Applied Materials Inc., Q2 2006 Earnings Call, May-16-2006 - NasdaqGS:AMAT

NasdaqGS:AMAT

Randy Bane, the Managing Director of Investor Relations at Applied Materials, made the following statements during the Q2 2006 Earnings Call:

1. Opening Remarks:

   • Introduced the call and the executives present.
   • Mentioned the release of financial results and the availability of the news release and presentation on the company's website.
   • Noted the presence of forward-looking statements and the associated risks and uncertainties.
   • Provided details on the SEC filings containing risk factors.
   • Clarified that the forward-looking statements were as of May 16, 2006, and the company's obligation to update them.
   • Mentioned the inclusion of non-GAAP financial measures and provided information on reconciliations.
   • Announced the structure of the call, including the financial results review by Nancy Handel, strategic position update by Mike Splinter, and financial targets for the third quarter by Nancy Handel.
   • Turned the call over to Nancy Handel for the financial results.

2. Closing Remarks:

   • Thanked everyone for joining the call.

   • Provided contact information for follow-up questions.

   • Concluded the call.

Nancy Handel, the Senior Vice President and Chief Financial Officer of Applied Materials, Inc., provided a detailed overview of the company’s financial performance for the second fiscal quarter of 2006. Here is a summary of her comments:

• Financial Results Overview:

  • Orders for the second quarter were $2.49 billion, surpassing the target and marking a 22% increase over the first quarter of 2006.
  • Revenue for the second quarter was $2.25 billion, up 21% from the previous quarter and exceeding the target.
  • Operating income was $561 million or 25% of revenue, compared to 8% for the first quarter of 2006.
  • Net income was $413 million or $0.26 per share, compared to $143 million or $0.09 per share for the first quarter.

• Financial Details:

  • Equity-based compensation expenses were $55 million or $0.03 per share, and there was a net benefit of $2 million associated with facilities realignment programs.
  • Gross margin for the second quarter was 46.5%, up from 45.1% for the first quarter of 2006.
  • Equity-based compensation expenses decreased the quarter's gross margin by 0.4%.
  • The company delivered strong cash flow and returned value to stockholders.

• Orders and Revenue Breakdown:

  • DRAM orders represented 27% of silicon systems orders, flash memory orders were 24%, foundry orders were 17%, and logic and other orders comprised the remaining 32%.
  • 300-millimeter orders represented approximately 73% of total systems orders.
  • 74% of the system orders were for 100nm and below process technology.

• Geographic Distribution:

  • Orders by major geographic areas were: Korea, 22%; Taiwan, 19%; North America, 18%; Japan, 17%; Southeast Asia and China, 14%; and Europe, 10%.

• Backlog and Adjustments:

  • Backlog for the second quarter increased to $2.93 billion, compared to $2.73 billion for the first quarter.
  • Backlog adjustments totaled $46 million, consisting primarily of customer cancellations.

• Operating Expenses and Efficiency:

  • Operating expenses for the second fiscal quarter were $484 million, relatively flat quarter over quarter.
  • Continued focus on improving operating efficiency has paid off with increased gross margins and operating profits.

• Tax Rate:

  • The effective tax rate for the second quarter was 31.3%, slightly lower than forecast.
  • The anticipated effective tax rate for the third quarter will be approximately 31.5%.

• Return on Invested Capital (ROIC):

  • Excluding non-GAAP adjustments, Applied's ROIC would have been 53%.

• Cash Flow and Investments:

  • Free cash flow generation for the quarter was $461 million.
  • Cash, cash equivalents, and investments decreased by $30 million to $5.8 billion.
  • Certain investments were reclassified from short to long term to better reflect the company's expectations regarding the conversion to cash.

• Share Repurchases and Dividends:

  • During the second quarter, the company repurchased 28 million shares of common stock for $500 million at an average price of $18.16 per share.
  • Since the beginning of fiscal 2005, the company has repurchased approximately 155 million shares, representing approximately 9% of shares outstanding at October 31, 2004, for a cash outlay of $2.7 billion.
  • In the third fiscal quarter of 2006, the company plans to repurchase shares in the range of $400 million to $600 million.
  • A cash dividend of $0.05 per share was declared, payable on June 8 to stockholders of record as of May 18.

• Financial Targets for Third Quarter 2006:

  • Orders up approximately 5% to 10% from Q2 levels.
  • Revenue up approximately 5% to 10% from Q2 levels.
  • Earnings per share (EPS) of $0.28 to $0.30, which includes an estimated $0.03 per share for equity-based compensation.

Nancy Handel's comments highlight the strong financial performance of Applied Materials during the second quarter of 2006, with notable increases in orders, revenue, and profitability. She also emphasized the company's focus on operational efficiency and its continued commitment to returning value to stockholders.

