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Financial Performance

Sales and costs were up 11% from a year ago and overhead was up by 7%, so income from operations rose 15% over the same period. Interest expense and taxes were small and didn’t move much, so net income expanded by 15%. Gross margin was 44.6% and net margin was 21.4%. Applied reduced their share count by 4% in the past year. In the face of a memory downturn, Applied had a really good year. The company generated almost a billion dollars in cash from operations. They spent $102M in capex and bought $60M more in investments than they sold, so they used $162M in cash for investing activities. They returned about $400M to shareholders, split equally between dividends and buybacks. A line in the cash flow statement I’m not used to seeing have a meaningful value is “Tax withholding payments for vested equity awards.” Applied had $153M of this in the quarter. In summary, a billion in cash flow came in and half a billion went back out to owners and employees (in the form of equity compensation,) leaving half a billion. From this, $100M was spent in capex and they invested another $60M, so their cash position increased $300M. Short-term assets and liabilities didn’t change much, and they didn’t acquire any companies as they are saving themselves for Kokusai. Book value increased 5% from a year ago.


Earnings Call Notes

Unless otherwise specified, financial information is non-GAAP

Gary Dickerson (CEO) prepared remarks

• They believe Q2 of 2019 was the bottom of this cycle for equipment spending. The peak-to-trough drop in revenue for the top five WFE companies in this cycle was 17%. In the previous cycle it was 44%, indicating the semiconductor market is becoming less volatile
• NAND is in the early stages of a recovery, with inventories down by half from this point last year. DRAM inventories at suppliers and end-users are reaching normal levels, and prices are bottoming. They see a DRAM recovery later in 2020.
• Their outlook for 2020 remains “very positive” even considering the effects of the Coronavirus

Dan Dern (CFO) prepared remarks

• Revenue was over the midpoint of guidance and earnings were above the high end of the range given
• They outgrew the WFE market in 2019
• During the quarter they received regulatory approval from Japan and Korea for their purchase of Kokusai Electric
• Q2 guidance: revenue of 4.34B +/- $200M, non-GAAP EPS of $1.04 +/-$0.06, non-GAAP GM of 45.4%

Question and Answer

• 2018 WFE was $56B, from Gartner. They see 2019 down 10-12% from that number. 2020 will be up 10-15% off of that 2019 number, from their company intelligence, and they expect to “significantly outgrow” the market in 2020. In China they see is $6B, with one-third 200mm and two-thirds 300mm.
• WFE as a percent of semiconductor industry revenue was 9% in 2013, the bottom when excluding the 2009 financial crisis. Now it is in a band around 13%. They see capital intensity strong and increasing in the industry.
• When asked if they expect to see a recovery in DRAM customer spending this year, given that prices are increasing, they said they thought they will start seeing DRAM spending recovery in 2020
• The $300M in deferred revenue this quarter is from restrictions and delays caused by the coronavirus outbreak. They believe revenue will recover in Q3 and Q4, and that their full-year forecast remains intact.


Summary

They come across in the call as arrogant, in the sound of their voices when they talk about their records in financial performance, gains in market share, etc. Their business is strong and steady. They are gaining share from competitors as well. Given their success it isn’t surprising the have developed some hubris. Their call reminds me of listening to Intel’s calls, except Intel is more arrogant. Applied is now calling the timing of the NAND recovery; first half of 2020. During the Q&A they also made a call on DRAM recovery, saying they see it happening in 2020 but not calling when within the year. The company story is unchanged this quarter. Good growth, steady gross margin in the mid 40%, returning about half of their free cash flow to shareholders. I think they are holding back on cash returns to shore up a store of dollars to complete the Kokusai acquisition. 2020 looks to be another good year for Applied with the NAND recovery beginning and foundry/logic still strong. 2021 should be great as both DRAM and NAND recoveries will be in full swing, on top of continued strong demand in foundry/logic.


-Smooth H. (no AMAT position)
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