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Notes from 4Q’19 and Fiscal Year 2019 Earnings Release and Conference Call

Down Year Demonstrates Stability

For the quarter, gross margin was 43.8% on sales of $3.75B for an EPS of $0.75. Full year revenue was $14.61B, with a gross margin of 43.7%, giving an EPS of $2.86. Non-GAAP EPS for the year was $3.04. Compared to FY18, non-GAAP EPS was down by a quarter in FY19, to $3.04 from $4.18. This is a product of slightly lower GM (44.0% vs. 46.1%) but more from lower revenue ($14.6B vs. $16.7B). Operating margin was 22.9% for the year compared to 26.9% a year ago. The last year was slower than the year before because the memory sector entered a downturn. Two-thirds of the company’s sales are WFE systems, with that portion split 60%-20%-20% between foundry/logic, DRAM, and Flash. The remaining third is services ($3.8B for the year) and display ($1.6B in the year). Gross margin is 27-28% for both WFE and Services, with Display and Adjacents pulling down the company average, at 21%. Applied spends 20% of revenue on overhead (R&D plus SG&A). For the year, they bought back 60 million shares of stock at an average price of $40 per share.

From a year ago, book value increased $1.4B to $19B. Cash and equivs wend down about $400M to $3.6B. Debt was about flat, though $600M of their long-term debt came into the twelve-month window. They have $5.3B of total long-term debt. The increase in owner’s equity came from a large ($1.6B) increase in “Other Assets”. Everything else (working capital, etc.) was flat. For the year, Applied generated $3.2B in operating cash flow and paid out almost this same amount to owners in share repurchases ($2.4B) and dividends ($771M). Capex was significantly lower than a year ago, by almost a third. Paying out all their operating cash flow to owners means the decrease in their cash position funded investing activities for the year. I read this as meaning management has enough confidence in future cash flow that they could take down their cash balance some to buy back stock they believe is underpriced. So far, they have been proven right ($40 average price paid vs. $55 per share on the market today). But the long-term difference is what matters. I think they will be proven even more right over the long term, and shareholders will look back at the higher level of stock purchases in this fiscal year as savvy.

Earnings Call Notes

Unless otherwise specified, financial information is non-GAAP

Gary Dickerson (CEO) prepared remarks

• This year was the first significant pullback in semiconductor spending since 2013. If the quarter just finished is the trough, then Applied’s revenue will be 20% down from the peak. Previous cycles the peak-to-trough difference was twice that. Memory makers are more stable now and are more focused on investing for continued profitability.
• 45% of FY19 revenues came from sources other than new 300mm equipment sales, up from 41% two years ago
• Three observations about the current cycle; 1) strong investment by foundry/logic customers, 2) early signs of a recovery in NAND investments, 3) “positive progression” in the ongoing inventory correction in DRAM. They are revising their 2019 WFE estimates up, believing now they will be similar to 2017 in terms of spending levels. They believe NAND will recover ahead of DRAM in 2020, and they expect 2020 revenues to be similar to 2019.

Dan Dern (CFO) prepared remarks

• Their “opportunistic” repurchases of stock were at an average of $39.86 per share
• Their year-end backlog is $6.5B, the highest year-end backlog ever
• Guidance for Q1: Revenue of $4.10B +/-$150M, EPS of $0.87 to $0.95, gross margin of 44.6%

Question and Answer

• Memory customers are continuing to drive technology advancement while reducing investment in capacity to bring supply and demand back into balance
• They continue to expect steady growth in domestic China, not hockey stick growth
• They characterize Foundry/Logic as “demand led.” Demand from this area is diverse in both customers and nodes. They are seeing strength both in the leading edge and in trailing nodes.
• The swing factor for Applied next year is the timing of the recovery in the memory market. They hope that NAND will recover in 2020. This was a pointed clarification, that I’m not sure he meant to communicate. It sounded as if they aren’t as sure about DRAM recovering in 2020 as they are about NAND recovering next year.
• “The environment is better today than it was a quarter ago, or six months ago”


This closes out a down year for Applied. But, as the executives pointed out in the call, if this year turns out to be the bottom then the semiconductor business will have shifted into a new regime of shorter, shallower down cycles. Their revenue was only off 20% this year, half of the drop seen in all downturns going back to 2000. They are putting their money where their mouth is, paying out all their free cash flow to shareholders during the down year and opportunistically buying more stock back while the price was low. They were willing to dip into their cash reserves to make business investments in order to take advantage of the depressed stock price in a down market. Those of you who have also read my posts on the Micron Technology board know this is something I criticized Micron’s management for – not having the courage to take a calculated risk and buy back a lot of shares in the down-cycle. Applied’s balance sheet is strong, as is their overall business. Foundry/Logic is 60% of their overall revenue and it continues to grow. They are seeing signs of the upturn beginning in NAND, and inventory corrections continue in DRAM. They see memory recovering sometime in 2020, at least in NAND. Of course, they weren’t willing to predict timing more precisely than that. The stock market has already priced at least some of this recovery into Applied’s shares. When the memory market is clearly recovering (as shown by the memory makers increasing their capex forecasts), Applied and the other WFE companies will see further gains in their share prices. I still believe buying AMAT here will beat the market in both the short and long-term.

-Smooth H. (no AMAT position)
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