Applied Materials Inc., Q1 2007 Earnings Call, Feb-13-2007 - NasdaqGS:AMAT

NasdaqGS:AMAT

George Davis, the Chief Financial Officer of Applied Materials, Inc., provided details on the company's financial performance for the first fiscal quarter ending January 26, 2007. Here is a detailed summary of his comments:

1. Orders Overview:

   • Total orders for the quarter were $2.54 billion, up 24% year-over-year and down 5.6% from the prior quarter.
   • Orders included record levels for Fab Solutions and an increase in silicon orders, partially offset by a significant decline in display orders.
   • There were seven orders in excess of $100 million.
   • Backlog increased to $3.55 billion, compared to $3.4 billion for Q4, with backlog adjustments totaling $111 million.

2. Revenue Overview:

   • Revenue for Q1 was $2.28 billion, representing a 23% increase year-over-year but 10% lower than the previous quarter.
   • Silicon, Display, and Fab Solutions segments all reported quarter-over-quarter revenue declines, with Display being the most impacted with a reduction of over 20%.

3. Gross Margin:

   • Gross margin for the first quarter decreased slightly to 46.7% compared to 47.1% for the fourth quarter.
   • The decline in gross margin was due primarily to lower revenue levels and product mix.
   • Equity-based compensation charges of $6 million were included in this quarter's gross margin.

4. Operating Expenses:

   • Operating expenses (RD&E, marketing and selling, and G&A) were $516 million, 6% lower than Q4.
   • Expense levels reflected savings from cost control initiatives, the December shutdown, and lower equity-based compensation cost.

5. Operating Income:

   • Operating income was $550 million or 24.1% of revenue, compared to 25.2% reported for the fourth quarter.

6. Net Income:

   • Net income was $403 million or $0.29 per share, compared to $449 million or $0.30 per share for the fourth quarter.
   • Non-GAAP net income was also $0.29 per share, with equity compensation expense partially offset by the positive effects of tax settlements relating to prior year audits.

7. Interest Income:

   • Net interest income for the quarter was $20 million, $8 million lower than the previous quarter due to lower average cash balances.

8. Balance Sheet and Cash Flow:

   • Cash, cash equivalents, and investments increased $199 million to $3.41 billion.
   • The company generated $381 million in cash from operations, partially offset by $132 million paid to settle the price adjustment on the accelerated stock buyback and $70 million paid in dividends.
   • Free cash flow generation for Q1 was $322 million, down from $600 million in Q4 due to higher working capital balances.
   • Accounts receivable increased modestly, and day sales outstanding grew to 82 days on lower revenue levels and changes in regional mix.
   • Inventory increased by $112 million, principally due to increases in raw materials and work-in-process inventories.
   • The company completed the accelerated share repurchase, repurchasing 145 million shares at an average price of $18.08 per share.
   • Capital spending for the quarter was $59 million, and depreciation and amortization totaled $61 million.
   • Headcount at the end of Q1 was 14,003 regular full-time employees.

9. Segment Results:

   • Silicon:
     • Orders of $1.76 billion were up 5% over Q4.
     • Orders had the following mix: DRAM 51%, Flash Memory 20%, Logic and other 18%, and foundries 11%.
     • 300-millimeter tools accounted for over 90% of segment orders.
     • Orders for 65-nanometer and smaller process technology represented over 50% of silicon orders.
     • Net sales of $1.49 billion were up 22% year-over-year and down 8% from Q4.
     • Operating income was $520 million or 35% of sales, a decrease of $52 million or 9% from Q4.
   • Fab Solutions:
     • Orders of $686 million were up 13% year-over-year and 10% over Q4.
     • Net sales of $525 million were up 12% year-over-year but down 11% over the preceding quarter.
     • Operating income was $146 million or 28% of sales, a decrease of $23 million or 14% from Q4.
   • Display:
     • Orders of $67 million were down $288 million or 81% from Q4.
     • Net sales of $230 million were up 39% year-over-year but down 22% over the previous quarter.
     • Operating income for this segment was $64 million or 28% of sales, a decrease of $30 million or 32% from Q4.
   • Adjacent Technologies:
     • Net sales of $32 million were up 60% over Q4.

10. Unallocated Expenses:

    • Unallocated expenses of $169 million were down 15% over the previous quarter.
    • These expenses fall into three categories: equity compensation and certain components of variable compensation, corporate marketing and sales, and other corporate general and administrative functions.

11. Second Quarter Targets:

    • Orders are expected to be up in the range of 2% to 7%.

    • Revenue is expected to be flat to up 5%.

    • EPS is expected to be in the range of $0.27 to $0.28, with a tax rate assumption of approximately 34%.

    • Targets do not include the effects associated with the announced closure of implant operations in the United Kingdom, the costs incurred as a result of a comprehensive move to managed services in the IT function, and some additional minor costs for operational efficiency improvements.

    • The total cost of these initiatives is expected to be in the range of $105 million to $145 million, to be expensed over the next few quarters.

