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pww.comApplied Materials, Inc., Q2 2020 Earnings Call, May 14, 2020 - SEHK:4336

SEHK:4336

Michael Sullivan [Vice President of Investor Relations] 💬

Michael Sullivan, Vice President of Investor Relations at Applied Materials, made the following statements during the Q2 2020 Earnings Call:

  1. Opening Statement:

    • "Good afternoon, and thank you for joining Applied's Second Quarter of Fiscal 2020 Earnings Call, which is being recorded."
    • "Joining me are Gary Dickerson, our President and CEO; and Dan Durn, our Chief Financial Officer."

  2. Forward-Looking Statements Reminder:

    • "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 Form 10-Q and 8-K filings with the SEC."

  3. Non-GAAP Financial Measures Disclosure:

    • "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, which are available on the IR page of our website at appliedmaterials.com."

  4. Introduction of Gary Dickerson:

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

  5. Q&A Session Introduction:

    • "Thanks, Dan. [Operator Instructions] Operator, let's please begin."

  6. Closing Statement:

    • "Thanks, Joe. Dan, anything you'd like to say before we close the call?"

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

Gary E. Dickerson [President, CEO & Executive Director] 💬

Gary E. Dickerson, the President, CEO, and Executive Director of Applied Materials, began by addressing the impact of the COVID-19 pandemic on the company and its stakeholders. He expressed thoughts and best wishes for those affected and outlined the company's response to the situation, emphasizing two key principles:

  1. Maintaining Trust: Maintaining the trust of employees, customers, suppliers, and partners.
  2. Long-Term Focus: Focusing on initiatives that will allow the company to emerge stronger in the longer term.

Dickerson highlighted the following actions taken by Applied Materials:

  • Employee Health and Well-being: Prioritizing the health and well-being of employees and their families.
  • Remote Working: Implementing remote working arrangements for employees where feasible.
  • On-Site Safety Measures: For employees working on-site, the company has implemented strict safety protocols, including social distancing, enhanced cleaning and sanitation, health screenings, and mandatory use of personal protective equipment (PPE).
  • Continued Pay: Ensuring all employees and contingent workers continue to receive full pay.
  • Support for Critical Operations: Introducing additional incentives and benefits for employees supporting critical operations.

Dickerson also mentioned the company's efforts to support customers by ensuring their factories run smoothly and R&D programs stay on track despite supply chain constraints. He noted the dedication of the manufacturing, logistics, and field operations teams in maintaining customer support during challenging circumstances.

Regarding the company’s strategic response, he highlighted the following:

  • Customer Support: Going above and beyond to keep customers and the industry moving forward.
  • New Ways of Working: Defining new ways of working with customers that provide solutions today and create significant benefits over the long term.
  • Community Contributions: Creating a global charitable COVID fund to address immediate humanitarian needs and combat long-term effects on local communities and the nonprofit sector. Additionally, the company has donated masks and equipment to medical facilities, and employees have initiated various volunteer efforts.

Dickerson then summarized the company’s financial performance and near-term outlook:

  • Q2 Performance: Demand from semiconductor customers remained strong, but financial performance was negatively affected by supply chain constraints due to shelter-in-place orders.
  • Supply Chain Adjustments: The company has made adjustments to its global operations footprint and continues to work closely with suppliers to ensure needs are met.
  • Record Orders and Backlog: Entering Q3 with record orders and a record backlog for the semiconductor and service businesses combined.
  • Semiconductor Industry Environment:
    • Foundry/Logic: Demand at the leading edge remains healthy, with a strong commitment from customers to build out their factories and push forward with development roadmaps. Some pockets of weakness in specialty markets, mainly due to a pullback in the automotive and industrial sectors.
    • Memory: Positive progression in the market with inventory levels approaching normal and improvements in pricing trends. Incremental strength in investment by memory customers as the year progresses.
  • Display Business: Expectation for FY '20 revenues to be close to FY '19 as the industry navigates the bottom of this spending cycle.

Dickerson also provided a long-term perspective on the global economic concerns, emphasizing the acceleration of key technology inflections such as working from home, learning from home, and e-commerce, which are driving investments in cloud data centers and communications infrastructure. He discussed the company’s investments in digital infrastructure, sensors, metrology, data science, machine learning, and simulation, which enable faster product development cycles and transfer of new technologies from lab to fab.

