Analyst Conference Call Summary

semiconductors

conference date: August 13, 2020 @ 1:30 PM Pacific Time
for quarter ending: July 26, 2020 (third quarter, Q3 fiscal 2020)

Forward-looking statements

Overview: Revenue up 23% y/y in a recession; what more could you want?

Basic data (GAAP):

Revenues were $4.40 billion, up 11% sequentially from $3.96 billion and up 23% from $3.56 billion in the year-earlier quarter.

Net income was $841 million, up 11% sequentially from $755 million and up 47% from $571 million year-earlier.

EPS (diluted earnings per share) were $0.91, up 11% sequentially from $0.82 and up 49% from $0.61 year-earlier.

Guidance:

For fiscal Q4, revenue expected between $4.4 and $4.8 billion. Non-GAAP EPS $1.11 to $1.23.

Conference Highlights:

Gary Dickerson, CEO, said "By addressing our customers' highest value problems, Applied is outperforming today and is positioned to grow faster than our markets over the next several years." Applied labs are running at pre-pandemic levels of activity.

Consumer spending could be a headwind for the semiconductor industry, but so far spending has increased due to home schooling, work from home, and cloud build-out. Expects wafer fabric demand to grow this year despite some weak sectors, notably automobiles. Transition to workload-specific computing helps Applied. Memory investment will also grow this year, with DRAM and NAND growth rates similar.

Complexity of ICs continues to grow, which propels the deposition business. Fastest growing company in etch, with revenue up about 30% this fiscal year. High-speed DDR5 memory is also a growth and leadership area for Applied. Working on next generation transistors and interconnects.

Non-GAAP numbers: net income $976 million, up 19% sequentially from $817 million, and up 41% from $692 million year-earlier. EPS $1.06, up 19% sequentially from $0.89, and up 43% from $0.74 year-earlier. 45.0% gross margin, up from 44.0% year-earlier. 26.4% operating margin, up from 23.0% year-earlier.

Semiconductor Systems sales were $2.92 billion, up 14% sequentially from $2.57 billion, and up 29% from $2.27 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 55%, DRAM 22%, Flash 23%. Segment operating income was $958 million or $982 million non-GAAP, margin was 32.9% or 33.7% non-GAAP.

Applied Global Services (AGS) revenue was $1.03 billion, up 1% sequentially from $1.02 billion and up 11% from $931 million year earlier. Non-GAAP Operating income was $277 million.

Display segment revenue was $425 million, up 16% sequentially from $365 million and up 25% from $339 million year-earlier. Non-GAAP operating income was $87 million, with a 20.5% operating margin. Demand being driven by Gen 10.5 and OLED displays.

Cash and equivalents (including long-term investments) balance ended at $6.29 billion, up sequentially from $5.61 billion. Cash flow from operating activities was $867 million. Capital expenditures were $87 million. $202 million was used for cash dividends. Long-term debt was $ billion. $200 million was used to repurchase stock in the quarter.

Cost of goods sold was $2.44 billion, leaving gross profit of $1.96 billion. Operating expenses of $847 million consisted of: research and development $472 million; selling and marketing, $130 million; general and administrative $145 million. Leaving income from operations of $1.11 billion. Interest and other expense net $68 million. Income tax $199 million.

Q&A summary:

Gross margins? We are performing well in the current environment. Longer-term we are hopeful we can raise margins further.

Memory capital expense trends? WFE for the year is up 10% to 15%, of $51.5 billion. Expects strength in both memory and foundry logic, weighted to second half. We see strength into 2021.

Business outside the largest foundry customer? We are seeing strength in foundry logic throughout the year, with multiple customers at multiple nodes and using our innovative equipment. We believe Fiscal Q2 2020 was the low point for foundry business.

Regionalization/nationalization of capacity? Semiconductors are strategic. They transform every industry. Many leading companies are creating custom silicon. Need to get to the right performance per watt at the right cost. That is way more important than for instance TSMC coming to the U.S., or Japan's program, though that is good for Applied, it boosts our service business as well.

We hope to close the Kokusai Electric acquisition soon, and expect it to be immediately accretive to results. They have some unique technologies that will give us a greater advantage. We will communicate more about the strategic value once the transaction closes.

Applied has deep visibility into 3nm and 2nm because we are working with customers to develop those nodes. This puts us in the best position ever, including in etch, inspection and measurement, and PDC.

PDC business should generate over $1 billion in revenue this fiscal year. Growth rate is 40%. Major new drivers are optical inspection and e-beam with the market-leading resolution.

Backlog? In fiscal Q3 we caught up on part of the backlog. We have more to go. Should be caught up in fiscal Q4, so we will see true end-market demand in fiscal Q1 2021.

We have been able to improve leakage current by combining multiple machines in a single vacuum system. You should see that in FinFET soon. Our selective Tungsten solution is also going to be a driver.

China rules? We have not seen meaningful impact on our business, so far. $6.5 billion sales in 2019, looks like $9.5 billion in 2020. We see slow, steady development of the econsystem, with some increase in production capacity.

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