Analyst Conference Call Summary

semiconductors

conference date: November 17, 2022 @ 1:30 PM Pacific Time
for quarter ending: October 31, 2022 (fourth quarter, Q4 fiscal 2022)

Forward-looking statements

Overview: Strong growth, but sees some headwinds coming.

Basic data (GAAP):

Revenues were $6.75 billion, up 3.5% sequentially from $6.52 billion and up 10% from $6.12 billion in the year-earlier quarter.

Net income was $1.59 billion, down 1% sequentially from $1.61 billion and down 7% from $1.71 billion year-earlier.

EPS (diluted earnings per share) were $1.85, flat sequentially from $1.85 and down 2% from $1.89 year-earlier.

Guidance:

January 2023, Q1 2023, revenue about $6.7 billion. Non-GAAP adjusted diluted EPS between $1.75 and $2.11. Includes $490 million negative impact from export restrictions.

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials delivered a strong finish to our fiscal year with record performance, and we remain focused on mitigating supply chain constraints and doing everything possible to meet customer demand. Though we are slowing the rate of spending growth in the near term amid geopolitical and macroeconomic challenges, we are making the strategic investments to win the major technology inflections that will enable Applied to outgrow the semiconductor market." Backlog at the end of the fiscal year was $19 billion, of which $12.7 billion was for semi systems.

Hopes to continue to narrow supply gaps over the next few quarters. The backlog grew in Q4, particulary in metal deposition, due to supply chain issues. New export control regularion impact could be between $1.5 and $2.0 billion in fiscal 2023, depending on how fast the government grants licenses and how companies refocus their growth efforts. Costs are increasing. Memory spending is expected to be down y/y in 2023, but cutting-edge foundry spending is expected to grow. Applied is slowing its own spending ovall, but still is expanding where necessary to catch up on the backlog.

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. Consumer markets are softer while industrial markets are robust, including transition to electric vehicles. Overall some pullback in induatry spending in 2023, but believe Applied will do better that the overall market. Believes wafer fabrication equipment will grow faster than the overall market, and Applied's PPAC innovations will allow it to grow share. Packaging equipment business is growing quickly.

Non-GAAP numbers: net income $1.74 billion, up 4% sequentially from $1.68 billion, and down 1% from $1.76 billion year-earlier. EPS $2.03, up 5% sequentially from $1.94, and up 5% from $1.94 year-earlier.

Semiconductor Systems sales were $5.04 billion, up sequentially from $4.73 billion, and up 17% from $4.31 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 71%, DRAM 16%, Flash 13%. Segment operating income was $1.85 billion or $1.86 billion non-GAAP.

Applied Global Services (AGS) revenue was $1.42 billion, flat sequentially from $1.42 billion and up 4% from $1.37 billion year earlier. Non-GAAP Operating income was $402 million. Renewal rates are strong, but still some supply chain restraints, particularly for 200 mm systems.

Display segment revenue was $251 million, down 25% sequentially from $333 million and down 40% from $417 million year-earlier. Non-GAAP operating income was $34 million. Weaker due to exposure to the weak consumer segment.

Cash and equivalents (including long-term investments) balance ended at $4.5 billion, down sequentially from $5.60 billion. Cash flow from operating activities was $857 million. Capital expenditures were $223 million. Free cash flow $634 million. $233 million was used for cash dividends. Used $1.50 billion to repurchase shares. Long-term debt was $5.46 billion.

Cost of goods sold was $3.65 billion, leaving gross profit of $3.10 billion. Operating expenses of $1.11 billion consisted of: research and development $726 million; selling and marketing, $183 million; general and administrative $198 million. Leaving income from operations of $1.99 billion. Interest and other expense net $45 million. Income tax $358 million.

Q&A selective summary:

China forecast, Q4 outlook change? We originally (in October) said $400 million China impact in Q4, then we trimmed that to $280 million, plus we had excellent execution overall at the end of the quarter.

Industry WFE 2023 estimates? We think it is too early to give an estimate for the full year, we are just guiding for Q1. With our record backlog we see Q1 and Q2 revenue constrained by our supply, not demand. Not clear what will happen in the second half.

Our range for income depends on our ability to get export licenses from the government for certain customers. The whole industry is working on this new problem, we will update you as the year progresses.

Micron and other memory customers, are you seeing any cancelled orders? We started Q3 with high demand and backlog. We have seen cancellations and push-outs in the memory space, we will not quantify that. We had solid bookings in Q4 overall.

The technology is changing very quickly in all our markets, so customers are racing against each other to stay competitive. Gate-all-around, for instance, is a $1 billion market, we hope to gain share in the transition from Fin-Fet. We are enabling 50% reduction in wiring resistance. Etc.

We expect trailing nodes to remain a strong market.

The AGS impact in Q1 is from not being able to serve our Chinese customers. But we expect services to be up overall in 2023.

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