Applied Materials, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended April 28, 2024. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. The company supplies semiconductor and display manufacturing equipment, services, and software.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | First six months FY2024 | First six months FY2023 |
|---|---|---|---|---|
| Net revenue | $6,646 | $6,630 | $13,353 | $13,369 |
| Gross margin | 47.4% | 46.7% | 47.6% | 46.7% |
| Operating income / margin | $1,912 / 28.8% | $1,911 / 28.8% | $3,879 / 29.0% | $3,881 / 29.0% |
| Net income | $1,722 | $1,575 | $3,741 | $3,292 |
| Diluted EPS | $2.06 | $1.86 | $4.47 | $3.88 |
| Operating cash flow | Not provided by quarter | $3,717 | $4,562 |
- Q2 revenue was nearly flat year over year; net income rose about 9% and diluted EPS about 11%. For the six-month period, revenue was nearly flat, while net income rose about 14% and diluted EPS about 15%.
- Q2 gross margin improved 0.7 percentage points, primarily from lower material, freight and logistics costs, favorable mix, and lower inventory reserves; higher labor costs partially offset these benefits. Operating margin was unchanged.
- Six-month operating cash flow declined $845 million year over year, despite higher net income. Management attributed the decline mainly to higher income tax payments and lower new customer billings for unsatisfied performance obligations, partly offset by lower vendor payments. Capital expenditures were $486 million; operating cash flow less capex was approximately $3.2 billion.
Segments and material changes
- Semiconductor Systems: Q2 revenue was $4,901, down 2%; six-month revenue was $9,810, down 3%. Lower foundry and logic investment, particularly in leading-edge technologies, was partly offset by increased mature-node investment. DRAM technology-transition spending increased; the segment’s DRAM revenue mix rose to 32% in Q2 from 11% a year earlier.
- Applied Global Services: Q2 revenue increased 7% to $1,530 and operating income increased 14% to $436. Growth reflected long-term service agreements and greater spending on 200mm equipment.
- Display and Adjacent Markets: Q2 revenue rose 7% to $179, but operating income fell to $5 from $16, with margin declining to 2.8% from 9.5%, mainly due to unfavorable product mix. Six-month revenue rose 26% to $423.
- China represented 43% of Q2 revenue and 44% of six-month revenue, versus 21% and 19%, respectively, in the comparable prior-year periods. The filing attributes regional changes primarily to semiconductor equipment spending.
- Q2 interest and other income, net, was $141 million versus expense of $73 million a year earlier. The six-month amount was income of $536 million versus expense of $23 million, primarily reflecting equity-investment gains, lower investment impairment, and higher interest income. This contributed materially to net-income growth.
Cash, debt, liquidity, and capital returns
- At April 28, 2024, cash and cash equivalents were $7.085 billion; short- and long-term investments were $3.455 billion; total cash, cash equivalents, and investments were $10.540 billion.
- Debt comprised $100 million of commercial paper and $5.463 billion of long-term debt on the balance sheet. No amounts were drawn under the $1.5 billion revolving credit facility, which is scheduled to expire in February 2026.
- Working capital was $12.4 billion. Management stated that operating cash generation, existing cash, and borrowing capacity should be sufficient for liquidity requirements over the next 12 months.
- Six-month financing cash use was $2.179 billion, including $1.520 billion of share repurchases and $532 million of dividends paid. Approximately $11.2 billion remained authorized for future repurchases. The quarterly dividend declared in March 2024 was $0.40 per share, payable in June; future dividends remain subject to Board approval.
Outlook, risks, and unusual items
- The filing gives no specific numeric revenue or earnings guidance. Management described continued strategic customer investment in capacity and technology transitions, and intends to maintain substantial R&D investment. Demand and results can vary with customer spending, technology transitions, and industry conditions.
- Key risks include semiconductor-industry cyclicality; changing export controls and trade restrictions, particularly concerning China; customer and geographic concentration; supply-chain constraints; and foreign-exchange, interest-rate, cybersecurity, and regulatory risks.
- The company is cooperating with government authorities regarding subpoenas related to certain China customer shipments and certain federal award applications. It says the outcomes and any potential loss or penalties cannot be predicted or reasonably estimated.
- The fiscal 2024 review of asset useful lives reduced depreciation expense by $30 million in Q2 and $67 million in the first six months, increasing EPS by $0.03 and $0.06, respectively. This accounting-estimate change benefited reported earnings.
- The six-month effective tax rate increased to 12.9% from 11.9%, primarily because of lower tax credits, partly offset by larger share-based compensation tax benefits. Management expects global minimum tax rules to increase tax liabilities beginning in fiscal 2025; Singapore’s conditional reduced tax rates expire in fiscal 2025, subject to potential renewal.
Most important facts for investors to verify
- Whether China’s unusually high share of revenue is sustainable, and how export controls or the related government inquiries could affect shipments, sales, or penalties.
- Whether the earnings increase persists when equity-investment gains, higher interest income, and the depreciation benefit from revised useful lives are considered.
- Whether operating cash flow recovers as customer billings and working-capital movements change; six-month cash flow was lower despite higher net income.
- Whether memory and services growth offsets weaker leading-edge foundry and logic demand, and whether Display segment margins improve.
- How future tax-rule changes, tax incentives, customer concentration, and supply-chain conditions affect margins and cash generation.