Applied Materials, Inc., Q3 2020 Earnings Call, Aug 13, 2020 - SEHK:4336

SEHK:4336

Michael Sullivan, Vice President of Investor Relations, made the following statements during the Applied Materials, Inc. Q3 2020 Earnings Call:

Opening Statement

• Introduction: "Good afternoon, and thank you for joining Applied's Third Quarter of Fiscal 2020 Earnings Call. Joining me today are Gary Dickerson, our President and CEO; and Dan Durn, our Chief Financial Officer."

Forward-Looking Statements Reminder

• Forward-Looking Statements: "Before we begin, I'd like to remind you that today's call contains forward-looking statements, which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning the risks and uncertainties is contained in Applied's most recent Form 10-Q and 8-K filings with the SEC."

Non-GAAP Financial Measures

• Non-GAAP Financial Measures: "Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings presentation materials, which are all available on the IR page of our website at appliedmaterials.com."

Transition to Gary Dickerson

• Transition to CEO: "And now I'd like to turn the call over to Gary Dickerson."

Question and Answer Session

• Q&A Session Start: "Thanks, Dan. [Operator Instructions] Operator, let's please begin."

• Q&A Session End: "Thanks, Vivek, for your question. And Dan, any closing thoughts for today?"

• Closing Statement: "Okay. Great. Thanks, Dan. And we'd like to thank everybody for joining us today. A replay of the call is going to be available on our website by 5:00 Pacific Time, and we'd like to thank you for your continued interest in Applied Materials."

• Call Closure: "Mike, let's close the call."

Gary E. Dickerson, the President, CEO, and Executive Director of Applied Materials, made several statements during the Q3 2020 Earnings Call:

1. COVID-19 Pandemic Response:

   • Started the call by outlining the steps Applied Materials took to navigate the COVID-19 pandemic.
   • Actions were guided by two key principles:
     • Maintaining the trust of employees, customers, suppliers, and partners.
     • Focusing on strategic initiatives that will allow the company to emerge stronger over the longer term.

2. Company Operations:

   • Both manufacturing operations and R&D labs are running smoothly at pre-COVID levels of productivity.
   • Acknowledged the exceptional contributions, resilience, and creativity of employees and suppliers.

3. Vision for the Next Decade:

   • Outlined Applied Materials' vision for the next decade at SEMICON West.
   • Discussed the critical role semiconductors will play in shaping a better future for everyone.
   • Highlighted the advances in technology needed to unlock the potential of artificial intelligence.
   • Mentioned the new 10-year goals and roadmap for environmental sustainability.

4. Market Dynamics:

   • Remains mindful of global economic concerns and potential headwinds for consumer spending.
   • Demand for semiconductors has strengthened over recent months.
   • Accelerated technology inflections include work from home, home schooling, online retail, cloud data centers, and communications infrastructure.
   • Adoption of AI remains nondiscretionary for many companies.

5. Wafer Fab Equipment Spending:

   • Expects overall foundry/logic spending to grow this year, despite soft demand in specialty nodes serving automotive and industrial markets.
   • Strong commitment from customers to build out their fabs and drive R&D roadmaps gives confidence in sustainable spending in 2021 and beyond.
   • Sees investments in memory growing slightly faster than in foundry/logic, with similar growth rates in DRAM and NAND.

6. Business Performance:

   • Semiconductor Systems revenues are up 18% on a trailing 12-month basis and expected to be up 25% for the fiscal year.
   • Outperformed the market by focusing on customers' highest-value problems.
   • Deposition businesses (CVD, PVD, and epi) generated over $5.2 billion in revenue in calendar 2019 and gained 8 points of market share according to VLSI's data.
   • Etch revenues are up nearly 30% in fiscal 2020.
   • Revenue for Process Diagnostics and Control business is up more than 40% in fiscal 2020.
   • Described the broad product portfolio, which allows the company to see inflections early and develop more complete solutions for customers.

7. Foundry and DRAM:

   • In foundry, sees available market growing node-over-node and is positioned to outperform the market.
   • In DRAM, share is even higher than in foundry/logic, with significant potential to grow further.
   • Won multiple process tool of record positions for future node transitions, including multi-patterning, hard-mask, and hard-mask open applications.
   • Enabled by advanced logic-like features such as high-k metal gate, which grows the available market in areas where Applied Materials has clear technology leadership.

8. Aftermarket Businesses:

   • Revenues from Applied Global Services plus 300-millimeter upgrades are up 21% compared to the same period in 2019.
   • 60% of AGS's service and spare parts business comes from predictable recurring revenue streams.
   • Renewal rate for long-term service agreements is in excess of 90%.

9. Display Business:

   • Revenue outlook for fiscal 2020 is unchanged at $1.6 billion, and expects 2021 to be similar.
   • Encouraging signs in the high-end of the market, including robust demand for 8K screens and the adoption of OLED in TVs.
   • Optimistic about long-term opportunities in the display market.

10. Operational Changes:

    • Stimulated changes in the way companies in the industry operate due to COVID-19 restrictions.
    • Provided thousands of digital support sessions using AR and video.
    • Held over 900 training sessions with field support engineers using VR and live distance learning.
    • Fully restored R&D lab productivity while bringing only a fraction of the engineering staff on-site.
    • Believes that "innovate anywhere" provides substantial long-term benefits.

11. Closing Remarks:

    • Extraordinary hard work of employees and suppliers has allowed the company to operate at pre-COVID levels of productivity.

    • Despite potential macroeconomic headwinds, semiconductor equipment demand is strengthening.

    • Strategy to accelerate the PPACt playbook is yielding results.

    • Excited about the innovative new products and integrated solutions to be brought to market in the future.