Randy Bane, Vice President of Investor Relations at Applied Materials, made the following comments during the Q1 2007 Earnings Call:

1. Opening Remarks:

   • Thanked the operator and welcomed attendees to the Applied Materials fiscal 2007 first quarter conference call.
   • Introduced Mike Splinter, President and CEO; George Davis, Chief Financial Officer; and Joe Sweeney, Senior Vice President, General Counsel, and Corporate Secretary, who joined him on the call.
   • Mentioned that the financial results for the period ending January 26, 2007, were released at 1:05 pm Pacific Time and are available on Business Wire and the company's website.

2. Forward-Looking Statements:

   • Noted that the call contained forward-looking statements regarding Applied's performance, technology leadership, growth opportunities, operating efficiencies, tax rate, cash generation and deployment, restructuring activities, financial targets, customers' fab utilization trends and capital spending, and the outlook for the semiconductor, display, and solar industries.
   • Emphasized that these statements were subject to known and unknown risks and uncertainties and that information concerning these risk factors is contained in the earnings press release and the company's filings with the SEC.
   • Clarified that the forward-looking statements were based on information as of February 13, 2007, and that the company assumed no obligation to update such statements.

3. Non-GAAP Financial Measures:

   • Mentioned that the call contained non-GAAP financial measures, with reconciliations to GAAP measures available in the earnings press release and the Earnings Call Highlights document on the investor page of the company's website.

4. Call Agenda:

   • Indicated that George Davis would open the call with a discussion of the financial performance for the first fiscal quarter.
   • Noted that Mike Splinter would then highlight the current industry environment and the company's progress.
   • Stated that George Davis would close the commentary with targets for the second fiscal quarter of 2007.
   • Announced that they would open the call for questions after these remarks.

5. Handover to George Davis:

   • Turned the call over to George Davis to discuss the financial performance for the first fiscal quarter.

6. Closing of Prepared Remarks:

   • Completed the prepared remarks and announced the beginning of the question-and-answer session.
   • Invited the operator to begin with the first question.

Randy Bane's comments were primarily focused on introductory remarks, procedural details, and setting the agenda for the call.

Michael R. Splinter, the Former Executive Chairman of Applied Materials, made a series of comments during the Q1 2007 Earnings Call. Here is a detailed summary of his statements:

Opening Remarks

• Expresses gratitude to employees for their contributions to the strong performance of the company.
• Discusses the semiconductor industry's seasonal slowdown and provides an outlook on wafer starts, fab utilization, and revenue growth.
• Notes the success of new products in the memory market and the balanced nature of the memory business.
• Mentions the planning of over 20 new memory fabs over the next three years.
• Discusses the foundry sector's capital investment trends and expectations for a rebound in Q3 as 65nm RAMs enter high-volume production.
• Highlights the industry's move towards high-k dielectrics and metal gates, emphasizing Applied Materials' position in PVD, oxynitride gates, and other technologies.
• Comments on the Display business, noting customer hesitation and expectations for order recovery in Q2 and Q3.

Strategic Programs

• Mentions the success of the UVision brightfield product and the launch of new products like the Applied Opus AdvantEdge and Producer GT systems.
• Announces the cessation of future development of beamline implant products and the closure of operations in Horsham, England.
• Discusses the progress in the Adjacent Technologies segment regarding solar equipment contracts.

Factors Benefiting Applied Materials

• Lists continued investments by memory manufacturers, foundry CapEx commitments, and Display producers' capacity expansion as key factors supporting the company's success in 2007.

Questions and Answers

1. On Memory and Foundry Spending

   • Discusses the front-half loaded spending by memory manufacturers, particularly in DRAM.
   • Notes the foundry sector's downturn and expectations for a comeback in the second half of the year.
   • Comments on the risk in memory in the first half, stating there is very little risk as the company is building to commitments and shipping according to the mix for the next 13 weeks.
   • Discusses Applied Materials' position in the high-k metal gate technology.

2. On Memory Pricing

   • Comments on the recent decline in DRAM prices and the long-term view on memory pricing and profitability.
   • Discusses the potential impact of Vista on DRAM demand and bit growth.

3. On Silicon Bookings

   • States that the company does not provide guidance on a segment basis.

4. On Memory Trends

   • Discusses the expected balance in memory spending over the year, with DRAM loaded in the front-half and more flash in the second half.

5. On Logic Trends

   • Discusses the expected bottoming out of utilization in logic and foundries in calendar Q1 and the subsequent recovery driven by 65nm product ramps.

6. On Foundry Order Contribution

   • Expects modest increases in foundry orders in the April quarter, with stronger growth expected in the July quarter.

7. On Memory Product Mix

   • Discusses the expected 50% to 60% contribution of memory to the semi-product mix and the potential for foundry and logic to increase their share later in the year.

8. On Implant Market

   • Explains the commoditization of the ion implant market and the lack of differentiation among suppliers.
   • Comments on the strategic evaluation of underperforming businesses and the focus on growth and shareholder contributions.

9. On Solar Business

   • Discusses the focus on thin film solar cells and the expectation to sell capacity rather than development systems.

10. On Flash Projects

    • Notes the expectation for several major flash factory orders in the second half of the year.
    • Comments on the competitive nature of flash manufacturers and their investment plans.

11. On Market Share Gains

    • Acknowledges the company's market share gains, particularly in the memory market, and the leverage to the foundry group.

Closing Remarks

• Reiterates the company's position and expectations for the remainder of the year, highlighting the focus on technology leadership, service, and innovation.