Analyst Conference Call Summary


Applied Materials

conference date: August 19, 2021 @ 1:30 PM Pacific Time
for quarter ending: August 1, 2021 (third quarter, Q3 fiscal 2021)

Forward-looking statements

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

Basic data (GAAP):

Revenues were $6.20 billion, up 11% sequentially from $5.58 billion and up 41% from $4.40 billion in the year-earlier quarter.

Net income was $1.72 billion, up 29% sequentially from $1.33 billion and up 104% from $841 million year-earlier.

EPS (diluted earnings per share) were $1.87, up 31% sequentially from $1.43 and up 105% from $0.91 year-earlier.


Fiscal Q4 sales approximately $6.33 billion. Non-GAAP diluted EPS $1.87 to $2.01.

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials delivered record performance as long-term trends fueled by the digital transformation of the economy drive strong, secular demand for semiconductors. Applied has the broadest and most enabling portfolio of technologies to accelerate our customers' roadmaps, putting us in a great position to outperform our markets again in 2021 and the years ahead."

But the supply environment was challenging. The industry has seen a permanent structural shift to address long-term digital economy trends. Foundry spend is the fastest growing segment at present. Applied is outperforming its markets and has plans to do even better in the future. Demand is strong for leadership products. Process diagnostics and control is growing particularly fast. PPACT (performance, power, area, cost and time) program is showing benefits. Believes all reporting segments will show higher revenue in 2022.

AIX (Actionable Insight Accelerator) initiative is going well.

National governments are recognizing the strategic importance of semicondutors, leading to support for greater capacity.

Non-GAAP numbers: net income $1.74 billion, up 24% sequentially from $1.51 billion, and up 78% from $976 million year-earlier. EPS $1.90, up 17% sequentially from $1.63, and up 79% from $1.06 year-earlier. 48.0% gross margin, up from 45.0% year-earlier. 32.5% operating margin, up from 25.2% year-earlier.

Semiconductor Systems sales were $4.45 billion, up 12% sequentially from $3.97 billion, and up 52% from $2.92 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 63%, DRAM 20%, Flash 17%. Segment operating income was $1.79 billion or $1.79 billion non-GAAP.

Applied Global Services (AGS) revenue was $1.29 billion, up 8% sequentially from $1.20 billion and up 25% from $1.03 billion year earlier. Non-GAAP Operating income was $393 million.

Display segment revenue was $431 million, up 15% sequentially from $375 million and up 1% from $425 million year-earlier. Non-GAAP operating income was $100 million.

Cash and equivalents (including long-term investments) balance ended at $8.17 billion, down sequentially from $8.34 billion. Cash flow from operating activities was $1.69 billion. Capital expenditures were $137 million. $219 million was used for cash dividends. Used $1.5 billion to repurchase shares. Long-term debt was $5.45 billion. $6.5 billion share buy back remains.

Cost of goods sold was $3.23 billion, leaving gross profit of $2.97 billion. Operating expenses of $954 million consisted of: research and development $640 million; selling and marketing, $159 million; general and administrative $155 million. Leaving income from operations of $2.01 billion. Interest and other expense net $33 million. Income tax $264 million.

Q&A summary:

Icap business as half of foundry logic? Greater than 55% of WFE this year is foundry, icaps nodes are greater than 50%, balanced. Strength across those nodes. We are on the leading edge for those nodes, popular in IoT, Auto, sensors, etc. We have key enabling technologies at attractive margins. We are talking about trillions of devices and sensors at the edge, and the performance needs to be improved.

DRAM trajectory? DRAM WFE demand is expected strong rest of year. We have strong momentum in the business. Customers are adopting logic type structures. In 2022 we see overall WFE up, including DRAM. As to a peak, we see higher demand in 5 years, but DRAM node over node shrinks are seeing less bit growth than they did historically. So capital intensity is rising. Every year may not be a peak, but the trendline remains up.

Makeup of spend in China? Includes both domestic and international business, lots of pieces. $10 billion China WFE spend last year. Weighted to Icaps market this year. We serve across all three of our reporting segments. For supply chain continuity nations was more regional capacity. But we are not expecting government spend in 2022, we expect to start to see it in 2023.

Backlog? PPACT roadmap determines who wins and loses in the industry. Our customers are looking at new materials, new packaging, buried power rails, etc. With no smaller pitch you can get significant area savings. This is Applied's sweet spot.

Display inflection timeline? We have seen screen sizes increase, foldable screens, market fundamentals are strengthening. Should see improvement in 2022, but not a big jump in demand. OLED needs some technical improvements to bring it to large screens.

Inventory trends? In this quarter we are likely to see the inventory rise in anticipation of increased demand in the future. We are growing in a disciplined way.

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Disclaimer: my analyst summaries may include both my condensations of statements made by company representatives and my own analysis. They are not covered by any warranty. I cannot guarantee anything said by company representatives is true. Itry not to make errors, but it is possible. What I put in these notes may not be what you would note. This is journalism, not advice.

Copyright 2021 William P. Meyers