Applied Materials Inc., Q1 2010 Earnings Call, Feb 17, 2010 - NasdaqGS:AMAT

NasdaqGS:AMAT

During the Applied Materials Inc. Q1 2010 Earnings Call, Michael Sullivan, Vice President of Investor Relations, made the following statements:

1. Opening Remarks:

   • Thanked the operator and greeted the attendees.
   • Introduced the Applied Materials executives present on the call: Mike Splinter (Chairman and CEO), George Davis (Chief Financial Officer), and Joe Sweeney (General Counsel and Corporate Secretary).

2. Overview of the Call:

   • Mentioned that the earnings release was issued at 1:05 Pacific Time and is available on Business Wire and the company's website.
   • Provided an overview of the call structure: Mike Splinter would comment on the business environment and strategies, followed by George Davis discussing financial performance and expectations.
   • Announced the 2010 Analyst Meeting scheduled for March 30 in New York City, with details to be provided later.

3. Transition to Mike Splinter:

   • Passed the call over to Mike Splinter for his remarks.

4. Closing Remarks:

   • Thanked everyone for attending the call.

   • Notified participants that a replay of the call and the earnings presentation would be available on the company's website beginning at 5:00 PM Pacific Time and would remain accessible until March 3.

   • Expressed appreciation for the continued interest in Applied Materials.

Here’s a detailed summary of the comments made by Michael R. Splinter, the Former Executive Chairman of Applied Materials, during the Q1 2010 Earnings Call:

Opening Remarks

• Applauded the company's strong growth in the first quarter, led by the Silicon Systems Group (SSG), which experienced nearly 50% growth in net sales.
• Raised the company-wide fiscal year sales outlook to growth of more than 50%.
• Highlighted the successful acquisition of Semitool, which opens up new growth opportunities in semiconductor equipment and leadership in advanced packaging.
• Acknowledged the challenges faced by manufacturing and field support operations due to the steep ramp in SSG, thanking teams and suppliers for their efforts.

Business Environment and Strategies

• Expected SSG sales to more than double in fiscal 2010.
• Raised wafer fab equipment (WFE) spending projection to a range of $21 billion to $23 billion for the calendar year, viewing 2010 as the first year of a strong investment cycle.
• Noted high memory prices encouraging investment in the next generation of technology.
• Anticipated that bit demand for memory will outpace supply in 2010.
• Foundries are investing aggressively for the transition to 32 nanometers and capacity additions at 45 nanometers.
• Believed the next phase of investment will be driven by DRAM technology transitions, flash memory capacity expansions, and foundry investments.
• Discussed plans for new fabs leading to increased equipment spending in 2011.
• Expected strong competitive gains with more than two points of share growth across SSG.
• Highlighted the opportunity for Applied's Brightfield system to gain five points of share in the nearly $1 billion wafer defect inspection market.
• Mentioned the progress of the Semitool acquisition and the collaboration in advanced packaging, expecting at least 25 charger PVD systems installed for packaging in 2010.
• Noted the growth in the number of semiconductor tools under contract in Asia and the focus on additional service and spares growth in the region.
• Discussed strong demand in the Display industry, particularly in LCD TVs in China, and the expectation of Display equipment spending growing by more than 60% over approximately the next 12 months.
• Mentioned the global expansion of solar capacity, especially in China, with expectations of 5 to 7 gigawatts of incremental capacity additions in 2010, representing a near doubling from 2009.
• Commented on the recent events in Korea involving charges against several employees for allegedly improperly using customer confidential information, emphasizing the company's commitment to high ethical standards and intellectual property protection.

Closing Remarks

• Reiterated the company's goal to lead the industry in core semiconductor markets, expand opportunities in Display and services, and drive new growth in Energy and Environmental Solutions.
• Emphasized the focus on improving efficiency and effectiveness to deliver long-term profitability.

Questions and Answers

• Addressed questions about the possibility of surpassing peak sales levels during the current upcycle, indicating that visibility is limited and that surpassing the peak would require a WFE run rate approaching $30 billion.

• Discussed the trajectory of flash orders, noting that flash orders are expected to recover in the second half of the year as major flash producers start investing.

• Commented on the cost-cutting measures and their impact on the P&L, suggesting that the full impact would be seen in the April quarter.

• Provided insights into the Crystal and Silicon business, stating that it has been about half of the revenue and order profile for Energy and Environmental Solutions (EES) and that operating margins are well into the double digits.

• Addressed questions about the foundry intensity, noting that foundry spending is currently localized to one company and that broader investment from the rest of the foundry community is expected in the second half.

• Clarified the company's guidance for the silicon business, stating that it is expected to be flat to plus or minus 10% in the second half, depending on flash memory investment and the participation of other foundry players.

• Discussed the challenges facing SunFab customers and the company's commitment to the thin-film solar technology, emphasizing the long-term potential of the utility-scale solar market.

George S. Davis, the Former Chief Financial Officer and Executive Vice President of Applied Materials, provided key insights and details during the Q1 2010 Earnings Call. Below is a detailed summary of his statements:

Opening Remarks

• Acknowledged the strengthening business environment and Applied Materials' improved financial performance.
• Noted that results were in the upper end of the target range, driven by strong operating performance in the Silicon Systems Group (SSG).
• Mentioned the inclusion of stock-based compensation in non-GAAP results and guidance.

