Applied Materials Inc., Q1 2008 Earnings Call, Feb-12-2008 - NasdaqGS:AMAT

NasdaqGS:AMAT

George Davis provided extensive commentary during the Applied Materials Inc. Q1 2008 Earnings Call. Here is a detailed summary of his statements:

Opening Remarks

• Q1 Performance: Noted that Q1 was a dynamic quarter, with the company meeting or exceeding targets in all respects despite varying market conditions.
• Business Segments: Mentioned that steps were taken to address the operating performance and cost structure in the semiconductor equipment and related services businesses, while simultaneously investing in the growing solar and display units.
• Order Momentum: Highlighted particularly strong order momentum in Q1, with new orders rising by 13% over Q4, significantly exceeding the target of down 5% to 15%.
• Solar Orders: Noted that the order book reflected the first orders related to the company’s SunFab thin film solar lines, contributing approximately 7 points to order performance.
• DRAM Demand: Mentioned that there was lower demand for semiconductor equipment, primarily driven by DRAM customers.
• Backlog Increase: Stated that the backlog for Q1 increased by about $400 million to $4.1 billion, with minimal adjustments totaling $32 million.
• Baccini Acquisition: Noted that the Baccini acquisition was completed after the close of Q1, and thus its results and any adjustments related to the acquisition were not yet reflected in the numbers.

Financial Results

• Revenue: Reported that revenue for Q1 decreased 12% to $2.1 billion, slightly better than the target of down 13% to 18%.
• Gross Margin: Stated that gross margin for Q1 decreased modestly to 44.8% from 45.5%, primarily due to the effect of lower revenues, partially offset by lower material costs and cost reduction efforts.
• Operating Expenses: Mentioned that Q1 operating expenses were $562 million and included restructuring charges of $38 million for severance costs related to the company's cost reduction plan and $11 million for implant facility retirements.
• Operating Income: Noted that operating income decreased to $373 million or 18% of revenues. Non-GAAP operating income was $493 million or 24% of revenue.
• Net Income: Reported that net income was $262 million or $0.19 per share, at the high end of the target range of $0.16 to $0.20 per share. Excluding the impact of the cost reduction plan related charges, EPS would have improved by $0.02 and exceeded guidance for the quarter.
• Non-GAAP Net Income: Stated that non-GAAP net income was $345 million or $0.25 per share, reflecting a 26% decrease from Q4.

Segment Results

• Renamed Segments: Noted that two of the company's segments had been renamed. Adjacent Technologies was renamed Energy and Environmental Solutions (EES), reflecting the organization's clear focus on energy. Fab Solutions was renamed Applied Global Services (AGS), to reflect the decision to manage all service-related activities in that unit.
• Silicon Systems: Reported that silicon orders were down 20% over Q4, as demand for equipment from DRAM customers declined further while foundry and larger customer demand remained low. Operating income performance in Silicon Systems was strong at $445 million or 36% of sales.
• Applied Global Services: Noted that Q1 orders were down 6% from Q4, primarily due to lower orders for spares. Net sales decreased 2% from Q4, due to seasonally lower sales for spares, partially offset by increased factory software sales. Operating income decreased 7% compared to Q4.
• Display: Mentioned that display orders for Q1 for equipment were up 363% from Q4 and up 1,500% year-over-year, as LCD customers began to invest again in response to rising LCD panel demand. Display sales of $133 million were down from Q4, reflecting the low order activity seen in fiscal 2007. Operating income decreased to $34 million or 26% of net sales.
• Energy and Environmental Solutions: Noted that Q1 orders in EES totaled $260 million, up 165% from Q4, and included recognition of the first Applied SunFab thin film line orders. Net sales of $122 million were up 98% from Q4. The Q1 operating loss for EES was $48 million, resulting from increased operating costs associated with building out the global thin film and crystal and silicon solar team, M&A charges related to the HCT acquisition, and costs related to the expansion of solar marketing efforts.

Balance Sheet and Cash Flow

• Cash Flow Performance: Noted that the company continued to have strong cash flow performance, generating $390 million in cash from operations, representing 19% of revenue.
• Cash Balances: Mentioned that the company ended the quarter with cash balances and marketable securities of $3.36 billion.
• Share Repurchase Activity: Noted that in Q1, Applied returned $683 million or 175% of operating cash flow to its stockholders. Of this amount, $600 million was for the repurchase of 34 million shares at an average price of $17.84 and $83 million was for cash dividends.