Michael Splinter, the President and CEO of Applied Materials, made several comments during the Q2 2006 Earnings Call. Here’s a detailed summary of his remarks:

Opening Remarks

• Business Performance:
  • Applauded the company’s strong performance in the second quarter, driven by robust demand for integrated circuits and advanced nano manufacturing solutions.
  • Highlighted the team’s focus on improving overall efficiency, resulting in strong financial performance.

Strategic Position and Market Environment

• Core Business Expansion:

  • Outperformed competitors in etch, implant, thin films, and inspection for the last two quarters.
  • Expected to continue strong performance through the year.
  • CVD business volume expected to set a new record in 2006, growing faster than the market.
  • Advanced solutions like RadOx, DPN, and recessed epi are enhancing transistor performance.
  • High-growth areas in CMP, etch, and CVD are being adopted by memory manufacturers to improve litho performance and increase density.

• Product Portfolio and Adjacent Markets:

  • Delivered new technology like UVision, opening up the brightfield inspection market.
  • Announced a strategic partnership with Dainippon Screen (Sokudo) to expand litho-enabling solutions.
  • Expected more new products over the coming months to position the company for continued outgrowth and outperformance.

• Applied Global Services (AGS):

  • AGS achieved record revenue and profitability, driven by spares, refurbished equipment, and Metron products.
  • Acquired capabilities in Singapore to expand globally, particularly in chamber performance services.
  • Expected AGS to continue growing and delivering new levels of profitability.

• Long-Term Growth Opportunities:

  • Built AKT flat-panel product business into a leader in its product area, focusing on about 20% of the available market.
  • Planned acquisition of Applied Films to expand into color filters and the solar photovoltaic market.
  • New businesses built on core thin-film nanomanufacturing capabilities will generate additional growth.

• Operational and Financial Performance:

  • Made progress in operational and financial performance, including gross margin, cycle time, balance sheet, and cash flow.
  • Goal is to make Applied Materials fast and flexible to operate core business with excellence while adding new businesses.

Industry Environment

• Healthy Industry Environment:

  • Noted a healthy environment with increasing growth rates in electronics product demand.
  • Global electronics market expected to grow in excess of 7% that year.
  • Demand for cell phones, digital TVs, gaming PCs, MP3s, and other chip-powered products is driving the need for increased semiconductor capacity and equipment investments.

• Customer Capacity Buildout:

  • Customers have spent rationally on capacity and maintained high utilization rates with improved profitability.
  • New fab activity is up, creating new opportunities for the company.
  • Believes 2007 will be a year of continued CapEx expansion.

Closing Comments

• Company Strengthening:
  • Strengthening Applied Materials to become an even greater partner for customers.
  • Noted a larger set of opportunities than at any other time in the company’s history.
  • Praised employees for their focus, dedication, and commitment in driving the company’s ability to grow profitably.

Q&A Session

• CapEx Outlook:

  • Forecasted CapEx growth in 2007 to be around 10%, possibly high single digits, driven by continued growth in consumer electronics and electronics demand.
  • Assumed GDP remains on track.

• Orders Outlook:

  • Expected memory to remain strong and foundry to be up in the third quarter.
  • Acknowledged some pull-ins but considered it rational behavior.

• AKT Business:

  • Expected AKT orders to be strong in the second half of the year, with significant growth in the last two quarters.

• Geographic Orders:

  • Explained the doubling of orders from Southeast Asia and China, largely due to 200mm bookings, with expectations for continued strength.
  • Noted strong orders from Korea, driven by DRAM and flash, and attributed to the company’s efforts to gain a bigger share of the memory market.

• Foundry Spending:

  • Expected foundry spending to increase in the third quarter as capacity tightens.

• Backlog Adjustments:

  • Explained that the majority of the $46 million in backlog adjustments were due to a change in product mix at one customer.

• Capital Expenditure (CapEx) Growth:

  • Expected continued trends to drive CapEx in 2007, particularly from consumer electronics and flash memory utilization.

• Market Dynamics:

  • Addressed concerns about inventory levels, pricing pressures, and product cycle pushouts, stating that overall demand remained healthy and that electronics demand is still seasonal, with most consumption in the second half of the year.

• Service Business Growth:

  • Emphasized the importance of intellectual property and technical capability in the service business, particularly in chamber performance services, as a key differentiator and growth driver.

• Market Share Gains:

  • Working to gain market share in both flash and DRAM, with more gains currently in flash.

• Product Wins:

  • Mentioned ongoing business strength in etch, especially in the memory area, and efforts with customers on next-generation technologies.

These comments provide insight into the company’s strategic direction, market outlook, and operational performance during the period.