Applied Materials’ financial priorities

Like many chip makers, Applied Materials’ (AMAT) profit margins bottomed out in the second quarter of fiscal 2019 after rising for two straight years. The slowdown comes at a time when the semiconductor industry is transitioning to AI, which needs advanced manufacturing technology.

During AMAT’s fiscal 2019 second-quarter earnings call, CFO Dan Durn listed the company’s financial priorities in the current environment. He stated that the company aims to manage its expenses while spending on new product developments, maximizing its recurring revenue from its Services segment, and delivering returns to shareholders.

What Are Applied Materials’ Financial Priorities for 2019?

Operating expenses

Applied Materials kept its operating expenses at $754 million in the second quarter of fiscal 2019 and expects to maintain the same level in the third quarter of fiscal 2019. In the second quarter of fiscal 2019, AMAT reduced its general and administrative expenses and maintained its R&D (research and development) and marketing and selling expenses at the same level as last year.

R&D

Durn stated that AMAT was spending its R&D budget on five key components: “new architectures, 3D structures and scaling techniques, novel materials, new ways to shrink feature sizes and advanced packaging including new ways to connect chips together.”

Maximizing service revenue

Durn stated that investing in new techniques would improve AMAT’s competitiveness and increase its installed base. The company is not only increasing its installed base but also looking to get more of its installed base under long-term service agreements that generate assured revenue for its services.

Shareholder returns

Higher service revenue will improve its cash flows, which will then be used to provide returns to shareholders in the form of dividends and stock buybacks. In the second quarter of fiscal 2019, AMAT generated $800 million in operating cash flow, of which it spent $118 million on capex, $625 million on stock buybacks, and $189 million on dividends.

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