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February 18, 2021

Financial Results

Statement of Operations

Revenue was above the high end of guidance ($5.15B) at $5.162B. Gross margin of 45.5% was similar to last quarter. While overhead increased in all three categories (Applied has R&D, Marketing and Selling, and General and Administrative,) revenue grew faster. Operating margin in the quarter was 20.6%. This would have been 300 bps higher except for the cost of a voluntary severance program they executed in the quarter. Their income tax rate was abnormally low at 8.9%. EPS was up more than 25% from the same quarter a year ago, though it was flat compared to last quarter, owing in part to the one-time severance costs. Earnings per diluted share were $1.22 on a diluted share count of 925M.

Statement of Cash Flows

Applied has increase cash from operations by more than 50% from last year, after backing out the $148M cost of the voluntary retirement program this quarter. They continue to invest in the business with capital expenditures 35% above depreciation and amortization and $86M added to working capital. They net shifted $83M into investments. Owner’s cash flow was $1.051B in the quarter. When annualized, this is $4.54 per share, or a 3.8% yield at a price of $119 per share. This owner’s cash yield is in the higher end of the normal range for WFE stocks. Of this billion-ish dollars of cash flow, applied only paid out $201M to owners, in the form of a dividend. They bought back no shares in the quarter as they prepare to close on the purchase of Kokusai Electric.

Balance Sheet

The Company continues to accumulate cash, preparing for the closing of the Kokusai Electric acquisition, which is expected to close next month. They now have $6.2B in cash, against $5.45B in debt. It is surprising with the rate of increase in revenue that working capital has stayed about flat from last quarter. AP actually came down a little. Overall, with almost $1B in added cash in the quarter, book value rose to $11.5B, or $12.43 per share. If the Kokusai purchase happens as expected, we will see a big shift on the balance sheet in the current quarter, from cash to goodwill.


Earnings Call Notes

Unless otherwise specified, financial information is non-GAAP

Gary Dickerson (CEO) prepared remarks

• Data center capex is expected to grow 15% this year
• NAND spending in 2020 was up 30% in a recovery year, and they expect NAND growth to be modestly up in 2021
• Supply-demand dynamics in DRAM are better than NAND and DRAM is expected to grow faster than NAND in 2021
• WFE capex intensity is below recent peaks in all three segments: foundry/logic, DRAM, and NAND
• They expect to increase their WFE market share again in 2021
• Their services business has grown at a CAGR of 12% over the last five years, faster than the growth rate of their installed base. This means they are getting more revenue per installed tool.
• They are staying with their November forecast for the display market, which is that it is still in a slump.

Dan Dern (CFO) prepared remarks

• All three segments are expected to grow revenue in the second half of 2021
• NAND spending in 2020 grew 2x as fast as the overall market. DRAM grew faster than the market and foundry/logic under-grew the overall market.
• In 2021, DRAM is expected to outgrow NAND
• Q2 outlook (non-GAAP): Revenue = $5.39B +/- $200M, non-GAAP EPS = $1.50 +/-$0.06, Systems revenue = $3.85B (up 50% Y/Y), Services revenue = $1.14B (up 12% Y/Y), Display revenue = $370M, non-GAAP GM = 47.0%. Their tax rate is expected to be 12-13%.

Question and Answer

• 2020 overall WFE was about $60B, driven by memory. 2021 is expected to be more favorable for Applied, because DRAM growth will be strong. They expect to grow market share again in 2021.
• Their view of overall WFE in 2021 is “a bit higher” than the industry consensus of high $60B to $70B
• In the back half of 2021 they expect to be in the 46.5% to 47.0% range
• Their revenue last year was split 70% leading edge and 30% lagging technology
• Localization of nations bringing fabs into their borders increases WFE intensity, because smaller fabs are less efficient
• Domestic China in 2020 was $10B and will be up “a few billion” this year. Their forecasts do not include an assumption that they can ship to SMIC this year.
• Their display business in 2021 will look similar to what they did in 2020. They believe there are “green shoots” visible for a better 2022 in this segment.


Summary

2020 was a record year for Applied Materials. 2021 is set up to be another record year, not just for Applied but for the overall wafer fab equipment industry. The industry consensus is for total WFE revenue in the year to grow to $70B, from $60B in 2020. Applied’s model has the total equipment market a little larger than that. They believe their market share increased last year and will increase again this year, implying revenue grown for the company of 20% year-over-year. They expect their gross margin to increase about 100 bps by the end of 2021 from the current level. This would make AMAT a company with $25B in revenue and almost $12B in gross margin dollars. Their three WFE segments all support a record year. Foundry/logic is in the news for severe supply shortages. TSMC and Samsung have both announced record capital expenditure plans in 2021. The DRAM market recovery is underway, so spending in that segment will increase as this year goes on. NAND is the weakest of the three. The company characterized 2020 as a recovery year for NAND, but it is still not strong because NAND produces are not making high enough margins to justify increased investment. Applied is stronger in DRAM than NAND, so this is less of a concern for them than for a company like Lam Research. Even with a record year, the biggest event of 2021 will be the closing of the acquisition of Kokusai Electric, which is expected in March. Even with all this good news, Applied is not unreasonably priced.



-S. Hughes (no AMAT position)
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