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pww.comApplied Materials, Inc., Q4 2020 Earnings Call, Nov 12, 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 Q4 2020 Earnings Call:

  1. Opening Statement:

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

  2. Forward-Looking Statements Disclaimer:

    • "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."

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

  4. Transition to 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:

    • "All right. Thank you very much. That concludes our conference call, and 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, provided a comprehensive overview of the company’s performance and future outlook during the Q4 2020 Earnings Call. Below is a detailed summary of his comments:

Key Points:

  1. Record Performance:

    • Applied Materials delivered record revenue in the fourth fiscal quarter.
    • Earnings hit an annualized run rate of $5 per share for the first time.
    • For the fiscal year, revenues grew 18%, and earnings grew 37%.

  2. Strategic Investments:

    • Significant strategic investments were made in new technologies and products to address the industry's highest value problems and position the company for sustained long-term success.

  3. Employee Resilience:

    • Praised employees, suppliers, and partners for their resilience and adaptability during unprecedented disruptions caused by COVID-19.
    • Teams adapted to new ways of working, delivered on commitments to customers and investors, and kept technology and product development on track.

  4. Market Environment:

    • Investments in IT and communications infrastructure, combined with the accelerated digital transformation of companies and the economy, are driving robust semiconductor and wafer fab equipment demand.
    • Foundry/logic customers are aggressively driving advanced R&D, indicating sustainable investment levels into 2021 and beyond.
    • Specialty markets underperformed in 2020 due to headwinds in industrial and automotive, representing an upside for 2021 as these sectors rebound.
    • Memory spending is growing faster than foundry/logic, with NAND outgrowing DRAM in 2020 and DRAM expected to grow significantly faster than NAND in 2021.

  5. Product and Business Performance:

    • Semiconductor Systems revenues were an all-time high, with expectations to grow another 12% in the next quarter.
    • Semi Systems revenue grew 26% for the fiscal year, with broad-based strength across products and device types.
    • Metals deposition business grew revenues 42% in fiscal 2020 to nearly $2.2 billion.
    • Etch business generated record revenues, growing nearly 30% year-over-year.
    • Inspection business delivered record performance, with systems revenues increasing 46% for the year.

  6. Integrated Materials Solutions (IMS):

    • Applied Materials is uniquely positioned to accelerate the industry's new playbook (PPACt), which includes new architectures, materials, and packaging technologies.
    • IMS products, which combine technologies in innovative ways, are gaining traction with customers and will be a significant growth driver.

  7. Advanced Packaging:

    • The packaging business is scaling, generating record revenues of $0.5 billion for the year, up over 20% from fiscal 2019.
    • Applied Materials is expanding its ecosystem footprint through organic investments and partnerships.

  8. Service Business (AGS):

    • AGS delivered record revenues for the quarter and the year.
    • Subscription-style business revenue grew to record levels.
    • Long-term service agreements increased by 13% in fiscal 2020, with 60% of service and spare parts business coming from recurring revenue streams.

  9. Display Business:

    • Hit the 2020 revenue target in a challenging market.
    • Outlook for 2021 is similar to 2020, with no significant changes.
    • Encouraging leading indicators of future growth include increasing adoption of OLED displays for IT applications and smartphones.

  10. Environmental and Social Responsibility:

    • Announced a new 10-year roadmap for environmental and social responsibility over the summer.
    • The roadmap lays out the detailed actions behind the vision to make possible a better future for everyone.

  11. Future Opportunities:

    • The company's future opportunities have never been better, with numerous trillion-dollar inflections enabled by advances in materials engineering.
    • AI is highlighted as a significant inflection that will touch every major industry and area of the economy.
    • Applied Materials is uniquely positioned to accelerate the industry's new PPACt playbook to advance power, performance, area cost, and time to market of next-generation semi devices.

  12. Summary:

    • Despite the unprecedented challenges of 2020, Applied Materials is delivering record performance.

    • Strong momentum in key growth areas like etch and inspection.

    • Demand for semiconductors remains strong, driven by IT infrastructure, digital transformation of businesses, and the acceleration of longer-term technology trends, especially AI.

    • Future opportunities are better than ever, with investments in next-generation technologies critical for the AI ecosystem and laying the groundwork for Applied's future growth.

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

Daniel J. Durn, the Former Senior VP & CFO of Applied Materials, provided insights and details on various aspects of the company’s performance and outlook during the Q4 2020 Earnings Call. Below is a detailed list of his comments:

General Performance and Outlook

  • Q4 Performance: Applied Materials delivered record revenue and earnings per share despite the ongoing challenges related to COVID-19.
  • System Shipments and Customer Support: Teams managed to significantly increase system shipments and customer support in a disciplined manner, resulting in higher operating profits and free cash flow.
  • Unmet Backlog: All unmet backlog from earlier in the year has been shipped.
  • Q1 Guidance: Provides a direct look at the healthy demand trends continuing in the business.

