01—Abstract
Summary
Summary of the 8-K filed May 16, 2024. Cited figures are marked; the original filing is the authoritative source.
Applied Materials reported fiscal Q2 2024 (quarter ended April 28, 2024) results that were essentially flat on revenue but mixed on profitability.
Net revenue was $6.65 billiona, unchanged from a year earlier, and GAAP gross margin rose 0.7 points to 47.4%. GAAP operating margin held at 28.8%, while non-GAAP operating margin slipped 0.1 point to 29.0%. GAAP diluted EPS rose 11% to $2.06, and non-GAAP diluted EPS rose 5% to $2.09.
The EPS growth came mainly from below-the-line items, including a $141 millionb swing in interest and other income (from a $73 million expense a year earlier) that reflects gains on strategic investments, rather than from stronger operations. Non-GAAP free cash flow fell 44% to $1.14 billion as operating cash flow dropped to $1.39 billion, largely due to working capital changes. The geographic mix shifted sharply.
China rose to 43% of revenue ($2.83 billionc) from 21% a year earlier, while the United States, Korea, and Taiwan all declined as a share of sales. Within Semiconductor Systems, which generated $4.90 billion (down 1.5%), DRAM rose to 32% of segment revenue from 11%, while foundry, logic and other fell to 65% from 84%. Applied Global Services grew 7% to $1.53 billion with a 28.5% operating margin, and Display and Adjacent Markets margin collapsed to 2.8%.
Management guided third-quarter revenue to approximately $6.65 billiond, plus or minus $400 million, and non-GAAP EPS to between $1.83 and $2.19. That range is wide, reflecting uncertainty around export regulation and demand. Capital returns remained substantial.
The company distributed $1.09 billion in the quarter, including $820 million in share repurchases and $266 million in dividends. Cash and equivalents reached $7.09 billion, and stockholders' equity rose to $18.2 billion from $16.3 billion at fiscal year-end 2023.
Investors should weigh the flat top line, the China concentration and its exposure to export controls, and the lower cash generation against the stable margins and healthy balance sheet. This 8-K furnishes the earnings release under Item 2.02 and is not deemed filed under Section 18 of the Exchange Act.
02—Key points
Key Highlights
- Revenue of $6.65 billion was flat year over year, while GAAP gross margin improved 0.7 points to 47.4%.
- GAAP diluted EPS rose 11% to $2.06 and non-GAAP diluted EPS rose 5% to $2.09, but EPS growth was helped by a swing in investment gains rather than operating growth. GAAP operating margin was flat at 28.8%, and non-GAAP operating margin fell 0.1 point to 29.0%.
- China rose to 43% of net revenue ($2.83 billion) from 21% a year earlier, while U.S., Korea, and Taiwan shares declined, raising concentration and export-control risk.
- Non-GAAP free cash flow fell 44% to $1.14 billion, with operating cash flow of $1.39 billion versus $2.29 billion a year earlier.
- Semiconductor Systems revenue declined 1.5% to $4.90 billion, with DRAM rising to 32% of segment sales from 11%, while Applied Global Services grew 7% to $1.53 billion at a 28.5% operating margin.
- Q3 FY2024 guidance calls for revenue of about $6.65 billion (plus or minus $400 million) and non-GAAP EPS of $1.83 to $2.19, a wide range that signals limited visibility.
- The company returned $1.09 billion to shareholders in the quarter ($820 million in buybacks and $266 million in dividends), and cash rose to $7.09 billion.
03—Questions
Frequently Asked Questions
Why did EPS grow while revenue and operating margins were flat?
EPS growth came largely from non-operating items. Interest and other income, net, was $141 million versus a $73 million expense a year earlier, reflecting gains on strategic investments and a lower share count (diluted shares fell to 836 million from 847 million). Operating income was essentially unchanged at about $1.91 billion, so the increase in GAAP EPS was not driven by core operating improvement.
How concentrated is Applied Materials' revenue in China, and why does it matter?
China accounted for 43% of Q2 FY2024 net revenue ($2.83 billion), up from 21% a year earlier, making it the largest region by a wide margin. This raises exposure to U.S. export regulations and license requirements, which the company cites as a risk factor, as well as to Chinese demand and trade policy. A sudden restriction on sales to China could materially affect revenue.
Why did free cash flow decline so sharply?
Non-GAAP free cash flow fell 44% to $1.14 billion from $2.04 billion. Operating cash flow dropped to $1.39 billion from $2.29 billion, mainly because of a $414 million negative net change in operating assets and liabilities this quarter (versus a $423 million positive change a year earlier), along with higher cash income tax payments of $467 million. Capital expenditures were stable at $257 million.
What does the Q3 guidance imply for the business?
Management expects Q3 FY2024 revenue of about $6.65 billion, plus or minus $400 million, which implies roughly flat sequential revenue at the midpoint. Non-GAAP EPS guidance of $1.83 to $2.19 is wide, and the company notes that it excludes unpredictable items such as future acquisition charges and tax items. Investors should treat the range as an indication of uncertainty rather than a precise forecast.
Is the company's balance sheet and capital return program still strong?
Yes. Cash and cash equivalents increased to $7.09 billion from $6.13 billion at fiscal year-end 2023, and total stockholders' equity rose to $18.2 billion from $16.3 billion. Long-term debt was stable at $5.46 billion. The company repurchased $820 million of stock and paid $266 million in dividends in the quarter, though free cash flow in the period did not fully cover these distributions.
04—Continue