Analyst Conference Call Summary

semiconductors

conference date: May 20, 2021 @ 1:30 PM Pacific Time
for quarter ending: May 2, 2021 (second quarter, Q2 fiscal 2021)

Forward-looking statements

Overview: Astonishing y/y jump in revernue and profits.

Basic data (GAAP):

Revenues were $5.58 billion, up 8% sequentially from $5.16 billion and up 41% from $3.96 billion in the year-earlier quarter.

Net income was $1.33 billion, up 18% sequentially from $1.13 billion and up 76% from $755 million year-earlier.

EPS (diluted earnings per share) were $1.43, up 17% sequentially from $1.22 and up 74% from $0.82 year-earlier.

Guidance:

Fiscal Q3 2021 revenue expected between $5.72 and $6.12 billion. Non-GAAP diluted EPS $1.70 to $1.82

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials' record performance is underpinned by broad-based strength across our semiconductor businesses. We are confident in our ability to outperform our markets as large, secular trends create sustainable demand for semiconductors and our leadership in materials engineering becomes increasingly critical to deliver new chip technologies."

Overcame supply chain challenges in the quarter. Demand continues to grow, and key technology trends have accelerated. Just-in-time supply chains may not be the most effective strategy going forward, given the strategic importance of semiconductor chips. Trends should drive demand for semiconductor manufacturing equipment higher. AI computing has become a necessity and requires even more investment. Energy efficiency has become critical, requiring better materials technology. Foundry fab will be the fastest growth area in 2021, followed by DRAM. Applied is outperforming the overall market. Applied's process, diagnostics and control equipment is expected to grow 50% in 2021. Integrated materials processing solutions generating significant revenue in 2021.

AIX (Actionable Insight Accelerator) initiative is going well.

Expects to be more active with stock buy backs going forward; authorized more.

Non-GAAP numbers: net income $1.51 billion, up 18% sequentially from $1.28 billion, and up 85% from $817 million year-earlier. EPS $1.63, up 17% sequentially from $1.39, and up 83% from $0.89 year-earlier. 47.7% gross margin, up from 44.6% year-earlier. 31.7% operating margin, up from 24.7% year-earlier.

Semiconductor Systems sales were $3.97 billion, up 12% sequentially from $3.55 billion, and up 54% from $2.57 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 56%, DRAM 14%, Flash 30%. Segment operating income was $1.54 billion or $1.56 billion non-GAAP.

Applied Global Services (AGS) revenue was $1.20 billion, up 3% sequentially from $1.16 billion and up 18% from $1.02 billion year earlier. Non-GAAP Operating income was $359 million.

Display segment revenue was $375 million, down 9% sequentially from $411 million and up 3% from $365 million year-earlier. Non-GAAP operating income was $66 million, with a 17.3% operating margin.

Cash and equivalents (including long-term investments) balance ended at $8.34 billion, up sequentially from $8.22 billion. Cash flow from operating activities was $1.19 billion. Capital expenditures were $204 million. $202 million was used for cash dividends. Used $750 million to repurchase shares. Long-term debt was $5.45 billion.

Cost of goods sold was $2.93 billion, leaving gross profit of $2.65 billion. Operating expenses of $1.07 billion consisted of: research and development $617 million; selling and marketing, $148 million; general and administrative $149 million; deal termination $154 million; severance $6 million. Leaving income from operations of $1.58 billion. Interest and other expense net $34 million. Income tax $215 million.

Q&A summary:

WFE forecast, ability to supply customers, backlog? We are planning for our busienss to be up 2H over 1H, and also in 2022. Several quarters ago we began working on increasing our capacity to satisfy the demand we see.

Margin trajectory? Up 310 basis points y/y, we did a lot of work to achieve that. We have initiatives to make Applied even more efficient. Expects continued strong performance. We are using innovation to solve high-value problems for our customers.

DRAM market dynamics? In 2020 DRAM market was up in high teens, but ours was up 27% or so. We expect momentum to pick up going forward so that our customers bit supply can catch up with bit demand.

Expects to see about $1 trillion on global semiconductor demand by 2030. Demand will grow significantly faster than human population. Capital intensity will increase.

In the panel market we see increased consumer demand, larger screen sizes, better pricing later in 2021 and in 2022. We are prepared to reposition this business for a better operating margin in 2022 and beyond.

Gate all around is a technology we are leading in, our e-beam leadership is critical for gate all around and other new technologies.

China? It was strong in the quarter, but not out of line historically. There is slow, steady investment in the ecosystem there. Does not appear to be driven by a specific market or customer.

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