Full Year Results

  • Semiconductor-Related Businesses: Semi Systems and AGS combined grew by over 20% year-over-year.
  • Installed Base Business: Includes AGS plus 300-millimeter upgrades, grew by over 9% year-on-year and represents close to 1/3 of Applied's revenue.
  • Long-Term Service Agreements: About 1/3 of the agreements signed in 2020 had terms of at least 3 years, representing a 10-fold increase over the past 3 years.
  • Data-Enabled Tools: Grew the installed base of data-enabled tools by nearly 40%.
  • Financial Highlights:
    • Record revenue in both Semi Systems and AGS.
    • Increased non-GAAP gross margin by 110 basis points.
    • Invested 69% of non-GAAP OpEx in research and development.
    • Grew non-GAAP operating profit by 32% and increased EPS by 37%.
    • Generated $3.8 billion in operating cash flow, setting a new record.
    • Returned $1.44 billion to shareholders.
    • Raised the dividend for the third year in a row.
    • Allocated nearly $650 million to stock buybacks.
    • Increased cash on the balance sheet by nearly $2 billion.

China Licensing Requirement

  • Impact: Reduced revenue in Q4 and Q1 guidance.
  • Compliance: Applied Materials has already applied for licenses where needed to comply with the new rules.

Backlog

  • Record Levels: Reached nearly $6.7 billion in Q4.
  • Semi-Related Businesses: Combined backlog grew to nearly $5.5 billion.
  • Display Backlog: Declined year-over-year, but the company is tracking leading indicators of eventual recovery.

Q1 Business Outlook

  • Revenue: Expected to be approximately $4.95 billion, plus or minus $200 million, with the midpoint up about 19% year-over-year.
  • Non-GAAP EPS: Expected to be about $1.26, plus or minus $0.06 or up nearly 30% year-over-year.
  • Product Revenue Breakdown:
    • Semiconductor systems: Around $3.45 billion, up nearly 23% year-over-year.
    • AGS revenue: About $1.07 billion, up around 7% year-over-year.
    • Display revenue: Around $400 million, up about 20% year-on-year.
  • Non-GAAP Gross Margin: Expected to be about 45.3%, higher year-over-year and lower sequentially due to near-term changes in product and customer mix.
  • Non-GAAP OpEx: Expected to increase to $860 million, reflecting higher expenses from a 14-week quarter plus 1 month of annual merit increases, partially offset by holiday shutdown savings.
  • Tax Rate: Assumed to be around 12%.
  • Weighted Average Share Count: Assumed to be around 925 million.

Q&A Session

  • DRAM Business Outperformance: Significant signs of strength in 2020, with the DRAM market growing a couple of points higher than the overall industry. Applied Materials is significantly outperforming the market.
  • Conductor Etch Success: Momentum in conductor etch, with strong adoption of high-K metal gate technology for improved I/O speeds.
  • China Market: Meaningful spend by both domestic and multinational customers, with broad-based investments across 200- and 300-millimeter geometries and device types.
  • SMIC Impact: Licensing requirement affected Q4 revenue and Q1 guidance, but the company is working with governments to satisfy the licensing requirement.
  • Gross Margins: Long-term target is 45% plus or minus 2 points, depending on where the company is in the cycle.
  • Kokusai Acquisition: Optimistic about receiving clearance by the end of the calendar year. Capital allocation strategy will be communicated after the transaction closes.
  • Capital Intensity: 12% is a good number to start with, with an upward bias over time given technological advancements.
  • DRAM vs. NAND Growth: Foundry/logic expected to remain strong, NAND expected to be flattish year-over-year, and DRAM set up to significantly outgrow the market in 2021.
  • Lagging Edge vs. Leading Edge: Expectation for a recovery in lagging edge markets like auto and industrial, which should be a tailwind for the business.
  • Advanced Packaging: Size of the Advanced Packaging business is $500 million in revenues this year, with a significant growth outlook given the importance of packaging technologies.
  • NAND Revenue: NAND revenue was roughly flat year-on-year, but the business performed significantly more than flat in the first three quarters of 2020, and the performance is expected to be roughly in line with the overall market in the next quarter.
  • Long-Term Service Agreements: Strategy is to continue growing the percentage of revenue from long-term service agreements, aiming to push the number north of the current 60%.

Closing Remarks

  • Challenges and Achievements: Applauded the company's performance in a year filled with extraordinary challenges, delivering record financial metrics.

  • Outlook: Growth opportunities for the semiconductor industry are bigger than ever, with the industry roadmap moving towards Applied Materials’ new playbook.

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