Analyst Conference Call Summary

semiconductors

conference date: February 18, 2021 @ 1:30 PM Pacific Time
for quarter ending: January 31, 2021 (first quarter, Q1 fiscal 2021)

Forward-looking statements

Overview: Very strong revenue growth, record revenue.

Basic data (GAAP):

Revenues were $5.16 billion, up 10% sequentially from $4.69 billion and up 24% from $4.16 billion in the year-earlier quarter.

Net income was $1.13 billion, flat sequentially from $1.13 billion and up 27% from $892 million year-earlier.

EPS (diluted earnings per share) were $1.22, down 1% sequentially from $1.23 and up 27% from $0.96 year-earlier.

Guidance:

For Q2 fiscal 2021, net sales to be approximately $5.39 billion, plus or minus $200 million. Non-GAAP adjusted diluted EPS is expected range of $1.44 to $1.56.

Conference Highlights:

Gary Dickerson, CEO, said "In our first fiscal quarter, we have seen a continued acceleration of demand in our semiconductor business as major macro and industry trends fuel increasing consumption of silicon across a wide range of markets and applications. We have strong momentum across the company, as our broad portfolio and exposure to technology inflections, combined with the traction of our new products, put us in a great position to substantially outgrow our markets again in 2021 and beyond." Waiting for regulatory approval of the Kokasi acquisition.

In 2020 Applied outperformed in its markets and grew earnings faster than revenue. Expects to do the same in 2021. Focus is on innovative technologies that will propel growth through the decade. Believes virtualization of work will continue to accelerate even after the pandemic ends.

PDC, CBD, etch, diagnostics and control, IMS (integrated materials solutions) and advanced packaging are expected to be strong growth areas in 2021. But does not expect much growth in the display segment.

Non-GAAP numbers: net income $1.28 billion, up 11% sequentially from $1.15 billion, and up 42% from $904 million year-earlier. EPS $1.39, up 3% sequentially from $1.25, and up 42% from $0.98 year-earlier. 45.9% gross margin, up from 44.9% year-earlier. 29.0% operating margin, up from 25.7% year-earlier.

Semiconductor Systems sales were $3.55 billion, up 16% sequentially from $3.07 billion, and up 26% from $2.81 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 58%, DRAM 17%, Flash 25%. Segment operating income was $1.26 billion or $1.28 billion non-GAAP, margin was 35.5% or 36.1% non-GAAP.

Applied Global Services (AGS) revenue was $1.16 billion, up 5% sequentially from $1.11 billion and up 16% from $1.00 billion year earlier. Non-GAAP Operating income was 340$ million.

Display segment revenue was $411 million, 15% sequentially from $485 million and up 24% from $332 million year-earlier. Non-GAAP operating income was $75 million, with a 18.2% operating margin.

Cash and equivalents (including long-term investments) balance ended at $8.22 billion, up sequentially from $7.2 billion. Cash flow from operating activities was $1.42 billion. Capital expenditures were $121 million. $201 million was used for cash dividends. Long-term debt was $5.45 billion. $0 million was used to repurchase stock in the quarter in anticipation of the Kokasi transaction needs.

Cost of goods sold was $2.81 billion, leaving gross profit of $2.35 billion. Operating expenses of $1.07 billion consisted of: research and development $606 million; selling and marketing, $147 million; general and administrative $161 million; severance $142 million. Leaving income from operations of $1.28 billion. Interest and other expense net $43 million. Income tax $110 million.

Q&A summary:

WFE outperformance in 2020 v. 2021? In 2020 if WFE around $60 billion, we grew semi 26.5%. Drivers were NAND 2X, DRAM above the average. We expect the mix to be better in 2021, with DRAM outgrowing RAM, so we expect to significantly outperform the market this year. Beyond 2021 we see continued strong performance in 2022. 2D scaling is coming to an end, the new roadmap favors Applied, new structures and new materials. Listed the many technologies Applied is innovating in.

Expects WFE global in 2021 high 60s to $70 billion or more. The demand is diverse and broad. Expects a decade-plus investment cycle, though customers will be disciplined.

Optical inspection tool, PDC growth? Optical wafer inspection system has been a driver, is in early stage of adoption. E-beam growth is strong. Electron optics leadership, which we will expand to our broader platforms. Customers care about driving key metrics. Our synergies within the company are growing.

Services have been growing at about twice the size of our installed base. One driver is the need to keep machines at tighter specifications. We have more long term service agreeements, as a percent, in place.

Austen manufacturing site, freeze impact? We did have power fluctuations, we see no material impact, weather will get better, we are ready to ramp up again quickly.

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