Analyst Conference Call Summary

semiconductors

conference date: August 17, 2023 @ 1:30 PM Pacific Time
for quarter ending: July 31, 2023 (third quarter, Q3 fiscal 2023)

Forward-looking statements

Overview: Revenue down 1% y/y, but better than expected.

Basic data (GAAP):

Revenues were $6.43 billion, down 3% sequentially from $6.63 billion and down 1% from $6.52 billion in the year-earlier quarter.

Net income was $1.56 billion, down 1% sequentially from $1.58 billion and down 3% from $1.61 billion year-earlier.

EPS (diluted earnings per share) were $1.85, down 1% sequentially from $1.86 and flat from $1.85 year-earlier.

Guidance:

For Q4 fiscal 2023, revenue $6.11 to $6.91 billion. Non-GAAP diluted EPS $1.82 to $2.18.

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials executed well in our fiscal third quarter, with revenue and earnings at the high end of our guidance range. Over the past several years, we have focused our strategy and investments on key technologies to accelerate the Internet of Things and AI era, enabling us to consistently deliver strong results in 2023 and positioning Applied Materials for sustainable outperformance." AI expected to propel semi industry growth to $1 trillion by 2030. Plans to invest heavily in R&D in the next few years.

Non-GAAP numbers: net income $1.60 billion, down 5% sequentially from $1.69 billion, and down 5% from $1.68 billion year-earlier. EPS $1.90, down 5% sequentially from $2.00, and down 2% from $1.94 year-earlier. ICAPS is the largest sale segment in 2023. Industry must move to 3D architectures, new materials, new ways to shrink. New PPACt (Power, Performance, Area, Cost, Time to Market) playbook also creates opportunities. In July Vistara platform and EcoTwin software were introduced.

[note: ICAPS = IoT, Communications, Automotive, Power and Sensors]

Semiconductor Systems sales were $4.68 billion, down sequentially from $4.98 billion, and down 1% from $4.73 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 79%, DRAM 17%, Flash 4%. Segment operating income was $1.62 billion. In Q3 2023 Applied gained share in DRAM, where high-bandwidth chips are growing fast.

Applied Global Services (AGS) revenue was a record $1.46 billion, up sequentially from $1.43 billion and up 3% from $1.42 billion year earlier. Non-GAAP operating income was $429 million. 200 mm and subscriptions were strong.

Display segment revenue was $235 million, up sequentially from $168 million and down 29% from $333 million year-earlier. Non-GAAP operating income was $37 million.

Cash and equivalents (including long-term investments) balance ended at $8.7 billion, up sequentially from $7.1 billion. Cash flow from operating activities was $2.58 billion. Capital expenditures were $255 million. Free cash flow $2.32 billion. $268 million was used for cash dividends. Used $439 million to repurchase shares. Long-term debt was $5.5 billion.

Cost of goods sold was $3.45 billion, leaving gross profit of $2.98 billion. Operating expenses of $1.17 billion consisted of: research and development $767 million; selling and marketing, $193 million; general and administrative $214 million. Leaving income from operations of $1.80 billion. Interest and other expense net $0 million. Income tax $246 million.

Q&A selective summary:

DRAM strength? Expect sequential growth in Q4, based on expected sales to China. While memory market has been weak, but DRAM equipment market has been strong. We are taking logic technologies into DRAM, for high-speed DRAM, enabling us to gain market share. In Q3 the shipments of DRAM to China were relatively small.

Sustainability of sales? In 2023, first half did benefit from catching up on earlier orders. Into 2024, China is the largest for ICAPS, but it is not the fastest growing. We think ICAPS will grow in 2024. Spending is moving to materials-enabled technology.

We see the current buying as rational, not a pull forward due to fear.

Hybrid bonding? High bandwidth packaging, we have the broadest portfolio to enable it. So a meaningful opportunity for us, on track to double sales over 3 to 5 years. Hybrid bonding is a great opportunity over time, but not big in the short term. We believe gate all around will ramp towards the end of 2024.

Equipment investment is a two to four year timeline, so reports of current slowdowns in orders may not have much real effect.

The $1.7 billion in revenue from China in the quarter is almost all domestic, very little is international businesses operating in China. It includes services. We see demand is global, so anything not shipped to China will be shipped for production elsewhere.

Services growth despite lower memory utilization? Yes, transactions having to do with utilization were down, but service of 200 mm equipment was up.

About a third of our revenue are from complex combined technologies under vacuum.

AI driven expansion estimate? WFE AI share is currently about 5%, growing rapidly.

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