Applied Materials Inc., Q3 2009 Earnings Call, Aug-11-2009 - SEHK:4336

SEHK:4336

Michael Sullivan, Vice President of Investor Relations, made the following statements during the Applied Materials Inc. Q3 2009 Earnings Call:

1. Introduction:

   • Thanked Kara, the operator, and welcomed everyone to the call.
   • Introduced the executives present: Mike Splinter (Chairman and CEO), George Davis (Chief Financial Officer), and Joe Sweeney (General Counsel and Corporate Secretary).
   • Noted that the earnings release was issued at 1:05 Pacific Time and is available on Business Wire and the company’s website.
   • Outlined the agenda: Mike Splinter would discuss the market environment and the company’s strategies, followed by George Davis discussing financial performance and expectations for the fourth quarter.
   • Announced that Applied Materials would attend the PVSEC Conference in Hamburg, Germany, and make detailed presentations about its Solar businesses on September 21. He mentioned that the presentations would be webcast live and provided further details about the timing.

2. Transition to Mike Splinter:

   • Passed the call over to Mike Splinter.

3. Closing Remarks:

   • Thanked Mike Splinter and asked him to make concluding remarks.

   • Thanked everyone for joining the call and provided information about the replay availability on the company’s website, stating that it would be available starting at 5:00 p.m. Pacific Time until August 25.

   • Ended by thanking everyone for their continued interest in Applied Materials.

Michael R. Splinter, the Former Executive Chairman of Applied Materials, provided insights on various aspects of the company’s performance and strategy during the Q3 2009 Earnings Call. Below is a detailed summary of his comments:

Opening Remarks

• Global Economy and Customer End Markets: Last quarter, encouraging signs were noted in the global economy and customer end markets. Currently, there are more indications of growing demand.
• Economic Decline: The economic decline in the U.S., Europe, and Japan appears to be moderating.
• China’s GDP Growth: China’s GDP is growing at about 8%, driven by government stimulus, which is increasing demand for semiconductors, flat panel displays, and solar cells.

Financial Results and Trends

• Q3 Financial Results Improvement: Financial results improved in almost every category, and there is order growth following steep declines in the first half of the fiscal year.
• Wafer Fab Equipment and Display Orders: There is a pickup in wafer fab equipment orders, and a ramp of display orders is expected over the next few quarters.
• Solar Fundamentals: Solar fundamentals are expected to improve over the next 12 months, with potential for a larger upturn in wafer fab equipment next year.
• Cautious Optimism: Despite positive trends, it’s too early to conclude a broad-based recovery. Cost reduction programs are being maintained, and financial strength is preserved while investing in key areas.

Strategic Planning

• Long-Range Strategic Planning: Long-range strategic planning is underway to align products, cost structure, and capabilities with market opportunities for outstanding profitability.
• Analysis Completion: The analysis is expected to be completed over the next few months and incorporated into the operating plan for fiscal 2010.

Industry and Business Segments

• Semiconductors:
  • IC Demand: IC demand improved over 15% in revenue and over 25% in units in the second calendar quarter.
  • Average Utilization: Average utilization improved to about 75%.
  • DRAM: DRAM experienced stronger ASPs on bit shipment growth of about 9% year-over-year.
  • NAND Growth: NAND growth was about 36% year-over-year, driven primarily by smartphones and portable media players.
  • Wafer Fab Equipment Spending Estimate: Applied raised its wafer fab equipment spending estimate from a previous range of $8 billion to $11 billion to a new range of $10 billion to $12 billion.
• Silicon Systems Group:
  • Performance: Performance exceeded expectations, with expectations to gain share virtually across the board.
  • Positive Trends: Adoption of immersion lithography, advanced transistors, and the memory conversion to copper.
  • Customer Investments: Leading-edge foundries invested in CVD and PVD solutions, increasing Applied’s share leadership and process extendibility to the 3X node.
• Applied Global Services:
  • Service and Spares Business: Modest improvement in the Silicon Service and Spares business.
  • Wafer Starts: Wafer starts among semiconductor customers are down about 30% from a year ago, limiting growth.
• Display:
  • Utilization Rates: Leading-edge customers are operating fabs above 90% utilization.
  • Outlook for Profitability: The industry’s outlook for profitability has improved.
  • Panel ASPs: Panel ASPs grew about 15% from their trough in the spring of this year.
  • LCD-TV Unit Demand: Global LCD-TV unit demand is expected to increase over 20% in 2009, driven primarily in China and the U.S.
• Solar:
  • Market Strength: Strength in the Chinese market, feed-in tariffs support in Italy, Greece, and France, and modest growth in the U.S. are offsetting cutbacks in Spain.
  • PV Solar Installations: Annual PV Solar installations are expected to grow at a 30% compound rate, with China poised to grow at twice the industry rate.
  • Capacity Addition: In 2010, more than 4 gigawatts of capacity is estimated to be added.
  • Crystalline Silicon: Polysilicon prices are flattening, and module prices are falling. Utilization and major manufacturers in China and Taiwan rose to the 80% to 100% range.
  • Product Differentiation: Applied’s products are providing differentiation, with strong momentum in Crystalline Silicon Solar equipment.
  • New Max Edge Wafering System: Achieved sign-off at a major Chinese customer and is in the process of shipping 55 wafering systems to another major customer in the region.
  • Thin Film: Operational efficiency has improved, with factory startups at half the original time and significant material cost reductions rolled out to customers.
  • SunFab: Demonstrated 8.6% stable modules at tandem junction customers and achieved 10% stable modules in the lab.

