Analyst Conference Call Summary

semiconductors

conference date: May 18, 2023 @ 1:30 PM Pacific Time
for quarter ending: April 30, 2023 (second quarter, Q3 fiscal 2023)

Forward-looking statements

Overview: Good quarter, optimistic talk but fiscal Q3 guided to sequentially weaker revenue.

Basic data (GAAP):

Revenues were $6.63 billion, down 2% sequentially from $6.74 billion and up 6% from $6.25 billion in the year-earlier quarter.

Net income was $1.58 billion, down 8% sequentially from $1.72 billion and up 3% from $1.54 billion year-earlier.

EPS (diluted earnings per share) were $1.86, down 8% sequentially from $2.02 and up 7% from $ year-earlier.

Guidance:

For Q3 fiscal 2023, revenue $6.15 billion, plus or minus $400 million. Non-GAAP adjusted diluted EPS in the range of $1.56 to $1.92.

Conference Highlights:

Gary Dickerson, CEO, said "Revenue was at the high end of our guidance range. Despite macro headwinds our outlook remains favorable." Weakness in PCs and smartphones is a headwind for memory chips. Several other markets, including automotive, remain strong. ICAPS also remains strong, with the U.S., Europe and Japan currently the fastest growing regions. Gate-all-around products will start ramping in 2024. Believes can continue to grow the dividend. Will be making a major investment to be announced soon. [note: ICAPS = IoT, Communications, Automotive, Power and Sensors]

Non-GAAP numbers: net income $1.69 billion, down 2% sequentially from $1.72 billion, and up 3% from $1.64 billion year-earlier. EPS $2.00, Down 2% sequentially from $2.03, and up 8% from $1.85 year-earlier.

Semiconductor Systems sales were $4.98 billion, down sequentially from $5.16 billion, and up 12% from $4.46 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 84%, DRAM 11%, Flash 5%. Segment operating income was $1.76 billion.

Applied Global Services (AGS) revenue was $1.43 billion, up sequentially from $1.37 billion and up 4% from $1.38 billion year earlier. Non-GAAP Operating income was $414 million.

Display segment revenue was $168 million, up sequentially from $167 million and down 56% from $381 million year-earlier. Non-GAAP operating income was $21 million. Weaker due to exposure to the weak consumer segment.

Cash and equivalents (including long-term investments) balance ended at $7.1 billion, up sequentially from $6.2 billion. Cash flow from operating activities was $2.29 billion. Capital expenditures were $255 million. Free cash flow $2.04 billion. $219 million was used for cash dividends. Used $800 million to repurchase shares. Long-term debt was $5.5 billion.

Cost of goods sold was $3.54 billion, leaving gross profit of $3.09 billion. Operating expenses of $1.18 billion consisted of: research and development $775 million; selling and marketing, $194 million; general and administrative $214 million. Leaving income from operations of $1.91 billion. Interest and other expense net $134 million. Income tax $202 million.

Q&A selective summary:

Lagging edge spending in China? We are bullish, the customers are bullish about the end markets. We are seeing our equipment installed and ramped, mostly for ICAPS, for the known growing end markets like sensors and power. There are government incentives there.

How big are the faster growing regions you named? China is the largest in the ICAP space. The regions growing faster are not small ones. Utilization is healthy in the ICAPS space. Companies believe their investments will be sustainable over the next few years.

Semi backlog? We still have an elevated backlog. Most business groups are caught up on underserved demand. But on the whole the backlog is elevated.

For the second half of calendar 2024, we expect the current dynamic to continue, with ICAP strong and memory weak.

Leading edge, there is intense competition among our customers. 3 nm will be a big node. Steps for Applied go up over 20% in the transition to 3 nm. Governments are also competing with each other to give incentives.

On China export controls, we got some clarification that will allow us to ship to some factories in the near future.

Moving from system-on-chip to system-in-package will be a strong transition for us.

Timeline for memory business recovery? It is at historic lows. In the quarter it was still moving in the wrong direction. Believe it will turn around, but hard to call the timing.

We are still working to catch up on the backlog for implant.

We look at yield for each factory. So far that is in line with our growth rate assumptions.

AGS upside driver? 85% is spares and service. Over 60% is long-term agreements. We have high renewal rates. Mid-teens 200 mm business is mostly ICAPS and very robust.

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