 PM Pacific Time
for quarter ending: April 26, 2020 (second quarter, Q2 fiscal 2020)

Forward-looking statements

Overview: Continued y/y revenue growth. Below analyst consensus and prior guidance, but good considering the pandemic.

Basic data (GAAP):

Revenues were $3.96 billion, down 5% sequentially from $4.16 billion and up 12% from $3.54 billion in the year-earlier quarter.

Net income was $755 million, down 15% sequentially from $892 million and up 13% from $666 million year-earlier.

EPS (diluted earnings per share) were $0.82, down 15% sequentially from $0.96 and up 17% from $0.70 year-earlier.

Guidance:

Suspended guidance on March 23. Still potential for pandemic disruptions, so not providing guidance at this time. But believes, based on customer surveys, semiconductor system revenue should be up sequentially in Q3.

Conference Highlights:

Gary Dickerson, CEO, said "While the situation remains fluid, based on the visibility we have today, our supply chain is recovering, and underlying demand for our semiconductor equipment and services remains robust."

Coronavirus pandemic has created challenges. Priority is safety, but the workforce remains productive. There have been supply chain constraints. We were impacted by inability to ship to some customers.

The backlog of orders grew in the quarter, despite some pockets of weakness related to the automotive and industrial sectors. Believe still likely double digit percentage growth this fiscal year. Investing in next-generation products. The pandemic is working as an accelerator for trends that were already underway, including working from home. Believes AI and big data will shape the next decade, requiring advances in semiconductor technologies.

Increased the dividend 5% during the quarter. Borrowed during the quarter as a precaution, but repaid before the end of the quarter.

Non-GAAP numbers: net income $817 million, down 10% sequentially from $904 million, and up 24% from $660 million year-earlier. EPS $0.89, down 9% sequentially from $0.98, and up 27% from $0.70 year-earlier. 44.6% gross margin, up from 43.5% year-earlier. 24.7% operating margin, up from 22.4% year-earlier.

Semiconductor Systems sales were $2.57 billion, down 9% sequentially from $2.81 billion, and up 18% from $2.18 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 56%, DRAM 22%, Flash 22%. Segment operating income was $782 million or $798 million non-GAAP, margin was 30.5% or 31.1% non-GAAP. There were supply constraints in the quarter, so the backlog grew.

Applied Global Services (AGS) revenue was $1.02 billion, up 2% sequentially from $997 million and up 3% from $984 million year earlier. Non-GAAP Operating income was $260 million.

Display segment revenue was $365 million, up 10% sequentially from $332 million and up 5% from $348 million year-earlier. Non-GAAP operating income was $78 million, with a 21.4% operating margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $5.61 billion, down sequentially from $5.67 billion. Cash flow from operating activities was $ million. Capital expenditures were $ million. $193 million was used for cash dividends. Long-term debt was $6.2 billion. $199 million was used to repurchase stock in the quarter.

Cost of goods sold in Q2 was $2.21 billion, leaving gross profit of $1.75 billion. Operating expenses of $817 million consisted of: research and development $550 million; selling and marketing, $130 million; general and administrative $137 million. Leaving income from operations of $932 million. Interest and other expense net $54 million. Income tax $123 million.

Q&A summary:

Memory guidance for sequential growth? Both DRAM and NAND spend should be balanced. 2020 an investment year based on technology roadmaps, with new technology rather than expanded capacity.

Gross margin trajectory? We made decisions starting in January. We want to maintain cycle times and throughput. That does increase some costs during a pandemic. It is a margin headwind, but we are also expecting a favorable segment mix. Overall we a planning for gross margin to be flat in Q3 from Q2.

Best end markets for you this year? We have good balance across device segments. PPACT roadmap acceleration in memory and foundry are an advantage. We see strong foundry logic investment, etch, double digit growth in memory for scaling. Our pipeline for new products has never been better.

Export controls? We believe in fair trade and IP protection. We believe we can meet the U.S. government standards by the time new rules are effective.

Chinese demand? End of 2019 market was $6.5 billion. In 2020 we see an increase of $2 to $3 billion, probably at the high end of the range given the recent news.

Optical inspection new product? We have momentum in inspection and measurement, the new optical product is expected to do well.

PDC? E-beam is strong. New products being introduced. We have a new product in packaging that is showing momentum. We expect to continue to grow etch share.

$650 million impact from supply from COVID, impact on Q3? Suppliers need to reopen, they need to catch up. Our suppliers are getting back to pre-COVID output levels. Making up for lost volumes will likely happen in fiscal Q4 and Q1. Logistics return to normal may be a longer-term problem because of lack of aircraft space.

Service revenue in China? We do semiconductor and display in China. We service both multinationals and the domestic industry, maybe 35% to 65%.

Change of cadence on Moore's law back to more aggressive? WFE 51 to 52 billion in 2019. Was 60% foundry, 40% memory. Sizing 2020 is premature, but believe split will be about the same. In 2021 innovations will drive PPACT, T or time being a really important element. Putting us in a strong competitive position.

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