Analyst Conference Call Summary

semiconductors

conference date: February 16, 2023 @ 1:30 PM Pacific Time
for quarter ending: January 30, 2023 (first quarter, Q1 fiscal 2023)

Forward-looking statements

Overview:

Basic data (GAAP):

Revenues were $6.74 billion, nearly flat sequentially from $6.75 billion and up 7% from $6.27 billion in the year-earlier quarter.

Net income was $1.72 billion, up 8% sequentially from $1.59 billion and down 4% from $1.79 billion year-earlier.

EPS (diluted earnings per share) were $2.02, up 9% sequentially from $1.85 and up 1% from $2.00 year-earlier.

Guidance:

For fiscal Q2 2023 expects $6.40 billion in net sales, +/- $400 million. Expects non-GAAP diluted EPS between $1.66 and $2.02. Includes negative $250 million impact related to one of our suppliers.

Conference Highlights:

Gary Dickerson, CEO, said "While the economy and semiconductor industry are facing challenges in 2023, Applied Materials delivered strong first quarter results, and we believe Applied is well positioned to outperform our markets this year. Our resilience is underpinned by our strong positions with leading customers at key technology inflections, large backlog of differentiated products and growing service business."

Non-GAAP numbers: net income $1.72 billion, down 1% sequentially from $1.74 billion, and up 1% from $1.70 billion year-earlier. EPS $2.03, flat sequentially from $2.03, and up 7% from $1.89 year-earlier.

Semiconductor Systems sales were $5.16 billion, up sequentially from $5.04 billion, and up 13% from $4.57 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 77%, DRAM 13%, Flash 10%. Segment operating income was $1.92 billion.

Applied Global Services (AGS) revenue was $1.37 billion, down sequentially from $1.42 billion and up 4% from $1.32 billion year earlier. Non-GAAP Operating income was $383 million. Renewal rates are strong, but still some supply chain restraints, particularly for 200 mm systems.

Display segment revenue was $167 million, down sequentially from $251 million and down 54% from $366 million year-earlier. Non-GAAP operating income was $8 million. Weaker due to exposure to the weak consumer segment.

Cash and equivalents (including long-term investments) balance ended at $6.2 billion, up sequentially from $4.5 billion. Cash flow from operating activities was $2.27 billion. Capital expenditures were $287 million. Free cash flow $1.9 billion. $220 million was used for cash dividends. Used $250 million to repurchase shares. Long-term debt was $5.5 billion.

Cost of goods sold was $3.59 billion, leaving gross profit of $3.15 billion. Operating expenses of $1.18 billion consisted of: research and development $771 million; selling and marketing, $197 million; general and administrative $207 million. Leaving income from operations of $1.97 billion. Interest and other expense net $9 million. Income tax $244 million.

Q&A selective summary:

We expect we can double our ICAPs revenue in 2023. That is specifically implant; we had supply chain issues in 2022 that limited us.

DRAM recovery timeline? We have seen the weaking in memory. We can't predict an exact time when the market will turn around. Utilization is lower this quarter and expected lower next quarter. Pricing is declining or flattening. Inventories are still growing. But we do believe that next year companies will begin to invest again.

Backlog SSG trend? We did see weakness in leading logic and memory. The strength in the mix is from ICAPs, which offset weakness. Some is in 200 mm, it ties back to long lead times in the highly differentiated equipment where we are working off the backlog. We expect to narrow the backlog as our supply improves.

Excess memory capacity, migration to new nodes? The inventory situation in the current market is not guiding their future plans. Lower equipment buys may be due to ability to reuse in new roadmaps. We think foundry and logic will grow faster than memory for a number of years.

It is hard to estimate the order flow coming in versus reducing the backlog. We are behind one to four quarters depending on the business unit. Recovery rates will vary. We expect 2024 to be a better year than 2023.

3 nm production ramp? The largest leading edge customers are in low utilization, so pushing out or canceling some tools. Customers say demand for 3 nm is very strong, so it will be a very big investment. Gate all around should rise v. FinFet. Wiring cost per wafer goes up. Will be even better at 2 nm. It is not a question of demand, just timing.

Most China demand is ICAPs related, for us. ICAPs growth is in other regions, flatter in China.

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