Applied Materials 2Q16 Earnings Call Notes

Applied Materials’ (AMAT) CEO Gary Dickerson on Q2 2016 Results

Customers continue to invest to ramp new technologies as battle for leadership

“While we’re paying close attention to the global economy, at Applied, we continue to see strong demand for our products and services. This is because our semiconductor and display customers are focused on developing and ramping new technologies rather than simply building capacity. The inflection-driven investment our customers are making are highly strategic. They are battling for leadership and investing to ensure that they are ready as market demand shifts to these new technologies. In foundry, we expect investment levels for the year to be similar to 2015. We anticipate more than half of 2016 spending will be focused on the 10-nanometer node, as well as 7-nanometer pilot production.”

China is probably our strongest region

“Yes, one other thing I would say is China is probably our strongest region relative to our position with both the domestic companies and multi-national companies and as Bob said the momentum just keeps building. We have doubled revenue in china over the last 2 years and I am spending a fair amount of time there myself and certainly you look at what’s happening there now and discussions for future projects. As Bob said, multi-year wave opportunity in terms of China. ”

We returned 250% of FCF to investors in the last year. We can’t stay at that level forever

” Share is obvious. We are very committed to shareholders returns, cash returns in fact in the last year we have returned 250% of free cash flow so we can’t stay at that level. We are already committed and we also said in the call we will beat our targets of weighted average share in the model in 2018 so you know we are almost there now so we will continue to get better on that. In terms of the magnitude of the debt we have to talk to the board but we are committed to the shareholder returns. We are committed to beating away average shares in the model and the details of it will have to go through with the board in June.”

Robert Halliday

Disruptive technology changes are happening in display

“Disruptive technology changes are happening in the display market that will increase customer spending this year and beyond. In the TV market, while there is sufficient overall capacity at this time, we expect additional investments in certain regions. In longer term, I believe that technologies now being piloted in mobile will be attractive in 3Ds as well. Such adoption would be very positive for us.”

2016 should be strong year in etch share

“as I said earlier, we think that 2016 is going to be a really strong year for us in growing our Etch share. We have a very strong position, very strong position in 3D NAND conductor edge. So, as that business continues to grow, as that wave moves forward over the next few years, we are in a really great position and we have some of the most exciting products in this group that I have seen in my whole career.”

Applied Materials 2Q15 Earnings Call Notes

Outlook flat to last year with potential downside risk

“While progress towards our strategic goals and financial model remains on track, changes in the business environment over the past few weeks have created some near-term headwinds. Looking at the market as a whole, we now see 2015 wafer fab equipment spending being approximately flat relative to 2014, with potential downside risk. The most substantial revision to our outlook is foundry spending, where we have lowered our estimates for the remainder of the calendar year. This is primarily due to customers managing excess inventory, improving their yields, and reusing equipment.”

Foundries are aggressively pursuing 10nm technology

“While we see a pause in capacity additions, the leading foundries are still aggressively pursuing 10-nanometer technology, and we expect this to become a key battleground in 2016 with the buildout of pilot production”

In summary fab spending trending lower than expectations

“In summary, 2015 wafer fab equipment spending is trending lower than our prior expectations. Our focus on technology inflections and new products is producing revenue and share growth opportunities, notably in memory. But the demand mix presents gross margin challenges in the short term.”

Customers are getting higher tool utilization and more reuse

“You see our customers talking about it. We’re getting higher tool utilization. Samsung talked about it earlier in the year. TSMC has started to talk about that, higher tool utilization, more tool reuse. So that’s across – and even inventory in the channel, you see some data on that. So I think what you have right now is a problem in fuller utilization, more efficient utilization of tools.”

We’re seeing it more because we’re earlier and heavier in the cycle

“In terms of why do we see it and other people aren’t talking about it, we are a month later, number one. Number two, if you do look at the mix of Applied tools, sometimes they’re about a little bit earlier and heavier in a cycle”

We have two primary US competitors, one is more memory centric, the other more logic centric

“I’ll tell you another way you can triangulate on what we’re saying. We have two primary U.S. competitors. One is generally thought of as more memory centric; one is thought of as more foundry and logic centric. And if you look at it, the person who is more memory centric probably a month ago saw a little bit better outlook than we did. And the one who is more foundry and logic centric saw a significantly less optimistic, I believe, outlook than we did.”

Been positioning company around inflections

“we’ve been positioning the company around the major inflections. So if you look at the way we structured the organization, the way we move the investment within the company in patterning, for instance, in etch and CVD, we’ve got the highest CVD orders ever in the history of the company; etch, the second highest orders in the history of the company this last quarter. And our memory share is increasing.”

Despite macro, increasing capital intensity probably means it works out ok

“in listening to our customers, 10-nanometer is going to be a pretty big spend year for them next year. So the rough mathematics is that if you look node to node, so the 32-nanometer to 28-nanometer versus 2016 14-nanometer versus 10-nanometer, wafer starts might be down a little bit, maybe 10% per launch, but capital intensity per node is up about 20%, so the volume versus capital intensity is still not bad. I think the problem we have right now is we get this reuse.”

“the other thing you have to go look at is all the macro stuff, which is beyond my pay grade. What’s going to happen in China in phones and the next Apple phone? I don’t know that stuff. But in a reasonable demand environment, the increasing capital intensity and the importance of 10-nanometer to our customers and the fact they’re absorbing the tools at this point means it’s probably okay.

