Applied Materials Inc., Q2 2010 Earnings Call, May 19, 2010 - NasdaqGS:AMAT

NasdaqGS:AMAT

During the Applied Materials Inc., Q2 2010 Earnings Call on May 19, 2010, Michael Sullivan, the Vice President of Investor Relations, made the following statements:

1. Opening Remarks

   • "Thank you, Marcelo, and good afternoon. Joining me today are: Mike Splinter, our Chairman and CEO; George Davis, our Chief Financial Officer; and Joe Sweeney, our General Counsel and Corporate Secretary."
   • "Today, we'll discuss our results for our second quarter, which ended on May 2. Our earnings release was issued at 1:05 p.m. Pacific Time, and you can find a copy on Business Wire and on our website at amat.com."
   • "Mike Splinter will be off the call with comments on our business environment, performance, and strategies; George will follow with a look at our financial performance for the second quarter, along with our expectations for Q3. We'll then open the call for your questions."

2. Handover to Mike Splinter

   • "With that, I'd like to hand the call over to Mike Splinter."

3. Closing Remarks

   • "Thank you, George. And to help us reach as many of you as we can, please ask just one question and no more than one brief follow up."
   • "Thank you, George. And to help us reach as many of you as we can, please ask just one question and no more than one brief follow up. Marcelo, let's please begin."
   • "And at this point, we'd like to thank everyone for joining us this afternoon. A replay of today's call will be available on our website beginning at 5:00 p.m. Pacific time today. The replay and our earnings slide package will remain on our website until the 2nd of June. Thank you for your continued interest in Applied Materials."

These statements encompass the entirety of Michael Sullivan's contributions during the earnings call.

Michael R. Splinter, the Former Executive Chairman of Applied Materials, made a series of comments during the Q2 2010 Earnings Call. Here is a detailed summary of his remarks:

Opening Remarks

• Business Environment: Splinter noted that the company's position had improved significantly compared to the previous year, which was marked by the global economic recession.
• Employee Performance: He praised the employees for their response to the challenges faced over the last three quarters and the commitment to excellence.
• Market Outlook: Customers were responding to growing demand for consumer electronics in emerging markets, and after a period of underinvestment, there was now a multi-year upcycle in both the semiconductor and display industries.
• Financial Decisions: The improved outlook gave the company confidence to increase its cash dividend and resume its stock buyback program.

Business Results

• Silicon Systems Group (SSG): SSG saw sales growth of over 40%, well above expectations.
• Display Business: Exceeded goals for sales and profitability.
• Thin Film Solar: Taking decisive steps to realign the business with a lower market output due to reduced spending plans by customers.

Detailed Business Comments

• Silicon:

  • Raised wafer fab equipment (WFE) spending projection to $26 billion to $28 billion for the calendar year, a $5 billion increase from the previous forecast.
  • Confident in a multi-year upcycle that began three quarters ago, with 11 new fabs and fab expansions tracked.
  • Foundry and DRAM segments showed strength, with tight memory supply and stable prices.
  • Incremental demand for tablets and smartphones is expected to absorb about 60% of the new NAND capacity coming online in 2011.
  • Applied gained more than two points of WFE share in calendar 2009, more than any other top 10 supplier.
  • Semitool acquisition gave Applied the number one position in the advanced packaging market, a fast-growing sector.
  • Goal is to gain another two points of WFE share in 2010, surpassing the 2006 peak.
  • Etch sales in Q2 alone were equivalent to all of the previous fiscal year's sales.

• Display:

  • Strong demand for flat panel TVs and notebooks, particularly in China.
  • High factory utilization of about 95% led to investment in new capacity.
  • Forecast for Display equipment spending raised to over 70% growth from 2009.
  • Cycle expected to be broader and longer, with orders from major customers in Korea, Taiwan, and Japan, followed by China.

• Solar:

  • Total industry PV installations expected to be 8 to 10 gigawatts for the year, with module prices stabilizing.
  • Capacity additions expected to be 10 to 12 gigawatts in 2010, driven by Chinese customers.
  • Over half of all solar panels will be made in China, and Applied is well-positioned.
  • Q2 was the highest-ever quarter for crystalline silicon bookings, led by Baccini Cell Systems, with expectations to gain several points of metallization share.
  • Strong demand for the new Baccini Esatto system with double printing technology.
  • Managing a steep ramp in the Wire Saw business while closely monitoring demand from a concentrated customer base.

