Applied Materials, Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Three months ended January 28, 2024 (13 weeks), compared with the three months ended January 29, 2023. Dollar amounts are in millions unless stated otherwise.
Business context and results
Applied Materials supplies semiconductor and display manufacturing equipment, services and software. Its three reportable segments are Semiconductor Systems, Applied Global Services (AGS), and Display and Adjacent Markets.
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net revenue | $6,707 | $6,739 | Down $32; essentially flat |
| Gross profit / margin | $3,204 / 47.8% | $3,145 / 46.7% | Margin up 1.1 points |
| Operating income / margin | $1,967 / 29.3% | $1,970 / 29.2% | Income down $3 |
| Net income | $2,019 | $1,717 | Up $302 |
| Diluted EPS | $2.41 | $2.02 | Up $0.39 |
| Operating cash flow | $2,325 | $2,270 | Up $55 |
Revenue, margins and material changes
- Semiconductor Systems revenue declined 5% to $4,909; operating income fell 6% to $1,744, and segment margin was 35.5% versus 35.9%. Foundry and logic spending weakened, partly offset by stronger memory investment, particularly DRAM transitions.
- AGS revenue rose 8% to $1,476 and operating income increased 21% to $417, driven mainly by long-term service agreements and higher spending on legacy systems.
- Display and Adjacent Markets revenue increased 46% to $244, mainly on mobile-display equipment demand; operating income was $25 versus $3.
- Gross margin improved primarily due to lower material, freight and logistics costs and lower inventory reserves, partly offset by unfavorable product mix. Operating income was nearly unchanged as higher operating expenses offset the gross-profit improvement.
- Net income growth substantially exceeded operating-income growth. Interest and other income, net, rose to $395 from $50, primarily reflecting a $281 net gain on equity investments and higher interest income. The filing identifies a $287 unrealized gain on publicly traded equities.
- China represented 45% of revenue, compared with 17% a year earlier; Taiwan fell to 8% from 29%. Revenue is geographically concentrated: Asia Pacific accounted for 83% of the quarter’s total. Samsung Electronics accounted for 15% of revenue.
Cash, debt and liquidity
- Cash and cash equivalents were $6,854; short- and long-term investments totaled $3,548. Combined cash and investments were $10,402, versus $9,150 at October 29, 2023.
- Total debt was approximately $5,562, comprising $100 of short-term commercial paper and $5,462 of long-term debt. No amounts were outstanding under the $1.5 billion revolving credit facility.
- Operating cash flow was $2,325. Capital expenditures were $229. Investing activities used $447; financing activities used $1,157, including $700 of share repurchases, $266 of dividends paid and $192 of tax withholding on vested equity awards.
- Working capital was $12.1 billion, up from $11.8 billion at the prior fiscal year-end. Days sales outstanding improved to 64 from 73 a year earlier.
- Management said operating cash generation, cash balances and borrowing capacity should be sufficient to meet liquidity requirements for the next 12 months.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue or EPS guidance. Management said customers continued strategic investments in capacity and technology transitions, while customer spending varies with industry cycles, end-market demand and technology shifts.
- Management intends to continue substantial R&D investment. It also anticipates quarterly dividends, subject to Board approval and business conditions; the Board declared a $0.32-per-share dividend payable in March 2024. Approximately $12.0 billion remained authorized for future repurchases at quarter-end.
- A change in estimated useful lives for certain buildings and manufacturing equipment reduced Q1 depreciation expense by $37 and increased basic and diluted EPS by $0.03. This is a change in accounting estimate applied prospectively.
- Increased G&A expense reflected higher professional fees and share-based compensation; G&A share-based compensation was $64 versus $23 a year earlier. Total share-based compensation was $170 versus $148.
- Key risks include semiconductor and display industry cyclicality, customer and geographic concentration, supply-chain constraints, and changing export controls. The filing describes multiple government subpoenas concerning certain China customer shipments, as well as a February 2024 subpoena related to certain federal award applications. The company is cooperating and says outcomes and potential losses or penalties cannot be reasonably estimated.
- The company also noted that enacted global minimum tax regimes are expected to increase tax liabilities beginning in fiscal 2025; Singapore reduced tax rates are due to expire in fiscal 2025, subject to potential renewal and conditions.
Most important facts for investors to verify
- Whether the large China revenue share and related export-control requirements affect future shipments, customer demand or compliance exposure.
- How much of the increase in net income and EPS reflects investment gains and higher interest income rather than operating performance.
- Whether Semiconductor Systems demand and margins stabilize, and whether AGS growth and display-equipment demand persist.
- The status and potential financial or operational implications of the government subpoenas; the filing provides no estimable loss range.
- Whether the $37 depreciation benefit is considered when comparing underlying margins and earnings trends.