Targets for Next Quarter

• Orders: Expected orders to be in the range of down 5% to up 5%, reflecting expected strength in solar and display.
• Revenue: Expected revenue to be in the range of flat to up 5%.
• EPS: Expected EPS to be in the range of $0.18 to $0.22 per share, in line with mix effects and higher spend in solar and display.

Questions and Answers

• Display Order Execution: Mentioned that the company is seeing a substantial push by customers to pull display orders into the first half of the year. Noted that while orders would not maintain the record level achieved in Q1, there would likely be another strong quarter for display in Q2.
• Solar Bookings: Noted that the company booked $160 million in solar orders in Q1 and anticipates booking some additional orders off of last year's contracts in the future.
• Backlog Age: Mentioned that most of the order behavior for orders in terms of when they would be recognized for instance on the semiconductor equipment side is within the normal pattern quarter-and-a-half out.
• Cost Reduction Efforts: Explained that the headcount reductions were a big part of the cost savings and that the global supply chain strategy would continue to drive cost reductions over time.
• Guidance for Q2: Explained that the cautious side of the guidance is due to the fact that the company is coming off the peak in display orders. Display had an incredible quarter for orders in Q1, and it would be hard to top that in Q2.
• SunFab Orders: Mentioned that the order recognition policy was based on being within 12 months of sign-off with the customer and having assurance that the supply chain was available to serve that order and all prior orders.
• EPS Guidance: Explained that the EPS guidance was influenced by a combination of factors, including increased investment in solar, manufacturing activities, and the volatility of the outlook.
• Financial Model: Noted that the operating model for the Silicon Systems Group would continue to improve over time. Display would see most of the revenue ramp at the end of the year, and Energy and Environmental Systems would still be in the build-out phase for the thin film business.
• Service Contracts for SunFab Lines: Mentioned that service contracts come after the warranty period and essentially take care of all aspects of maintenance on the line. The first solar service contract for a SunFab line was signed.
• Revenue Recognition for SunFab: Mentioned that the current plan is for the line to be upon customer sign-off.

These points cover the detailed statements made by George Davis during the Q1 2008 Earnings Call.

Randy Bane, Vice President of Investor Relations at Applied Materials, made the following remarks during the Q1 2008 Earnings Call:

1. Opening Remarks:

   • Thanked the operator and greeted attendees.
   • Introduced himself and provided an overview of the call, mentioning the participation of Mike Splinter (President and CEO), George Davis (Chief Financial Officer), and Joe Sweeney (Senior Vice President, General Counsel, and Corporate Secretary).
   • Noted the availability of the financial results and a slide presentation on the company’s website.

2. Forward-Looking Statements Disclaimer:

   • Reminded listeners about the forward-looking statements disclaimer, highlighting that such statements are subject to risks and uncertainties.
   • Mentioned that information concerning risk factors is contained in the earnings press release and SEC filings.

3. Non-GAAP Financial Measures:

   • Noted that the call includes non-GAAP financial measures, with reconciliations provided in the earnings press release and earnings call slides on the investor page of the website.

4. Call Structure:

   • Explained that George Davis would lead the call with a discussion of financial performance, followed by Mike Splinter's comments on company progress and outlook.
   • Mentioned that George Davis would close the commentary with targets for the second fiscal quarter of 2008.
   • Indicated that the call would be opened for questions after the remarks.

5. Handover to George Davis:

   • Turned the call over to George Davis for his discussion on financial performance.

6. Closing Remarks:

   • Thanked participants for attending the call and reminded them of the replay availability on the company’s website.
   • Concluded the call by thanking attendees for their interest in Applied Materials.

Throughout the call, Randy Bane's role was primarily to introduce and moderate the proceedings, ensuring a smooth transition between speakers and providing administrative details about the call and its documentation.

Michael R. Splinter, the Former Executive Chairman of Applied Materials, provided insights and updates on various aspects of the company’s performance and strategy during the Q1 2008 Earnings Call. Here is a detailed summary of his statements:

Overview

• Performance: Splinter highlighted that the Q1 performance was at or above targets, with strong bookings in display and solar. He noted that the company faced a weak global market for semiconductor equipment while experiencing a significant upswing in demand for display products.