Financial Results

• Applied's orders increased by 33% sequentially, primarily driven by SSG.
• Net sales rose 21% to $1.85 billion, with growth across all segments except Display.
• Reported non-GAAP net income of $179 million or $0.13 per share.
• GAAP results included restructuring and acquisition charges, along with investment impairments that collectively reduced earnings by $0.07 per share.
• Backlog increased by $200 million to $2.9 billion, aligned with order growth.
• Net positive backlog adjustment of $79 million, mainly due to the Semitool acquisition.
• Generated operating cash flow of $367 million, or 20% of sales.
• Ended the quarter with cash and investments of $3.2 billion, a reduction of just under $70 million from Q4, despite spending $323 million for Semitool and $80 million for dividends.

Spending and Cost Management

• Operating expenses grew as expected and included $24 million in acquisition and legal costs not included in the November outlook.
• Non-GAAP operating expenses increased by approximately $90 million, primarily due to the elimination of certain temporary savings and the absence of approximately $20 million in favorable adjustments from Q4.
• Expected operating expenses to be between $520 million and $540 million per quarter, including $25 million in quarterly spending for Semitool, the elimination of shutdowns, and incremental spending to support the steep business ramp, partially offset by ongoing cost initiatives.
• Remained focused on longer-term initiatives to enhance the company's Pan-Asia supply chain, integrate sales teams into the business units, and improve back office and IT infrastructure for more efficient transaction processing.
• Expected these initiatives to deliver $450 million of annualized cost savings by the end of the second fiscal quarter of 2011, with benefits back-end loaded due to the intensity of the ramp.

Segment Performance

• Silicon Systems Group (SSG):
  • Orders increased by 80% over Q4, with four customers accounting for over 65% of the total.
  • Net sales in the quarter grew 48%, well above expectations of greater than 20%.
  • SSG operating profit of $306 million was up nearly six points from Q4, reflecting strong flow-through and some offset due to higher compensation accruals and above-normal logistics and expediting costs.
  • Saw room for further margin improvement as net sales increase.
• Applied Global Services (AGS):
  • Orders increased 41% from a low Q4 level, and net sales were up 9% on higher fab utilization and increased wafer starts.
  • Operating margin declined two points to 15%, primarily due to low-margin refurbished systems.
• Display:
  • Orders decreased slightly in Q1, but momentum was expected later in the year as customers remained on track for new Gen 8.5 investments.
  • Net sales of $132 million were lower as anticipated, and operating margin was down modestly to 18.9%.
• Energy and Environmental Solutions (EES):
  • Orders decreased 36% primarily due to declines in thin film solar.
  • Orders for crystal and silicon solar equipment more than tripled versus Q4 on strong demand for wafering and cell products, particularly from China.
  • Net sales increased to $321 million, driven by two SunFab sign-offs, with growth of 15% close to expectations of 20%.
  • Targeted EES to be break-even on a non-GAAP basis for the year based on crystal and silicon profitability and SunFab sign-offs in the latter part of the fiscal year.

Outlook for the Balance of the Fiscal Year and Q2

• While second-half visibility remained limited, encouraged by strong demand across most customers and markets.
• Expected sales to be up by more than 50% in fiscal 2010, or by more than $2.5 billion over 2009.
• Expected SSG sales to be up more than 100% in fiscal 2010, reflecting growth in capital spending, improved market share, and the addition of Semitool.
• Expected AGS sales to be up in the range of 30% for the fiscal year, in line with higher utilization rates and wafer starts.
• Expected Display sales to be up 30% year-over-year, in line with the industry ramp.
• Expected EES sales to be in the range of flat to plus or minus 10% for the fiscal year, with upside potential if crystal and silicon solar equipment demand remained strong in the second half.
• Expected the tax rate for the full year to be in the range of 31% to 33%.

Q2 Expectations

• Expected total company orders to be up by more than 10% quarter-over-quarter.
• Expected SSG to continue benefiting from strong foundry and memory demand, with sales up by more than 25% in the quarter.
• Expected AGS sales to grow by more than 10%, reflecting a return to more normalized spending per wafer pass.
• Expected Display to have the strongest quarter of the fiscal year, with sales projected to more than double Q1 levels.
• Expected EES sales to decrease by more than 25% as growth in crystal and silicon solar equipment was more than offset by a near-term decline in thin film solar sales.
• Expected the company's overall net sales to be up by 15 to 25% in Q2.
• Expected non-GAAP quarterly earnings to be between $0.17 and $0.22 per share, representing profits growing at more than twice the rate of sales.

Questions and Answers

• Responded to a question about the possibility of surpassing peak sales levels from the 2007 cycle, noting that the peak would have to approach $30 billion in wafer fab equipment spending, and Applied did not anticipate surpassing Q2 2007 levels.

• Addressed a question about operating margins, stating that the peak operating margin was just over 39% in Q3 2007, and after adjusting for corporate overhead costs, it would be around 37%. He did not see any reason why Applied could not achieve those operating margins in the current environment.

• Clarified that the April quarter would reflect the full impact of temporary cost reductions coming back in, including the elimination of normal holiday shutdown days and the ramp of variable compensation.

• Addressed a question about gross margin and OpEx, explaining that the expected cost savings were $450 million, with about $250 million impacting OpEx. He noted that the cost savings would be back-end loaded and that the focus was on managing the ramp in the near-term while continuing to work on longer-term programs.

• Addressed a question about lead times for Wire Saws, HCT, and Baccini business, estimating lead times of about two quarters.

• Clarified that the 60% forecast for Display equipment spending was for the calendar year, while the company's fiscal year missed two of those months, and any difference between the market forecast and revenue forecast was due to revenue timing.

• Addressed a question about the $450 million cost reduction program, stating that it was about long-term structural change and that Semitool would be cash-accretive in year one and GAAP-accretive in year two, with synergy programs supporting this, though specifics were not disclosed.