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pww.comApplied Materials Inc., Q3 2008 Earnings Call, Aug-12-2008 - NasdaqGS:AMAT

NasdaqGS:AMAT

George S. Davis [Executives] đź’¬

George S. Davis, the Senior Vice President and Chief Financial Officer of Applied Materials, provided insights into the company's financial performance and targets. Here is a detailed summary of his comments:

Summary of Q3 Performance:

  • Orders: $2 billion, at the high end of the target range.
  • Backlog: Increased to $4.7 billion.
  • Revenue: $1.8 billion, down 14% from the previous quarter.
  • Gross Margin: Decreased to 40.2% from 45% in Q2.
  • Operating Expenses: $514 million, down slightly from Q2.
  • Operating Income: $228 million or 12% of revenue.
  • Net Income: $165 million or $0.12 per share.
  • Non-GAAP EPS: $0.17 per share.

Segment Results:

Silicon:

  • Orders: Down due to decreased demand from DRAM and Flash customers.
  • Revenue: Down 40% from Q2.
  • Operating Income: Declined to 23% of net sales.
  • Improvements: Despite the decline, operating performance continued to improve, showing ten points of operating margin improvement compared to Q4 of fiscal 2003.

Energy and Environmental Solutions (EES):

  • Orders: Increased 25% over Q2.
  • Revenue: More than doubled from Q2.
  • Operating Loss: Increased slightly over Q2.
  • Acquisitions: Impacted by acquisition-related charges of approximately $25-$30 million for PWS and another unspecified acquisition.

Applied Global Services (AGS):

  • Orders: Down 10%.
  • Revenue: Up slightly at $607 million.
  • Operating Income: Slightly lower than Q2.

Display:

  • Orders: Remained high but were down 24% from the previous quarter.
  • Revenue: Achieved record revenue with net sales of $311 million, up 57% from Q2.

Balance Sheet and Cash Flow:

  • Cash and Investments: Ended the quarter at $3.72 billion, a decrease of $124 million.
  • Cash Flow: Generated $320 million in cash from operations, or 17% of revenue.
  • Share Repurchases: Returned $381 million or 119% of operating cash flow to shareholders.

Q4 Targets:

  • Orders: Expected to be up in the range of 5 to 10% overall.
  • Revenue: Expected to be up in the range of 2% to 10% overall.
  • EPS: Expected to be in the range of $0.12 to $0.15 per share.

Market Outlook:

  • Semiconductor Capital Equipment Demand: Expected to remain flat, with any revenue increase appearing modest.
  • Flat Panel Display Shipment Demand: Will remain strong as customers add capacity, but the order cycle is expected to decline sharply.
  • Solar Business: Further progress in integrating crystalline silicon solar businesses, bringing revenue rates closer in line with shipment rates.
  • Services Markets: Expected to be relatively flat, with movement around last quarter’s level being a function of demand for spares and used equipment from semiconductor customers.

Additional Points:

  • Solar Build Out: Operating margin will continue to be impacted by investments in the solar build out and SSG R&D.

  • Earnings Upside: Substantial upside in earnings over time as silicon recovers and increased profitability in solar.

  • Break-even Guidance: EES is still expected to be break-even in 2009, with profitability improving over time.

Robert Friess [Executives] đź’¬

Robert Friess made several announcements and comments during the Applied Materials Inc. Q3 2008 Earnings Call:

  1. Introduction:

    • Robert Friess welcomed everyone to the Applied Materials’ Fiscal 2008 Third Quarter Earnings Conference Call.
    • He noted that during the presentation, all participants would be in listen-only mode.
    • Robert reminded attendees that the conference call was being recorded on August 12, 2008.

  2. Forward-Looking Statements:

    • He informed the audience that the earnings call contained forward-looking statements, including those related to Applied Materials' performance, products, growth opportunities, strategic positions, solar strategy, operational initiatives, cost controls, acquisitions, share repurchases, and financial targets, among others.
    • He cautioned that actual results could differ materially from those expressed or implied by such statements due to known and unknown risks and uncertainties.
    • Robert referred to the company's filings with the SEC for information concerning these risk factors.

  3. Non-GAAP Financial Measures:

    • He mentioned that the call contained non-GAAP financial measures.
    • Reconciliations of the non-GAAP measures to GAAP measures were available in the earnings release and the financial highlight slide on the investor page of the company's website.

  4. Interim Role:

    • Robert indicated that he was participating in the quarter’s webcast as the Interim Head of Investor Relations while the company recruited a new executive to lead the Investor Relations function.

  5. Upcoming Event:

    • He announced that the company would be hosting an analyst briefing at the European Photovoltaic Solar Energy Conference in Valencia, Spain, on Monday, September 1st, and promised more details on this event soon.

  6. Executive Introductions:

    • Robert introduced the executives present on the call, including Mike Splinter, President and CEO; George Davis, Senior Vice President and Chief Financial Officer; and Jo Sweeney, Senior Vice President and General Counsel and Corporate Secretary.

  7. Call Agenda:

    • He outlined the agenda for the call, stating that Michael Splinter would discuss the market environment and the company's performance in each segment, followed by George Davis discussing the financial performance for the third quarter and the targets for the fourth fiscal quarter of 2008.
    • After the remarks, the call would be opened for questions.