Acknowledgments

• Employee Recognition: Thanked all employees for staying focused and doing their part to support customers and exceed goals during the unprecedented economic downturn.

George S. Davis, the Former Chief Financial Officer and Executive Vice President of Applied Materials, provided several insights and details during the Q3 2009 Earnings Call. Below is a detailed summary of his statements:

Financial Performance Overview

• Q3 Results: Applied Materials' performance for the third quarter exceeded targets for revenue and earnings per share.
• Revenue and Earnings Improvement: The $0.15 improvement from Q2 reflected higher revenue and gross margins, along with lower charges from impairments, restructuring, and severance, and the absence of bad debt provisions.
• Gross Margin: Gross margin improved by 13 points to 29%, showing the margin leverage associated with Silicon Systems Group (SSG) revenue growth.
• Operating Expenses: Lower by $47 million compared to the previous quarter, reflecting the roll-off of restructuring and other charges taken in Q2 and additional savings from the cost reduction program.
• Year-Over-Year Expense Reduction: Excluding restructuring, M&A charges, and equity expensing, operating expenses were down by $107 million, reflecting both permanent and temporary cost-saving activities.

Cost Initiatives Summary

• Cost Savings Goal: Last November, the goal was set to lower the non-GAAP earnings break-even point to $1.2 billion in quarterly revenue and the operating cash break-even to $1 billion.
• Q3 Performance: The company operated ahead of these goals in Q3.
• Cost Savings Objective Increase: Raised the cost savings objective to $460 million, which will be fully reflected in the Q4 '09 run rate.
• Permanent Cost Management Actions: Early and significant actions in cost management allowed the company to maintain R&D investments and fund a major expansion into the energy space while delivering strong financial performance during a difficult time.

Balance Sheet and Cash Flow Highlights

• Cash and Investments: The balance of $3.1 billion was up by $64 million quarter-over-quarter.
• Dividends and Capital Spending: Paid dividends of $80 million and had capital spending of $60 million.
• Cash from Operations: $194 million, or 17% of revenue.
• R&D Investment: Nearly $0.25 billion or 21% of revenue.
• Working Capital Discipline: Improved days sales outstanding from 82 days to 68 days and lowered inventory by $150 million, most notably in SSG and AGS.

Backlog and Adjustments

• Backlog: $3 billion at the end of the quarter, down from $3.2 billion at the end of Q2.
• Backlog Adjustments: Total adjustments of $141 million, including $146 million in cancellations and $51 million of debookings, partially offset by currency and other adjustments of $55 million.

Segment Results

• Silicon Systems Group (SSG):
  • Orders of $542 million, more than doubled from Q2.
  • Revenue of $498 million, up 91% sequentially.
  • Operating profits of $56 million or 11% of sales.
• Applied Global Services (AGS):
  • Orders were up 26% sequentially to $298 million.
  • Revenue of $343 million, up 7% sequentially.
  • Operating profit of $24 million or 7% of sales.
• Display:
  • Orders increased to $96 million after bottoming at $13 million in Q2.
  • Revenue decreased as expected, with sales of $69 million, including the first Gen 10 system revenue.
  • Only a modest loss due to the highly outsourced operational model.
• Energy and Environmental Solutions (EES):
  • Orders of $135 million, down 4% from Q2.
  • Revenue down 37% from Q2 to $224 million.
  • Operating loss of $53 million or 24% of sales.
  • Excluding M&A charges, the Crystalline Silicon business was operating margin positive in Q3.

Fiscal Q4 Expectations

• Orders: Expected growth in orders quarter-over-quarter, driven primarily by higher Display and EES orders.

• Revenue: Expected to be up 10% to 20% in the fourth quarter, led by Display, SSG, and AGS.

• Earnings: Expected to return to profitability in fiscal Q4, with an EPS target within the range of break-even to +$0.04 per share.

• Visibility: Limited visibility beyond one to two months, with factors such as consumer behavior, the back-to-school and holiday selling seasons, and changes in the global economic outlook potentially impacting customer investment plans.