Analyst Conference Call Summary

semiconductors

conference date: August 18, 2022 @ 1:30 PM Pacific Time
for quarter ending: July 31, 2022 (third quarter, Q3 fiscal 2022)

Forward-looking statements

Overview: Record revenue, but supply chain issues continue to constrain growth. DRAM and display segment weak.

Basic data (GAAP):

Revenues were $6.52 billion, up 4% sequentially from $6.25 billion and up 5% from $6.20 billion in the year-earlier quarter.

Net income was $1.61 billion, up 5% sequentially from $1.54 billion and down 6% from $1.72 billion year-earlier.

EPS (diluted earnings per share) were $1.85, up 6% sequentially from $1.74 and down 1% from $1.87 year-earlier.

Guidance:

For fiscal Q4 2022 net sales to be approximately $6.65 billion, plus or minus $400 million, which includes the expected impact of ongoing supply chain challenges. Non-GAAP adjusted diluted EPS expected in the range of $1.82 to $2.18.

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials delivered record quarterly revenue, yet ongoing supply chain challenges constrained our ability to meet demand, and our top priority remains increasing shipments to our customers. We feel confident in our ability to navigate macroeconomic headwinds and remain very positive about the long-term strength of the semiconductor market and our outsized growth opportunities." Beginning to see mitigation of supply chain issues. Demand still far exceeds supply. For fiscal 2023 expects lower memory segment spending. Foundry looks strong. Consumer segment could be week, but auto and industrial appears strong. See Applied as supply constrained for next several quarters. The order backlog increased in Q3 and continues to be large.

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. The technology roadmap is becoming increasingly complex which should shift spend to Applied's market over time.

Newer Applied technologies are scoring sales wins with customers. They enable a new roadmap as the old shrinkage cycle lengthens. Low resistance solutions for contacts and wiring are a multi-billion opportunity going forward.

Contact and interconnect are major focuses for customers going forward. The total available market is growing rapidly. Packaging revenue is also growing rapidly.

There are currently areas of both strength and weakness in the semiconductor market. Slowing headcount growth, increasing some prices which should help with margins.

Non-GAAP numbers: net income $1.68 billion, up 2% sequentially from $1.64 billion, and down 3% from $1.74 billion year-earlier. EPS $1.94, up 5% sequentially from $1.85, and up 2% from $1.90 year-earlier.

Semiconductor Systems sales were $4.73 billion, up 6% sequentially from $4.46 billion, and up 6% from $4.45 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 66%, DRAM 15%, Flash 19%. Segment operating income was $1.70 billion or $1.71 billion non-GAAP.

Applied Global Services (AGS) revenue was $1.42 billion, up 3% sequentially from $1.38 billion and up 10% from $1.29 billion year earlier. Non-GAAP Operating income was $434 million. Renewal rates are strong, but still some supply chain restraints, particularly for 200 mm systems.

Display segment revenue was $333 million, down 9% sequentially from $366 million and down 23% from $431 million year-earlier. Non-GAAP operating income was $70 million. Weaker due to exposure to the weak consumer segment.

Cash and equivalents (including long-term investments) balance ended at $5.60 billion, down sequentially from $6.02 billion. Cash flow from operating activities was $1.47 billion. Capital expenditures were $210 million. Free cash flow $1.26 billion. $225 million was used for cash dividends. Used $1 billion to repurchase shares. $440 million used for 2 acquisitions. Long-term debt was $5.46 billion.

Cost of goods sold was $3.51 billion, leaving gross profit of $3.01 billion. Operating expenses of $1.08 billion consisted of: research and development $705 million; selling and marketing, $180 million; general and administrative $197 million. Leaving income from operations of $1.92 billion. Interest and other expense net $49 million. Income tax $255 million.

Q&A summary:

Constraints, demand, margins? In the last couple of weeks we reconfirmed demand with customers. Overall demand is above our ability to supply for the next few quarters. We have invested in the supply chain so output should increase. Margin progress is incremental.

Customer reactions to timing adjustments? If a customer asks for a delay, we try to remain flexible. The more serious challenge is keeping up with demand. Memory is getting weaker.

Spending environment going forward? Demand is higher than supply, so we will work on increasing our supply. So even a drop in demand would likely still exceed supply, except in some specific areas.

Memory backlog is weakening, foundry is growing and therefore overall backlog. Foundry is an increasing % of overall wafer fab spend as companies race for top-end capacity.

China notice to prevent sub-14 mm shipments did not affect on July quarter. Most of our display revenue comes from China.

Chips and Science Act? Very happy with it. A small tail wind for the industry. Our customers may move to new locations, that can have startup costs, but it will not affect global end demand.

Our inventory of tools that are built except missing required parts is growing, but we expect to raise output over the next several quarters.

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