Applied Materials Inc., Q2 2008 Earnings Call, May-13-2008 - NasdaqGS:AMAT

NasdaqGS:AMAT

Linda Heller [Executives] 💬

Linda Heller, Vice President of Investor Relations at Applied Materials, made the following statements during the fiscal 2008 second quarter earnings conference call:

Introduction:
- Thanked the operator and welcomed everyone to the call.
- Introduced herself and mentioned that it is her first quarterly call at Applied Materials.
- Mentioned that she joined the company the day before the annual meeting in March and has been getting acquainted with many stakeholders since then.
Upcoming Event:
- Announced that Applied Materials will host a traditional analyst briefing at SEMICON West on Tuesday morning, July 15th.
- Noted that the event will be focused specifically on the Silicon Systems Group.
- Indicated that more details about the event will be provided soon.
Call Participants:
- Introduced Mike Splinter, President and CEO; George Davis, Chief Financial Officer; and Joe Sweeney, Senior Vice President, General Counsel, and Corporate Secretary as the executives who would be participating in the call.
Financial Results:
- Mentioned that the financial results for the period ending April 27th, 2008, were released at 1:05 p.m. Pacific Time.
- Stated that a copy of the news release is available on Business Wire and on the company's website, www.appliedmaterials.com.
Forward-Looking Statements:
- Reminded listeners that the call would contain forward-looking statements regarding the company's performance, products, growth opportunities, strategic positions, and financial targets.
- Noted that all forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially.
- Directed listeners to the company's filings with the SEC for information concerning risk factors.
- Clarified that the forward-looking statements are based on information as of May 13th, 2008, and that the company assumes no obligation to update such statements.
Agenda Overview:
- Indicated that Mike Splinter would start by discussing the current industry environment and the company's progress.
- Noted that George Davis would then discuss the financial performance for the second quarter and the targets for the third fiscal quarter of 2008.
- Mentioned that after the remarks, the call would be opened for questions.
Handover to Mike Splinter:
- Turned the call over to Mike Splinter to begin his remarks.
Closing Remarks:
- Thanked everyone for joining the discussion on Applied Materials' financial results.
- Announced that a replay of the call and its supporting slide package would be available on the company's website starting at 5:00 p.m. on the same day and would remain posted until May 28th.
- Expressed appreciation for the interest in Applied Materials and concluded the call.

Michael R. Splinter [Former Executive Chairman] 💬

Michael R. Splinter, the Former Executive Chairman of Applied Materials, provided updates and insights on several aspects of the company's performance and strategies during the Q2 2008 Earnings Call. Here is a detailed summary of his comments:

Introduction

Welcomed Linda Heller as Vice President of Investor Relations.
Noted that Applied Materials is growing in its display and solar businesses while managing through the wafer fab equipment downturn.
Mentioned the shifting global economy with uncertain macroeconomic conditions.

Industry Environment

Expected a further slowdown in semiconductor capital expenditures.
Anticipated wafer fab equipment spending to be down 25% to 35% in calendar 2008, a significant drop from the earlier view of a second-half recovery led by Foundry and Flash.
Outlined key markets for semiconductors in 2008:
- DRAM investment down 50%
- NAND Flash down more than 15%
- Logic down more than 20%

Recovery Factors

Believed that the current situation might be the bottom of the cycle.
Stated that sustained increases in DRAM unit prices translating into improved profitability and cash flow are needed for a return to growth.
Mentioned the potential for industry consolidation allowing for more rational future capacity growth.
Expected supply and demand to be in better balance in the second half of 2008 as demand outgrows bit supply led by growth in PCs and significant adoption of DDR-3.
Anticipated the next phase of capacity build-out for NAND Flash to meet growing demand for new applications, particularly solid-state drives, which offer significant value in power, space, and performance for PCs and enterprise systems.
Noted that Foundries would likely ramp capacity for 65 nanometers and increase leading-edge investment at 45 nanometers.

Execution Focus

Emphasized that 2008 is a year of execution for Applied Materials, focusing on driving new product introductions and improving operating efficiency.

Silicon Management

Navigating through a rough cycle while introducing new products, including the Applied Aera2 for mask inspection, Tetra for mask clean, and the Inflexion for bevel polish.
Highlighted the early customer reaction to these products and the significant new market opportunity they provide.
Addressed the decline in the CMP product line in 2007 due to substantial productivity improvements and the failure to capture business at a major Flash manufacturer.
Noted improvements in Reflexion CMP products recognized by key customers.
Discussed the pursuit of long-term opportunities in etch and inspection, expecting gains in inspection through the adoption of U-vision and Aera2 as defects related to immersion lithography become more difficult to detect.

Solar Business

Focused on multiple, simultaneous sun fab startups and growing equipment business with crystal and silicon customers.
Mentioned the challenges of starting up multiple factories simultaneously and performing critical R&D to boost cell efficiency and reduce costs.
Announced that Sun Film awarded Applied a contract for a second tandem junction sun fab line.
Highlighted the significant business established in crystalline silicon equipment, with the ATON PVD being the tool of choice for lines with capacity greater than 50 megawatts.
Noted the progress in precision wafer systems integration and the Baccini team's record quarter for shipments.

Service Team

Growing capabilities for solar and display customers while maintaining strong financial performance.
Mentioned the performance of the AGS team despite the difficult conditions related to semiconductor equipment.
Highlighted the AGS team's success in capturing new silicon service penetrations.
Introduced the sun fab performance service program and a multi-year agreement with T-solar in Spain.

