Analyst Conference Call Summary

semiconductors

conference date: May 19, 2022 @ 1:30 PM Pacific Time
for quarter ending: May 1, 2022 (second quarter, Q2 fiscal 2022)

Forward-looking statements

Overview: Good quarter, could have been better without supply constraints. Slightly below midpoint of guidance.

Basic data (GAAP):

Revenues were $6.25 billion, near flat sequentially from $6.27 billion and up 12% from $5.58 billion in the year-earlier quarter.

Net income was $1.54 billion, down 14% sequentially from $1.79 billion and up 15% from $1.33 billion year-earlier.

EPS (diluted earnings per share) were $1.74, down 13% sequentially from $2.00 and up 22% from $1.43 year-earlier.

Guidance:

For the July or Q3 fiscal 2022 quarter, net sales $6.25 plus or minus $0.4 billion. Non-GAAP EPS $1.59 to $1.95. Semiconductor revenue expected well below demand.

Conference Highlights:

Gary Dickerson, CEO, said "Demand for Applied Materials' products and services has never been stronger, yet we remain constrained by on-going supply chain issues. Our priority is to work quickly and creatively across the supply chain to bring more industry capacity on-line, while accelerating the technology inflections that we believe will enable Applied to outgrow the semiconductor market in the years ahead." Demand for semiconductors has never been stronger or broader, while industry's ability to fill demand has been constrained by supply chain issues, particularly in China in April. Applied is working with suppliers and customers to overcome this issue. Also adjusting prices. Orders are booked for 2022. Customers now looking to secure supply for 2023, so projecting demand will grow over 2022. Fab utilization is the highest on record. Gary sees a high single digit growth rate for the WFE market for the rest of the decade.

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

Newer Applied technologies are scoring sales wins with customers. They enable a new roadmap as the old shrinkage cycle lengthens.

Contact and interconnect are major focuses for customers going forward. The total available market is growing rapidly. Packaging revenue is also growing rapidly, with Applied at 60% share of its served market.

Authorized 8.3% dividend increase and a new stock buyback program in fiscal Q2.

Non-GAAP numbers: net income $1.64 billion, down 4% sequentially from $1.70 billion, and up 8% from $1.51 billion year-earlier. EPS $1.85, down 2% sequentially from $1.89, and up 13% from $1/63 year-earlier.

Semiconductor Systems sales were $4.46 billion, down 2% sequentially from $4.57 billion, and up 12% from $3.97 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 65%, DRAM 21%, Flash 14%. Segment operating income was $1.65 billion or $1.66 billion non-GAAP. $ billion backlog in a rich mix of products.

Applied Global Services (AGS) revenue was $1.38 billion, up 5% sequentially from $1.32 billion and up 15% from $1.20 billion year earlier. Non-GAAP Operating income was $422 million. But had supply chain constraints.

Display segment revenue was $381 million, up 4% sequentially from $366 million and up 2% from $375 million year-earlier. Non-GAAP operating income was $82 million. However, display equipment demand is softening.

Cash and equivalents (including long-term investments) balance ended at $6.02 billion, down sequentially from $7.76 billion. Cash flow from operating activities was $415 million. Capital expenditures were $210 million. Free cash flow $205 million. $211 million was used for cash dividends. Used $1.8 billion to repurchase shares. Long-term debt was $5/46 billion.

Cost of goods sold was $3.32 billion, leaving gross profit of $2.93 billion. Operating expenses of $1.03 billion consisted of: research and development $686 million; selling and marketing, $173 million; general and administrative $174 million. Leaving income from operations of $1.89 billion. Interest and other expense net $30 million. Income tax $328 million.

Q&A summary:

Given supply constraints and order backlogs, supply relations? Working to improve output to get to levels we anticipate later in the year. Lockdowns in China have been frustrating. We expect to do better as we get past this quarter. For customers we hope to work down the backlog as critical components come in. Customer visibility is better than ever, we are booking all the way into 2024, our customers have large backlogs with their customers.

Backlog level? Continued to grow, but not celebrating it. We want to work it down. We have more than two quarters of backlog. We are shipping tools that miss some parts that need to be added at the end point, we do not book those as revenue until they are completed. Guidance takes all this into effect.

Our capacity is high today, if we can get the key components we can ramp up output quickly. The biggest uncertainty is the Covid lockdown and how fast it will resolve.

Expects some pricing improvements in Q3-Q1, also hopes for some better pricing from suppliers.

Our customers want us to make investments so we can meet their demand. Wiring innovations are one of the biggest bottlenecks in the industry, we have solutions for this.

Revenue guidance beyond Q3? At $6.25 we are figuring on our knowledge of the supply chain. For Q4 will start also with no inventory on critical components, but should be incrementally larger than Q3, but no guidance yet, depends on the supply chain opening up.

Can you see Display returning to growth? The impact is from change in consumer demand, likely for several quarters. So resizing the business, but want to be ready to grow when demand picks back up. Expect to be down about 10% this year.

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