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Earnings Statement
Applied has a 45% GM for the quarter, earning $0.91 per share. Non-GAAP they were 2.5% better on GM at 46.2%. Net sales were 20% higher in the quarter from a year ago. They paid out $492M to owners in the quarter, $107M in dividends and $385M in share repurchases. For the full year, Applied paid back $1.6B to owners at an average price of $42.08 per share. This year was a record year for Applied in both revenues and earnings. Gross margin for the year was about the same as for the quarter (44.9% for the year and 45% for the quarter). Guidance for the first quarter of 2018 is for revenues between $4.0B and $4.2B and EPS of $0.94 to $1.02.

Comparing segment information, there was a shift in sales away from foundry and logic and to NAND flash. DRAM shrunk in percent share as well, but the whole sales pie got bigger, so DRAM still grew in absolute dollars. Their services business is one-third the size of WFE and has lower operating margin (27.9% vs. 32.9% for WFE). Their display business is a little smaller than services and has similar margins to the company average. Backlog for WFE grew 50% year-over-year.

Moving down the income statement (all QoQ); revenue grew 20%, COGS up 15%, so gross margin up 28%. R&D increased 18% from the year-ago quarter but SG&A was flat. They added some debt, which increased their interest payments from $38M to $57M. Net income for the quarter was $982M compared to $610M a year ago.

The balance sheet swelled with cash, finishing the quarter with $7.3B in cash and equivalents, up from $3.7B in this category a year ago. Inventories increased 50%, not surprising with the growth in sales and backlog. Semiconductor equipment, when shipped to customers but not yet qualified for production, remains as inventory on the sellers balance sheet. Hence, when sales grow rapidly, so do inventories. The rest of current as well as long-term assets were flat. They added $2.2B in debt in the quarter, taking advantage of low interest rates.

Looking at cash flows in FY17, I start with $3609M in cash from operations. Subtract $220M in ownership dilution from equity grants to employees, $345M in CapEx, and $68M in acquisitions, leaving $2976M in true cash generation from their business. They paid $1602M of this back to owners, or 54% of their cash income. This is sustainable as long as sales don't come back down as fast as they have gone up. Given the cyclicality of semiconductor equipment, I would be buying back fewer shares in the upturn and more in the downturn that will inevitably come.

Turning last to the geographic distribution of sales, Korea was a third of overall. Samsung and Hynix are buying equipment for NAND. Taiwan is 18%, China 15%, and Japan 13%. I was surprised to see Japan this high as they have been losing in leading edge for years. This may be related to the growth in trailing edge they mentioned in the conference call. Speaking of the call...

Conference Call
- All time record quarter
- Broader set of demand drivers for semiconductors than ever before. "We are at the start of an entirely new phase of growth"
- Customers are making "disciplined investments in capacity"
- Big investment in trailing edge, especially image sensors. Dual-camera phones are a driver here.
- China spending increased $2B from 2018 vs. 2017
- The equipment market has strengthened since September. 2018 will be bigger than 2017.
- FY17 was a record-breaking year. AMAT anticipates double-digit growth in 2018. They kept talking about how important AI will be to future growth.
- Services CAGR will be 15% through 2020
- 14% growth in systems for the year. Services up 20%, display revenue up 50%
- 2018-2019 "sustainability" of the market. WFE market for 2017-18 combined will be $90M. They believe chips and displays are both fundamentally strong.
- Backlog of $6B is a record. Book-to-bill is 1.1
- In their 2018 revenue projections; systems up 32%, services up 17%, display up 6%
- FY18 GM will be similar to FY17 GM (46%)

Analyst Q&A
- Operating margin goal for 2020 is 29.6%. This looks conservative against current performance. The execs stuck to their stated goal, keeping some sand in the trunk.
- There is a "strong balance" between foundry logic and memory. Memory is 2/3 NAND and 1/3 DRAM - FY18 will be the same split.
- DRAM: does capacity expansion look disciplined? Yes, market is being demand-led. They see 25% bit demand growth. They are seeing power and demand performance increasing in memory. The periphery is becoming more capable. SH comment: this is a threat to Intel.
- NAND bit demand growth was 40% in 2017, will be "higher" in 2018. Half of installed NAND base is 3D today. We are in the early innings of SSD adoption.
- If new demand for WFE is $45B annually, why not increase dividend? Watching closely, waiting to see tax policy out of Washington.
- Gross margin target of 47% for 2020. How high is this ceiling? They stand by their model.
- Memory supply growth: DRAM at 25% and NAND at 40-45%
- 40% of foundry spending is in trailing geometries
- AMAT gained market share in five of the last six years, and was flat in the sixth. This is a true statement, but this has been driven largely by acquisitions.

SH Closing Statements
I have no position in AMAT. This quarter doesn't change my view of buying AMAT stock. I will buy a basket of the WFE companies in the next downturn. For now, I think you pay a high price for a cheery consensus.
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