Applied Materials(AMAT) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Applied Materials reported record annual revenue of $25.8 billion, a nearly 12% increase year-over-year [35] - Non-GAAP gross margin decreased by approximately 90 basis points to 46.6% [35] - Non-GAAP operating profit grew over 7% to $7.86 billion, while non-GAAP operating margin decreased by 120 basis points to 30.5% [35] - Non-GAAP EPS increased nearly 13% to $7.70 [35] - The company generated about $5.4 billion in operating cash flow and over $4.6 billion in free cash flow, returning 151% of free cash flow to shareholders [35] Business Line Data and Key Metrics Changes - Semi Systems revenue grew more than 6% sequentially to $5.04 billion, with segment non-GAAP operating margin increasing 80 basis points to 36.9% [39] - AGS revenue was flat quarter-over-quarter at $1.42 billion, with segment non-GAAP operating margin declining to 28.3% [39] - Display revenue declined to $251 million, with segment non-GAAP operating margin also declining to 13.5% [40] Market Data and Key Metrics Changes - The total ending backlog increased 62% to $19 billion, with semi systems backlog increasing 90% to nearly $12.7 billion [36] - AGS backlog increased 30% to over $5.6 billion, reflecting a large increase in long-term service agreements [36] - The company expects a pullback in overall wafer fab equipment spending next year, but believes its business will be more resilient due to a significant backlog and strong customer demand for leadership products [28][17] Company Strategy and Development Direction - The company is focused on mitigating supply chain constraints and building a more resilient supply chain [9] - Applied Materials is making strategic investments in R&D and infrastructure to support industry growth and position itself for future success [26] - The long-term growth thesis remains unchanged, with the semiconductor market expected to reach $1 trillion by the end of the decade [19] Management's Comments on Operating Environment and Future Outlook - Management acknowledged macroeconomic headwinds, including inflation and softening consumer demand, but emphasized strong demand in leading-edge foundry/logic and robust automotive and industrial markets [12][15] - The company expects to close supply gaps over the next few quarters and is focused on improving manufacturing and logistics [9] - Management remains optimistic about the long-term growth outlook for the semiconductor industry and believes Applied is well-positioned to capitalize on future opportunities [26][19] Other Important Information - The company anticipates that the unmitigated impact of new U.S. export regulations could be up to $2.5 billion in fiscal 2023, with efforts to reduce this impact to between $1.5 billion and $2 billion [11][42] - The installed base of systems grew 8% and the number of tools under comprehensive long-term service contracts grew 16%, with a renewal rate of over 90% [18] Q&A Session Summary Question: Clarification on China impact and WFE outlook for 2023 - Management clarified that the impact from China was less than initially estimated due to better execution and logistics [50] - They noted that it is too early to provide a precise estimate for WFE in 2023, but the backlog remains strong [52] Question: Mitigated vs unmitigated impact from China - Management explained that the unmitigated impact refers to orders from affected customers, while mitigation depends on obtaining licenses and customer adjustments [57] Question: Memory customer spending cuts - Management acknowledged pushouts and reductions in memory demand but emphasized that the backlog remains solid [66] Question: Sustainability of AGS operating margins - Management indicated that AGS margins are supported by increased efficiency and repair capabilities, despite some headwinds [100] Question: Gross margin impact from China restrictions - Management discussed that the gross margin impact is due to smaller customers and the profitability of those customers [102] Question: WFE intensity and future growth - Management expressed confidence that WFE intensity will continue to rise due to increasing process complexity and technology inflections [108]