Display Team

Meeting the demands of an unprecedented ramp, with orders in the first six months of the fiscal year topping the full-year record achievement in 2006.
Expected revenue to be up roughly the same percentage in the fiscal year and continuing to ramp into 2009.
Highlighted the PiVot PVD system's acceptance due to improvements in uptime and cost of ownership.

Cost Structure Focus

Focused on the cost structure and committed to keeping costs in line with the business model.
Praised employees for their dedication and resolve to get results in different businesses and flexibility to meet the demands of changing conditions.

Questions and Answers

Provided detailed responses to analysts' questions regarding cost per watt, efficiency targets, and levers for reducing cost per watt in the solar business.
Discussed the company's guidance, including the expected decline in silicon equipment orders and revenue.
Addressed questions about solar equipment orders, recognizing revenue, and the progress of the first set of solar customers.
Commented on the company's margins, cost savings, and incremental margins in the silicon business.
Addressed the decline in sales in the Energy and Environmental Solutions segment and lead times for solar equipment.
Provided insights into the solar business's operating loss and trends in the Baccini business.
Offered perspectives on SST orders and the company's cost-cutting measures.

Summary

Reiterated the company's focus on execution and the strong financial and operational results across business groups.
Acknowledged the steep decline in Silicon Systems Group, indicating a cyclical bottom in Q3, and the company's commitment to managing costs while fully funding R&D.
Highlighted the strong ramp in display and solar and the progress of sun fab lines, including the first repeat orders from early customers.

George S. Davis [Executives] 💬

George S. Davis provided the financial summary for Applied Materials' second quarter and outlined the company's performance and financial targets for the third fiscal quarter of 2008. Here is a detailed list of his comments:

Financial Performance Summary:
- Orders totalled $2.4 billion, a 3% reduction from Q1.
- Backlog increased to $4.6 billion.
- Revenue for the quarter increased 3% to $2.1 billion.
- Gross margin for Q2 increased modestly to 45%.
- Operating expenses were $529 million.
- Operating income increased to $438 million or 20% of revenue.
- Net income was $303 million or $0.22 per share.
Segment Results:
- Silicon:
  - Orders were down slightly, as expected.
  - Net sales were up 2%.
  - Operating income was $448 million or 35% of net sales.
  - Operational and financial performance improvements were highlighted.
- Energy and Environmental Solutions (EDS):
  - Orders totalled $257 million for the second quarter.
  - Net sales of $85 million were down $37 million.
  - The operating loss for EDS of $71 million increased from Q1.
- Services Business (AGS):
  - Q2 orders were down 1% from Q1.
  - Net sales increased 1% from Q1.
  - Operating income was $159 million or 26% of sales.
- Display:
  - Orders in Q2 remained high but were down 11% from the record level achieved last quarter.
  - LCD customer investment demand remains high.
  - Display net sales of $198 million for Q2 reflected the increased level of order activity.
Balance Sheet and Cash Flow:
- Cash and investment balance increased by $484 million to $3.85 billion.
- Generated $874 million in cash flow from operations with 41% of revenue.
- Returned $381 million or 44% of operating cash flow to stockholders.
- Expect to spend between $200 million and $400 million on share repurchases in Q3 2008.
Guidance for Q3:
- Orders expected to be down in the range of 15% to 25%.
- Revenue expected to be down in the range of 10% to 18%.
- EPS expected to be in the range of $0.10 to $0.14 per share.
Additional Comments:
- Business groups are performing well, showing strong financial and operational results.
- Seeing a steep decline in Silicon Systems Group (SSG) indicating a cyclical bottom in fiscal Q3.
- Continue to benefit from a strong ramp in display and solar.
- Pleased with the progress of sun fab lines and seen the first repeat orders from early customers.
Balance Sheet and Cash Flow Details:
- Strong cash flow performance generating $874 million in cash flow from operations.
- Working capital performance reflected strong receivables and collections.
- Inventory build of approximately $200 million in solar-related businesses.
- Prudent approach to managing working capital requirements at solar.
- Sun fab contracts typically require cash payments and letters of credit.
- Returned $381 million to stockholders through share repurchases and dividends.
- Generated $260 million in cash from the exercise of 14 million stock options.
Revenue Recognition Policy for Sun Fab Tools:
- Early days for determining revenue recognition policy.
- Currently signing off based on customer acceptance.
- Will consider options like shipment-based recognition or percentage of completion after initial lines are up and running.
Break-Even and Profitability in Solar:
- Expected EDS to be break-even in 2009.
- Despite strong spending on customer demand, performing as expected.
- Revenue expected to pick up in the second half of the year, closing the gap on break-even.
Cost Savings and Margins in Silicon:
- Impact of exiting certain businesses and portfolio realignment.
- Cycle time reductions and continuous push for material cost savings.
- Formation of the single silicon group leading to opex benefits.
Incremental Margins in Silicon:
- Leveraged margins due to cost savings and operational improvements.
- Continuous focus on gross margin and operating expense improvements.
Solar Lead Times:
- Lead times vary depending on the product, ranging from six to nine months for some products.
- Roadmap to bring down lead times, leveraging Applied's capabilities.
Balance Sheet Metrics:
- Comfortable with the balance sheet and approach to solar contracts.
- Growth in deposits and LCs aligned with commitments.
- Above expectation cash flow from operations due to working capital discipline.
- No need to draw down cash balances to fund the solar ramp.