Analyst Conference Call Summary

semiconductors

conference date: November 18, 2021 @ 1:30 PM Pacific Time
for quarter ending: November 1, 2021 (fourth quarter, Q4 fiscal 2021)

Forward-looking statements

Overview: Another great quarter, record annual revenue.

Basic data (GAAP):

Revenues were $6.12 billion, down 1% sequentially from $6.20 billion and up 31% from $4.40 billion in the year-earlier quarter.

Net income was $1.71 billion, down 1% sequentially from $1.72 billion and up 51% from $1.13 million year-earlier.

EPS (diluted earnings per share) were $1.89, up 1% sequentially from $1.87 and up 54% from $1.23 year-earlier.

Guidance:

For fiscal Q1 2022 expects revenue of $6.16 billion, plus or minus $250 million, which includes the expected impact of ongoing supply chain challenges. Non-GAAP adjusted diluted EPS is expected to be in the range of $1.78 to $1.92.

Conference Highlights:

Gary Dickerson, CEO, said "Revenue was at the low end of guidance due to supply chain challenges. Demand for semiconductors and equipment continues to grow as the pandemic accelerates digital transformation of the economy, and currently, our supply chain cannot keep up. We expect supply shortages of certain silicon components to persist in the near-term, and managing these constraints in partnership with our suppliers and chipmakers is our top priority." Backlog grew due to demand and supply constraints. Does not expect to be able to meet demand in fiscal Q1.

The environment is challenging, but the demand for equipment is strong. Supply chain restraints became worse as the quarter progressed, and expects them to progress into 2022. But factory capacity is not a limiting factor; certain silicon components are. Suppliers are moving from a just-in-time to a just-in-case approach. Demand drivers continue to grow, so expects wafer fabric equipment demand growth to continue in 2022. Silicon used in end devices continues to grow. There is a fierce battle for leadership by IC producers in advanced nodes.

Aims to return 80% to 100% of free cash flow to investors.

AIX (Actionable Insight Accelerator) initiative is going well. Demand in Applied's leadership areas is very strong. Recently released new materials and has more lined up. Complex integrated systems are appealing to customers.

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

Non-GAAP numbers: net income $1.76 billion, up 1% sequentially from $1.74 billion, and up 53% from $1.15 billion year-earlier. EPS $1.94, up 2% sequentially from $1.90, and up 55% from $4.17 year-earlier. 48.1% gross margin, up from 45.4% year-earlier. 32.9% operating margin, up from 27.4% year-earlier.

Semiconductor Systems sales were $4.31 billion, down 3% sequentially from $4.45 billion, and up 40% from $3.07 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 63%, DRAM 23%, Flash 14%. Segment operating income was $1.72 billion or $1.73 billion non-GAAP. But Orders grew by 78%, full year/full year. In Q4 some component deliveries were late, affecting production of certain types of systems.

Applied Global Services (AGS) revenue was $1.37 billion, up 6% sequentially from $1.29 billion and up 23% from $1.11 billion year earlier. Non-GAAP Operating income was $425 million. Ended Fiscal Q4 with a record backlog.

Display segment revenue was $417 million, down 3% sequentially from $431 million and down 14% from $485 million year-earlier. Non-GAAP operating income was $86 million.

Cash and equivalents (including long-term investments) balance ended at $7.52 billion, down sequentially from $8.17 billion. Cash flow from operating activities was $1.15 billion. Capital expenditures were $ million. $216 million was used for cash dividends. Used $1.50 billion to repurchase shares. Long-term debt was $5.45 billion.

Cost of goods sold was $3.18 billion, leaving gross profit of $2.95 billion. Operating expenses of $931 million consisted of: research and development $622 million; selling and marketing, $155 million; general and administrative $155 million. Leaving income from operations of $2.01 billion. Interest and other expense net $8 million. Income tax $294 million.

Full fiscal year 2021: revenue $23.1 billion, up 34% y/y; GAAP net income $5.89 billion, up 63% y/y; GAAP EPS $6.40, up 63% y/y. Non-GAAP net income $6.29 billion, up 64% y/y; non-GAAP EPS $6.84, up 64%.

Q&A summary:

Supply constraint timelines? We managed it well for most of the year, then got behind towards the end of the quarter, focussed on it now. We are working with suppliers to free up demand. We are already doing a little bit better. While there were a number of parts shortages, there were 10 particular PLCs (programmable logic controllers) that gave us problems last quarter. Expect supply chain to improve quarter by quarter.

Customer reactions to wait times? They are taking all we can ship, we are largely keeping them happy.

Demand visibility? Strong as far out as we can see.

Could customers be ordering more than they need, double booking? Does not see double booking as a problem, currently.

Any constraints on services business? We are ahead of plan to hit our 2024 model. Not seeing any supply chain issues in that business.

Localization of semi capacity? It is good for our business. Movement to new locations creates opportunities, including for our services business. There is also an R&D ramp involved.

We think WFE is up 10%-ish next year. We expect 2H booking will be stronger than 1H.

Wiring resistance and foundry logic are the biggest challenges for our customers. We are delivering innovations for these to our customers, including a 50% improvement in resistance. Our etch market share is increasing.

Specific areas impacted by contraints? No display. While the constraints are not broad-based, the end markets are.

We see is memory on the whole is more flatish next year.

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