Daniel J. Durn, the former Senior Vice President and Chief Financial Officer of Applied Materials, Inc., shared several insights and details during the Q3 2020 Earnings Call. Below is a detailed list of his comments:

Opening Remarks

• Q3 Results Summary:

  • Despite challenges related to COVID-19, Applied Materials delivered double-digit year-over-year revenue growth across Semiconductor Systems, AGS (Applied Global Services), and Display.
  • Installed base business, including AGS and 300-millimeter upgrades, grew by 11% sequentially and 21% year-over-year, representing about one-third of the company's total revenue.
  • Overall, the company grew revenue by 23% year-over-year and generated non-GAAP earnings of $1.06, up 43% year-on-year.

• Q3 Performance Highlights:

  • Shipped a significant portion of the backlog that couldn't be satisfied in Q2 due to COVID-related supply chain disruptions.
  • Demand remained strong, and the Q3 ending backlog was nearly unchanged from the prior quarter.
  • Improved non-GAAP gross margin by 40 basis points sequentially and 100 basis points year-on-year.
  • Delivered sequential operating margin gains in both Semiconductor Systems and AGS.
  • Non-GAAP OpEx was in line with targets, with 69% allocated to research and development.
  • Increased non-GAAP operating profit to $1.16 billion, up 41% year-over-year.

• Financial Transactions:

  • Successfully issued $1.5 billion of senior notes at historically low rates and redeemed $1.35 billion of maturities due in October 2020 and June 2021.
  • These transactions extended weighted average maturities by about five years and reduced the average coupon of outstanding notes.
  • Returned $402 million to shareholders in dividends and buybacks.
  • Continued commitment to the shareholder distribution program and the Kokusai Electric transaction, with constructive discussions to close the final regulatory approval needed.

Business Outlook

• Revenue Growth:

  • Semiconductor Systems revenue is up 23% in the first half of the calendar year compared to the same period last year.
  • Outperformed peers in the foundry market, winning critical new applications in advanced patterning.
  • Leadership in foundry/logic strengthened and new application wins in memory.
  • Expect to be the #1 company in DRAM conductor etch this year, winning more than 50% of the available market.

• Fiscal Q4 Outlook:

  • Expected company revenue to be approximately $4.6 billion, plus or minus $200 million.
  • Non-GAAP EPS expected to be about $1.17, plus or minus $0.06.
  • Semiconductor Systems revenue expected to be approximately $3.025 billion, up about 31% year-over-year.
  • AGS revenue expected to be about $1.07 billion, up about 10% year-over-year.
  • Display revenue expected to be about $475 million.
  • Non-GAAP gross margin expected to be about 45.7%, up nearly 2 points year-on-year.
  • Non-GAAP OpEx expected to be around $820 million.

Gross Margins and Memory CapEx Trends

• Gross Margin Performance:

  • Company performed well in the current environment, with a 200 basis point increase in the fiscal Q4 guide.
  • Operations and supply chain teams mitigated the impact of the pandemic environment.
  • Long-term trajectory around gross margins includes opportunities to raise margins further as new innovations are delivered to the market.
  • Semiconductor Systems operating margin performance is strong, with an opportunity to get back to the prior benchmark.

• Memory CapEx Trends:

  • WFE (Wafer Fab Equipment) expected to be up about 10% to 15% year-over-year, off a 2019 baseline of $51.5 billion.
  • Strength in both memory and foundry/logic segments.
  • Proportion of spend weighted towards foundry/logic, with more than 55% of the spend in this area.
  • Strength expected to continue into 2021, with a similar proportion of spend.

Q&A Session

• Gross Margins and Expenses:

  • Company performed well, with the operations and supply chain teams mitigating the impact of the pandemic.
  • Long-term trajectory includes opportunities to raise gross margins further.
  • Semiconductor Systems operating margin is strong, with an opportunity to get back to the prior benchmark.

• Foundry/Logic Business:

  • Diversification of spend underway in the market, with multiple customers ramping multiple nodes.
  • Business significantly outperforming the overall foundry/logic market.
  • Fiscal Q2 was the low point for calendar 2020 in terms of foundry/logic business.
  • Strength expected into the back half of the calendar year.

• Regionalization of Capacity:

  • Acknowledged the strategic importance of semiconductor manufacturing capacity, citing initiatives in the US, Japan, and the EU.
  • Regionalization of capacity is beneficial for Applied Materials, particularly in terms of boosting the service business and strengthening strategic relationships.

• Kokusai Acquisition:

  • Made good progress on the regulatory front, with 5 of 6 regulatory approvals closed.
  • Constructive discussions to close the final regulatory approval.
  • Transaction expected to be immediately accretive to non-GAAP financial results upon close.

• Process Control Business:

  • Strong traction in process control, particularly in optical and e-beam inspection.
  • Differentiators include new optical inspection system and new e-beam technology with higher resolution electron optics.

• Display Business:

  • Display business seen as a great opportunity to take core technology into adjacent markets.
  • Market is at a cyclical bottom, with strengthening post-initial stages of COVID.
  • Opportunities for growth in OLED coming to TV and foldable flexible displays coming to handsets.

• Geopolitical Impact:

  • No meaningful impact on the business from recent military end-use regulations.
  • Domestic China market expected to see $2 billion to $3 billion of incremental spend, with a balanced profile of spend.

• Memory Capacity and Technology Transitions:

  • Continued investment in technology transitions, with no big spike in capacity.
  • More efficient spend profile, with capital intensity rising.
  • Balanced portfolio across all device types, with the company set up to perform well in various environments.

• Closing Thoughts:

  • Investments and strategy translating to growth and outperformance in the market.

  • Balanced share across all device types.

  • One-third of total business from installed base, providing more predictable revenue and cash flow.

  • Appreciated the efforts of employees and partners in meeting customer needs safely during a challenging environment.