Customers are moving to 3-D it going to happen, it’s just timing

“3D NAND we’re pretty bullish on actually because this is a technology transition which is more akin to a wafer size transition because when they have to switch from 2D to 3D for both device performance. And you can’t keep shrinking; electrons in a cell, you can’t get any smaller, and so you can’t effectively. So they’re going to go to 3D. It’s like 300-millimeter, you knew customers were going to go; it’s just timing. So they waited a year or two, but it’s happening. You can see the numbers going up rapidly, and everybody says it. So I think if anything, you’ve got a solid baseline of predictable spending that’s pretty healthy in 3D NAND for a number of years.”

Data center positive for DRAM

“DRAM bit growth is pretty good, so I think DRAM is okay. And the other thing helping DRAM and memory in general is the whole data center, big data, cloud stuff is definitely a positive, definitely.”

Logic hasn’t been high growth in a while

“Logic hasn’t been high growth for a while. It’s mostly driven by PCs. And for Applied, it isn’t that big either. So that one, we don’t think about it every single day because it hasn’t been that volatile in the last few years.”

Foundry driven by mobile, IoT

“if you get pretty good consumption of mobile devices and related things like that, and even some of this Internet of Things stuff is picking up frankly, then you’ve got healthy foundry demand.”

Applied Materials Analyst Day Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“the next few devices, graphics, processor and CPU require a lot more processing power but they require a lot more power. So it’s 80 watts or so on a high performance Ultrabook compare to smartphone, that is a dramatic difference and it really shifts where we have to focus to help our customers to solve those very, very critical problems.

And that is where this war on mobility is going to be won, the companies that can solve that battery life, the high performance and functionality, the portability, the user experience, those are the companies that are going to win… we are really still at the beginning of this adventure”

“Your smartphone is not going to be used for money, it is going to be used to be the central controller for many other devices”

“Today we are still pretty much stuck with touch, I think in the future we will have much better voice and we will require more processing power on the devices. We will have better gesture recognition, handwriting recognition and the like.”

“transistors are really at the fundamental level of integrated circuits, you have to have a better transistor every generation, it needs to be higher performance and lower power, it is the beginning, it’s the foundation, it enables those things like battery life, like performance. But several generations ago, transistors stopped improving when you scaled, in fact they started to get worse, they leaked more, there was hard to get better mobility. And so we’ve had to resort to quite a number of changes from metal gate to high-k dielectrics in planar transistors. And now as Bob said, vertical transistors and logic and certainly many vertical memory cells in 3D NAND and we’re going to see that trend to continue, because it is the only way to continue to improve the requirements of transistors.”

“But even if your base transistors operates at high speed, the thing that you have to have to deliver that performance stay outside well is interconnect, Applied is clearly the leader in interconnect”

“with increased process complexity, generation over generation in the next few years we expect that foundry spending will have to increase.”

“3D NAND factories will all be greenfield factories. There is no reuse when you move to these new generation of technology because of the stark difference between it and planar NAND. ”

“we’re seeing a very, very strong drive for finFET transistors so that capability can get in to the next generation of technology.”

“I have to tell you for all of us here at Applied, this is a tremendous amount of fun. We have great, great technology and all of us spend seven days a week, 24 hours a day with tremendous passion focused on these inflections with the technology that we have.”

“two reasons, why TSMC is winning, one is because they have better yields, and the other one is around device performance and transistor technology.

When we work with all of the foundry customers, TSMC stands on global foundries and also with Intel. All of these companies are focused on more features, better performance, longer battery life and the transistor technology, 20 nanometer finFET technology, this is the key focus for all of these companies.”

“Today, as that customers are moving to 20 nanometer and beyond, in all sectors of device making, logic, in the foundry space, in the memory space, really the key is that longer development cycles are necessary, many challenges that our customers face need longer development time and earlier engagement with the customers as a result.”

” the pillars of our growth: number one transistor…Second is about extending our leadership in interconnect…And third in opportunity space that we are very excited about is change the rules in patterning and in inspection.”

“We think bendable, rollable, foldable displays will come in a not too distant future. That type of form factor will require new material, new material deposited using high precision material engineering and all of this increases capital intensity for us.”

“display is a dominating component for smart devices…Start to the resolution, then people ask to optimize power, then people ask to optimize form factor.”

“Typical newspaper print is roughly 200 pixels per inch equivalent on a display, you go to magazine and books, something in order of 280 to 300. And then you go to some glossy pictures that’s roughly 700 PPI. So in fact the human eye can once you start to pay attention to this, you will want high and high resolution devices…to give you a point of reference, the iPhone 5 is 320 PPI roughly and the Galaxy phone is over 400 PPI roughly.”

“And so we as we believe it will be imminent over the next 12 months to 24 months multiple devices will get released using LTPS technology”

“So let’s get into the number of units, about eight tools is our serve available market in the all the amorphous silicon, mobility fabs, that number steps up to about 15 tools once you go pass 300 PPI, once you go to flexible OLED or OLED, somewhere 50 to over 20 tools per fab would be the number of tools that our customers would buy. So that’s a huge jump in terms of growth multipliers for display.”

“Spare and services again we have 26, over 25,000 install based your average tool can use $200,000 a year in spares and services.”

“So in an average year the net tools we shipped could be 1300 tools net, okay”

“In our industry the two enemies of the state frankly are fixed cost and time. Those are leading indicators of financials…if we move faster and eliminate fixed cost, we will win.”

“The materials innovation and foundry, it’s about the transistor, Samsung, TSMC, Global Foundries. They are all focused on 20 nanometer and thin fab as fast as possible.”

“Our highest share is in foundry space and the published data shows, I think year-to-date were something like 26% of the TSMC CapEx.”