Lastly, Dickerson highlighted the company’s strong performance in the market according to VLSI Research's report, mentioning gains in market share in deposition technology and momentum in metrology and inspection. He concluded by summarizing the company's guiding principles, strong semiconductor equipment demand, and commitment to accelerating the PPACt playbook.

Daniel J. Durn [Former Senior VP & CFO] 💬

During the Applied Materials, Inc. Q2 2020 Earnings Call, Daniel J. Durn, the Former Senior VP & CFO, provided several insights and updates. Below is a detailed summary of his statements:

  1. Q2 Results Overview:

    • Applied Materials suspended Q2 guidance on March 23 due to the global response to COVID-19 and significant challenges across the supply chain, manufacturing operations, and logistics.
    • Despite the challenges, the company delivered solid Q2 results, with revenue growth of 12% year-over-year, a 23% increase in non-GAAP operating profit, and a 27% growth in non-GAAP EPS to $0.89.
    • Semi Systems revenue was below original expectations due to COVID-related supply constraints, but demand remained strong.

  2. Financial Performance:

    • Returned $392 million to shareholders in buybacks and dividends and announced a dividend increase of nearly 5%.
    • Ended Q2 with nearly $7.4 billion on the balance sheet, including $1.5 billion in credit facility proceeds.

  3. COVID-19 Environment Assessment:

    • The industry has been designated critical infrastructure in many parts of the world.
    • All suppliers have resumed operations and are recovering to normal output.
    • Customer demand remains strong despite the potential macroeconomic impacts of COVID-19.
    • Repaid revolving credit facility borrowings post-quarter end.
    • Cash and investments on the balance sheet are approximately $5.9 billion, an increase of about $200 million compared to Q1.

  4. Acquisition Update:

    • Received Taiwan's clearance for the planned acquisition of Kokusai Electric and is awaiting final approval from China.

  5. Business Outlook:

    • Semiconductor Systems:
      • Q2 revenue would have been nearly $650 million higher absent COVID-related constraints.
      • Expects Q3 semi revenue to be up in the high single digits sequentially and higher again in Q4, resulting in strong double-digit growth for the fiscal year.
    • Services Business:
      • Highly resilient during the crisis, generating a growing proportion of revenue from subscription-like long-term service agreements.
      • AGS posted its first $1 billion quarter, with nearly 60% of revenue coming from service agreements.
    • Display Revenue:
      • Expects to be nearly the same in FY20 as in FY19.
      • Likely to be flat to slightly higher sequentially in Q3 and higher again in Q4.

  6. Gross Margin Discussion:

    • Made conscious decisions about how to position the company operationally and manufacturing-wise in the current environment.
    • There is a headwind from a margin standpoint due to maintaining cycle times and throughput.
    • Gross margin for Q3 is expected to be flat, with a favorable segment mix offset by the 13-week impact of a material supply chain disruption.

  7. Supply Chain and Logistics Challenges:

    • Suppliers are back in business, raising staffing levels and getting back to pre-COVID levels of output.
    • The logistics channels will take longer to normalize, with increased costs due to pivoting to alternative freight and logistics channels.
    • The commercial aviation industry's health will determine when logistics costs return to normal.

  8. Revenue Impact of Supply Constraints:

    • $650 million of revenue in Q2 was impacted by supply constraints.
    • Expects to recover this revenue in Q3 and Q4 as the supply chain improves.
    • The logistics cost increases are disconnected from the fundamental health of the supply chain and will persist until the commercial aviation industry recovers.

  9. China Business Decomposition:

    • In 2019, 29% of the company's revenue was generated in China.
    • Display business is almost entirely in China.
    • For semi-related business, it's a 70-30 split between systems and services.
    • The systems business is split 65% domestic and 35% multinational in China.

  10. Operating Expenses:

    • Original guidance for the last three quarters of the fiscal year was $820 million of OpEx per quarter.
    • Due to savings from reduced travel and disciplined discretionary spending, the company did better than expected.
    • Planning assumption for the remainder of the fiscal year is to keep OpEx at $820 million.

  11. Uncertainty and Market Dynamics:

    • Recognizes the macroeconomic risks but notes the company's broader and more resilient business.
    • Continues to see strength in the second half of the fiscal year.
    • Will stay close to investors and share updates as the situation evolves.

  12. Closing Remarks:

    • Shared best wishes to those affected by COVID-19 and thanked employees for their strong support of customers.

    • Noted the company's privileged role in enabling technologies needed during the pandemic.

    • Mentioned upcoming investor conferences and thanked participants for their interest in Applied Materials.

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