Cost Reduction Actions

• Restructuring: Announced a global cost reduction plan designed to generate about $150 million in annualized savings, affecting approximately 1,000 people. This is part of a roadmap to improve the operating model of the Silicon Systems Group.
• Operational Model: Aimed to improve the operating model by 4 points over the next three years while funding R&D to enhance product competitiveness.

Product and Market Updates

• Semiconductor Equipment:
  • Working with customers to gain acceptance of new products, including single wafer oxidation steps and E.HARP for next-generation shallow trench isolation.
  • Metal and gate technologies continue to advance ahead of the competition.
  • Collaborating with key memory customers on self-aligned double patterning for flash memory below 30 nanometers.
• Applied Global Services:
  • Expanded scope to provide services for display and solar customers.
  • Signed the first solar service contract for a SunFab line.
  • Expanding service offerings in the core business, including 200mm productivity upgrades and chamber performance services.
• Display:
  • Strong end customer demand for large format flat panel TVs led to significant capacity additions.
  • Expectation for a record year for new orders and possibly revenue in display, despite soft revenue in the first half.
  • Launched the new AKT-PiVot for array PVD, significantly increasing the served available market.
• Solar:
  • Scale is important in lowering the cost per watt over time.
  • Thin film solar approach is gaining traction and enthusiastic customer acceptance.
  • Recognized as the Green Energy Innovator of the Year by Platt's Global Energy Awards for the pioneering work on the Applied SunFab Thin Film Line.
  • Investing to build capabilities for crystalline silicon with the acquisition of Baccini, offering products in high value-added areas to lower manufacturing costs.
  • Demand for solar is robust and growing, with discussions with many new customers and existing customers talking about repeat orders.

Industry Environment

• Silicon Systems:
  • Facing a soft investment environment, with wafer fab equipment spending forecast to be down 5% to 15% in 2008.
  • Memory, specifically DRAM, expected to be down greater than 30%, while NAND flash is up but not enough to offset the difference.
  • Foundry spending expected to be modestly down, and investment for Logic should be roughly flat.
• Display:
  • Improved environment with expectations that industry investment will be up above 40% in 2008, driven by an LCD TV market projected to grow at annual rates greater than 28% from 2007 to 2011.
  • The build-out of Gen-8.5 is coming fast as every manufacturer is speeding to add capacity.

Outlook

• Economic Environment:
  • Uncertain U.S. economic environment and the potential for slowing global growth pose near-term challenges.
  • Positive momentum toward investment in clean energy as an economic and political priority.
• Focus on Execution:
  • Applied Materials is focused on execution in 2008 to deliver on the growth commitments made.

Customer Discussions

• Solar:
  • In discussions with up to four customers on gigawatt-scale fab lines.
  • Customers are thinking about a follow-on factory, some significant magnitude bigger than their first one.

Other Specific Points

• SunFab Installed:
  • Expecting production output by the middle of the year.
• Pipeline:
  • Silicon orders in revenue expected to be up modestly in Q2, but not calling it a momentum point.
• Thin Film Bookings:
  • Confidence across the board on solar continues to grow.
• Silicon Group:
  • Second half would have to be significantly stronger than the first half for the scenario to play out.
• Thin Film Bookings and Technology:
  • The demo line in Eisenhower shows technology to customers.
  • Not expecting to ship panels from the SunFab line until mid-year.
• Service Contracts:
  • Signed the first solar service contract for a SunFab line.
• Follow-On Factories:
  • All follow-on factories are expected to be tandem junction.
  • First tandem junction line output expected by the end of the fiscal year.
• Contract Negotiations:
  • In serious discussions on gigawatt-scale contracts.
  • Comfort with customers' financial wherewithal based on financing and commitment instruments.
• Revenue Recognition:
  • Revenue recognition for the initial SunFab lines upon customer sign-off.
• Customer Discussions (Continued):
  • In talks with companies interested in being power providers.
• Service Business:
  • Performance-based contracts can capture value from throughput improvements.

Closing Remarks

• Confidence:
  • The orders reported and the targets set reinforce confidence in the strength of the strategic direction.
• Focus:

  • Applied is focused on execution in 2008 and getting results despite a difficult economic environment.