Analyst Conference Call Summary

semiconductors

conference date: November 14, 2024 @ 1:30 PM Pacific Time
for quarter ending: July 28, 2024 (third quarter, Q3 fiscal 2024)

Forward-looking statements

Overview: Continuing revenue growth, non-GAAP EPS growth.

Basic data (GAAP):

Revenues were $7.05 billion, up 4% sequentially from $6.78 billion and up 5% from $6.72 billion in the year-earlier quarter.

Net income was $1.73 billion, up 1% sequentially from $1.71 billion and down 14% from $2.00 billion year-earlier.

EPS (diluted earnings per share) were $2.09, up 2% sequentially from $2.05 and down 12% from $2.38 year-earlier.

Guidance:

For Q1 2025 (Dec. 2024 quarter), revenue about $7.15 billion. Non-GAAP diluted EPS $2.29 plus or minus $0.18.

Conference Highlights:

Gary Dickerson, CEO, said "Applied Materials technology leadership and strong execution drove record Q4 and fiscal 2024 performance, our fifth consecutive year of growth. Our portfolio of products and services uniquely positions us to enable our customers in their pursuit of AI and energy-efficient computing. As these key drivers of semiconductor innovation continue to grow in importance, the industry roadmap is becoming increasingly dependent on materials engineering, where Applied is the clear leader." Strenthened positions in major inflections in logic, DRAM, and advanced packaging. Key strategic initiatives are on track.

Growing the dividend and continuing share buy backs are a priority.

Non-GAAP numbers: net income $1.92 billion, up 8% sequentially from $1.77 billion, and up 7% from $1.79 billion year-earlier. EPS $2.32, up 9% sequentially from $2.12, and up 9% from $2.12 year-earlier.

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

Semiconductor Systems sales were $5.18 billion, up sequentially from $4.92 billion, and up from $4.88 billion year-earlier. Revenue by type, as % of total: Foundry, logic and other 73%, DRAM 23%, Flash 4%. Segment operating income was $1.83 billion.

Applied Global Services (AGS) revenue was a record $1.64 billion, up sequentially from $1.58 billion and up from $1.47 billion year earlier. Non-GAAP operating income was $492 million.

Display segment revenue was $211 million, down sequentially from $251 million and down from $298 million year-earlier. Non-GAAP operating income was $5 million. End market demand was weak.

China revenue fell to $2.14 billion, from $2.96 billion year-earlier. It still represented 30% of sales.

Cash and equivalents (including long-term investments) balance ended at $10.8 billion, down sequentially from $12.1 billion. Cash flow from operating activities was $2.58 billion. Capital expenditures were $407 million. Free cash flow $2.17 billion. $329 million was used for cash dividends. Used $1.44 billion to repurchase shares. Long-term debt was $5.5 billion.

Cost of goods sold was $3.71 billion, leaving gross profit of $3.34 billion. Operating expenses of $1.29 billion consisted of: research and development $858 million; selling and marketing, $215 million; general and administrative $216 million. Leaving income from operations of $2.05 billion. Interest and other expense net $150 million. Income tax $164 million.

Q&A selective summary:

China mix has come down after we served that DRAM demand in earlier quarters. For Q1 our outlook contains about 30% for China. We expect the ICAPS market to grow over time. Some markets within that have been lower, like automotive, analog, and image sensors.

Gross margin increase in guidance? We think our underlaying rate has improved to 48.0% In Q1 we are guiding to 48.4% due to the product mix. We are focused on winning the inflections in a number of markets. We are seeing price improvements as we ship to these markets.

Change of administration (to Trump)? WFE likely showed growth in 2024. We see growth each year in the decade. Leading edge logic is accelerating. We can't speculate on what might change under the new administration.

Variation in the leading-edge foundry companies? We forecast demand based on end markets. It will be independent of which foundries are serving the new capacity needs. All three major players are looking to improve energy use in the AI chips. Which is our specialty.

Value based pricing drivers? Entire industry is focused on energy efficient computing. Looking for 100x improvements in 5 years, which is hard to accomplish. So they go to the most advanced node because of the savings on energy. Gate all around, etc., are difficult technologies. So not a one-shot thing. We are extemely well positioned to help our customers.

Operational benefits of integrated systems? Yes, cost innovation is an aspect. But it also helps companies optimize processes for new architectures, lowering their costs. Like with our pattern-shaping technology. Services innovation can also drive their operating costs lower.

We are seeing stronger DRAM demand, but not growth in NAND market, though we see a little bit of uptick in NAND demand in Q1.

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