• Thin Film:

  • Second quarter was difficult due to insolvency of a large customer, failure of a major new customer to secure financing, and reduced spending plans by other customers.
  • Reduced thin film solar revenue expectations for the year and lowered demand forecast for new factories.
  • EES will not meet its goal to achieve break-even for the year on a non-GAAP basis.
  • Asked the team to develop a plan to accelerate reductions in the thin film cost structure.
  • Expected the plan to be finalized by mid-June and for EES to make a positive contribution to the company's financial performance in fiscal 2011.
  • Will continue to sell some fabs but only where an acceptable return on investment is seen.
  • Confidence in the long-term potential of the thin film solar market remains high, but the business must stand on its own.

Closing Remarks

• Summary: Q2 was an exciting quarter for Applied Materials, with a significant ramp and a bright outlook for Silicon, Display, and Crystalline Silicon Solar businesses.

• Action Plan: Taking decisive action to address the shortfall in demand for thin film solar equipment.

George S. Davis, the Former Chief Financial Officer and Executive Vice President of Applied Materials, Inc., provided detailed insights and responses during the Q2 2010 Earnings Call. Here is a summary of his statements:

1. Financial Results Overview:

   • Applied delivered financial results at the upper end of target ranges for net sales and earnings per share.
   • Order growth was 29% quarter-over-quarter, with better-than-expected increases in Silicon and EES.
   • Net sales were up 24% led by better-than-expected Silicon growth.
   • Non-GAAP net income was $292 million or $0.22 per share, including an operating loss of $145 million in the EES segment.

2. Comparison with Second Quarter of 2009:

   • Compared to the second quarter of 2009, orders increased 290%, and net sales grew by 125%.
   • Non-GAAP net income increased by over $450 million from a loss position a year ago, increasing earnings per share by $0.34.

3. Sequential Comparisons:

   • Gross margin increased almost two points from Q1, reaching 40.4%, driven by higher net sales in the most profitable business segments.
   • Non-GAAP operating expenses of $527 million were within the targeted range.
   • The company expects quarterly non-GAAP operating expenses to remain between $520 million and $540 million through the end of the fiscal year.

4. Operations and Initiatives:

   • Opened a new manufacturing and logistics center in Singapore and expanded production in the display facility in Tainan.
   • Consolidation of worldwide operations is a critical element of the long-term productivity program, aiming to yield tangible cost improvements across all businesses.

5. Backlog and Cash Flow:

   • Backlog increased slightly to $3 billion, reflecting a healthy order book across all segments.
   • Operating cash flow performance for the quarter was very healthy, reaching 23% of sales or $527 million.
   • Strong working capital management resulted in record low days sales outstanding and a modest increase in inventory despite significant increases in net sales.
   • Cash flow benefited from a tax refund of approximately $130 million related to 2009 operating losses.

6. Segment Performance:

   • Silicon: Orders increased 25% from Q1, led by memory and logic customers. Net sales were much higher than expected, growing 45% quarter-over-quarter.
   • Applied Global Services (AGS): Orders were approximately 2% higher than in Q1. Net sales grew 7%, and operating margin increased almost five points to just below 20%.
   • Display: Orders increased over 100% driven by customer investments in China. Sales also more than doubled, and operating margin increased 14 points to 33%.
   • Energy and Environmental Solutions (EES): Reported a segment loss of $145 million, primarily driven by losses in the Thin Film Solar business.

7. Outlook for Third Fiscal Quarter:

   • Silicon net sales are expected to be roughly in line with the very strong Q2 levels.
   • AGS net sales are expected to increase in line with wafer starts and higher used equipment demand.
   • Display expects another solid quarter, but net sales are expected to be down at least 20% below a very strong Q2.
   • EES net sales are expected to be up by more than 25%, primarily as a result of higher crystalline silicon sales.
   • Overall, the company expects net sales in Q3 to be in the range of down 2% to up 5%.
   • Non-GAAP quarterly earnings per share are expected to be between $0.22 and $0.26 per share.

8. Response to Questions:

   • On the order outlook, the company is not providing specific guidance but expects orders to reflect the multi-year cycle in both semiconductors and display.

   • Non-GAAP operating expenses are expected to remain between $520 million and $540 million, with the absence of restructuring costs contributing to savings in the current quarter.

   • Silicon revenue guidance is flat, with the company expecting very strong demand in the coming quarters, although the exact movement in orders will depend on individual customer timing.

   • The backlog adjustments were mostly EES, with thin film being the largest contributor to cancellations. There were also some push-outs and FX adjustments.

   • The company continues to meet customer ramps and expects the benefits of cost savings to be realized in the latter part of the 18-month cost reduction program.

   • The backlog adjustments of $184 million were largely driven by EES, with thin film being the largest contributor, and there were also FX adjustments and minor cancellations in other segments.

   • The company intends to continue supporting existing customers and meeting commitments, without foreseeing major risks related to the EES business.