  8. Turnover to Mike Splinter:

    • Robert concluded his introductory remarks by turning the call over to Mike Splinter.

  9. Final Remarks:

    • After the Q&A session, Robert thanked everyone for joining the discussion of Applied Materials’ financial results.

    • He reminded the attendees that a replay of the call and supporting slide package would be available on the company’s website starting at 5 pm on August 12, 2008, and would remain posted until August 26, 2008.

Michael R. Splinter [Former Executive Chairman] đź’¬

Michael R. Splinter, the Former Executive Chairman of Applied Materials, made several comments during the Q3 2008 Earnings Call:

  1. Introduction and Acknowledgment of Robert Friess:

    • Thanked Robert Friess for stepping in as the Interim Head of Investor Relations while the company recruits a new executive for the role.

  2. Overview of Economic Environment:

    • Characterized the third quarter financial results as optimizing performance in a challenging economic environment, noting a particularly tough semiconductor equipment market.
    • Mentioned continued softening of world economies, with spikes in oil prices, tightened credit, falling US housing values, and rising unemployment.
    • Noted that US consumer confidence is at its lowest level in more than a decade.

  3. Wafer Fab Equipment Spending:

    • Over the past few months, forecasts for 2008 wafer fab equipment spending moved in line with the company's view of a 25% to 35% year-over-year decline.
    • There were some signs of strength in the PC market, showing double-digit unit growth, but this did not translate to broad investment by customers.

  4. Silicon Systems Group (SSG) Performance:

    • Highlighted the SSG's focus on financial and operating results, noting that the group performed well in the most challenging quarter since Q4 2003.
    • Mentioned specific achievements in mask inspection with the Aera2 and bright field inspection with the U-vision product.
    • Noted 23 new tool of record positions at major memory manufacturers for edge applications.
    • Discussed wins for the heart gap fill solution and epi solutions at major logic manufacturers.
    • Expected gains in copper PVD applications as memory transitions to copper interconnects.

  5. Display Group:

    • Noted a record revenue quarter, with over $310 million in revenue, delivering the largest volume of product in the display group's history.
    • Recorded revenue on the first PiVot PVD systems, which significantly improves target utilization to greater than 70%.

  6. Energy and Environmental Solutions (EES):

    • Revenues doubled and orders were up 25% in the quarter.
    • Focus has been on building production capability to meet the rapid expansion of product demand in precision wafering systems and Baccini’s cell systems business units.
    • Expected to be current to backlog by October.
    • Highlighted the progress in the SunFab thin film business, mentioning the successful startup of the first customer's factories.
    • Mentioned the issuance of a provisional opinion by the European Patent Office, finding invalidity in key claims of a patent related to tandem junction solar technology.

  7. Solar Industry Momentum:

    • Noted that the solar industry continues to gain momentum with strong investment prospects, particularly in Europe and Asia.
    • Announced two new contracts and one follow-on for SunFab, expanding into emerging solar markets like Italy and the Middle East.
    • Expressed hope for an effective incentive program in the US to build the solar market.

  8. Semiconductor Equipment Orders and Revenue:

    • Expected that fiscal Q3 was the trough for semiconductor equipment orders and revenue, remaining cautiously optimistic about a revenue recovery through the end of the year.
    • Discussed ongoing communication with customers regarding over 40 300mm projects and the uncertainty around the timing of those investments.

  9. Capital Intensity:

    • Capital intensity was down to 15% to 16% in 2008, below the typical range of 18% to 22%.
    • Expected capital intensity to return to approximately 20% over the next 1 to 2 years.

  10. Service Business:

    • Noted much less volatility in the service business compared to the capital equipment businesses.
    • AGS showed solid revenue and financial performance, with a strong proposition for expanding in Asia and signing major contracts.

  11. Infrastructure Investments:

    • Mentioned significant investments in infrastructure to enable the company to be more cost-effective and efficient, expanding capacity to meet customer needs.
    • Announced the new Asian Operations Center in Singapore and the expansion of the Thai manufacturing center.

  12. Strategy Overview:

    • Highlighted the company's focus on core businesses in silicon and service, making significant R&D investments in new products and technology for the next node of integrated circuits.
    • Noted the display team's execution at the top of the revenue cycle and expansion of product lines.
    • Mentioned the rapid development of capability in crystalline and thin film silicon products.

  13. Orders Guidance for Silicon:

    • Mentioned that silicon orders would be up in the quarter greater than 30%, primarily driven by a few customers increasing spending, particularly in flash and DRAM, with some foundry order increase expected.
    • Expressed caution about the sustainability of this increase into Q1, stating that it depends on consumer behavior in the second half of the year and inventory levels.

  14. Solar Panel Size and Handling:

    • Addressed concerns about customer preferences for quarter-size panels over full-size GEN8 modules, noting that handling techniques will become more familiar over time, leading to increased interest in full-size panels.

  15. Crystalline Silicon Solar Cell Equipment:

    • Confirmed the development of new products for 120-micron capability and the company's interest in supporting customers in developing new device structures.

  16. Credit Tightening Impact on Solar Customers:

    • Noted that while credit hurdles have increased, solar customers are still able to secure funding, and the industry remains an attractive investment.

  17. Closing Remarks:

    • Provided final remarks and thanked participants for attending the call.

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