Analyst Conference Call Summary

semiconductors

conference date: February 16, 2022 @ 1:30 PM Pacific Time
for quarter ending: January 30, 2022 (first quarter, Q1 fiscal 2022)

Forward-looking statements

Overview: Another great quarter, record revenue.

Basic data (GAAP):

Revenues were $6.27 billion, up 2% sequentially from $6.12 billion and up 21% from $5.16 billion in the year-earlier quarter.

Net income was $1.79 billion, up 3% sequentially from $1.71 billion and up 59% from $1.13 billion year-earlier.

EPS (diluted earnings per share) were $2.00, up 6% sequentially from $1.89 and up 64% from $1.22 year-earlier.

Guidance:

For Q2 fiscal 2022, revenue within $300 million of $6.35 billion. Non-GAAP Eps $1.75 to $2.05.

Conference Highlights:

Gary Dickerson, CEO, said "While the supply environment remains challenging, Applied Materials is doing everything we can to deliver for our customers and we recorded our highest-ever quarterly revenues. Our outlook for 2022 and beyond is very positive as long-term secular trends drive our markets structurally higher and Applied's broad technology portfolio puts us in a great position to capture a larger portion of our served markets." Demand has never been stronger, our ability to supply it is constrained. Orders were an all time high in the quarter. It will take some time for supply to come back into line with demand. Working on building a stronger supply chain to relieve constraints. Demand is still growing, Applied is close to being sold out for 2022 already. Likely 2023 will also be a growth year.

Used the metaverse word to point out that expects demand to continue for decades. PPACt (Power, Performance, Area Cost and time-to-market) will enable new demand. Government support for local supply will also boost demand. Expects demand for wafer fab equipment to grow faster than the economy.

Newer Applied technologies are scoring sales wins with customers.

Foundry logic was the fastest growing sector in the quarter. Non-GAAP operating margin in semi grew significantly y/y.

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

Non-GAAP numbers: net income $1.70 billion, down 3% sequentially from $1.76 billion, and up 32% from $1.28 billion year-earlier. EPS $1.89, down 3% sequentially from $1.94, and up 36% from $1.39 year-earlier.

Semiconductor Systems sales were $4.57 billion, up 6% sequentially from $4.31 billion, and up 29% from $3.55 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 60%, DRAM 25%, Flash 15%. Segment operating income was $1.77 billion or $1.78 billion non-GAAP. $8 billion backlog in a rich mix of products.

Applied Global Services (AGS) revenue was $1.32 billion, down 4% sequentially from $1.37 billion and up 14% from $1.16 billion year earlier. Non-GAAP Operating income was $403 million. 92% subscription renewal rate. But had supply chain constraints.

Display segment revenue was $366 million, down 12% sequentially from $417 million and down 11% from $411 million year-earlier. Non-GAAP operating income was $76 million.

Cash and equivalents (including long-term investments) balance ended at $7.76 billion, up sequentially from $7.52 billion. Cash flow from operating activities was $2.66 billion. Capital expenditures were $144 million. Free cash flow $2.51 billion. $214 million was used for cash dividends. Used $1.80 billion to repurchase shares. Long-term debt was $5.45 billion.

Cost of goods sold was $3.31 billion, leaving gross profit of $2.96 billion. Operating expenses of $983 million consisted of: research and development $654 million; selling and marketing, $167 million; general and administrative $166 million. Leaving income from operations of $1.98 billion. Interest and other expense net $51 million. Income tax $133 million.

Q&A summary:

Cost of greater supply, effect on margins? Gross margins are increasing, but are hit by material costs and logistic issues, but those should be transitory. Backlogs are largely in semi, which has better margins. Confident we can stay on our model. We need to do better on deliveries, but we can also discuss price increases with customers.

We got more materials in Q1 than Q4, but they were not the exact mix we needed, so we are still waiting for particular parts from the supply chain.

Are customers ordering more than they need, given the backlog? When you look at the low inventory and the mix, this does not indicated excessive ordering or double bookings. Q1 fab utilization was a record. Intel, for instance, is pretty committed to spending. In trailing edge, customers used to be able to do that by rolling over leading edge products, but now trailing edge demand is stronger than that rollover can meetl. 20 nm and above has gone up as a % of WFE because of increased demand. So I do not think we are overheated right now.

Etch market, inspection, metrology? We have a new platform that lowers wiring resistance by 50%. Capacitor scaling, DRAM, all these inflections are great for Applied. We have over 50% share of our served packaging markets. We have never been in a better position in etch, other areas. We are booking into 2023 in our leadership areas, including metal deposition.

$100 billion WFE global demand, is that unconstrained demand? Visibility is kind of gray, nobody is sure. Could demand still exceed supply at the end of the year, Yes. Would guess unconstrained demand is between $100 and $110 billion.

Part of the supply constraints are because we did not anticipate the strong demand for some of our products, like metal deposition.

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