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pww.comApplied Materials Inc., Q1 2006 Earnings Call, Feb-15-2006 - SEHK:4336

SEHK:4336

Paul Bowman [Executives] 💬

During the Applied Materials Inc. Q1 2006 Earnings Call, Paul Bowman, the Managing Director of Investor Relations, made the following statements:

  1. Opening Remarks:

    • Thanked everyone for standing by and welcomed attendees to the Applied Materials First Quarter Fiscal Year 2006 Earnings Conference Call.
    • Introduced the format of the call, stating that during the presentation, all participants would be in a listen-only mode, and afterwards, they would be invited to participate in the question and answer session.
    • Reminded attendees that the conference call was being recorded on February 15, 2006, and turned the conference over to Mike Splinter, President and CEO.

  2. Introduction of Executives:

    • Mentioned that he was accompanied by Mike Splinter, President and CEO, Nancy Handel, Senior Vice President and Chief Financial Officer, and Joe Sweeney, Senior Vice President, General Counsel & Corporate Secretary.

  3. Distribution of Financial Information:

    • Noted that financial results for the first fiscal quarter were released on Business Wire shortly after 1:05 pm Pacific Time.
    • Mentioned that a copy of the news release and the presentation containing highlights of the call was available on the investor section of the company's website at www.appliedmaterials.com.

  4. Forward-Looking Statements Disclosure:

    • Provided a detailed disclaimer regarding forward-looking statements, including risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.
    • Directed attendees to the company's filings with the SEC, including its Form 10-K for fiscal 2005 and recent Forms 10-Q and 8-K, for information concerning risk factors.

  5. Non-GAAP Financial Measures:

    • Noted that the call contained non-GAAP financial measures and provided information on where to find the reconciliation of non-GAAP financial measures to GAAP financial measures.

  6. Call Agenda:

    • Explained that the call would begin with an analysis of the first quarter financial results by Nancy Handel, followed by Mike Splinter, who would provide an update on the industry environment and Applied's strategic position.
    • Announced that Nancy Handel would provide the second quarter 2006 financial target after Mike Splinter's comments.

  7. Handover to Nancy Handel:

    • Turned the call over to Nancy Handel for her presentation on the financial results.

  8. Question and Answer Session:

    • Announced the start of the question and answer session and requested that each firm limit its questions to one.
    • Invited the operator to begin with the first question.

  9. Closing Remarks:

    • Thanked everyone for listening to the first quarter 2006 earnings announcement.

    • Notified attendees that the webcast of the call would be available on the company's website until March 1st.

    • Announced the date, time, and location of the annual meeting of stockholders and provided details about the webcast availability.

    • Informed attendees about the mailing of the proxy statement and its posting on the company's website.

    • Reminded attendees of the option to receive fiscal 2006 filings electronically by signing up on the company's website.

    • Concluded the call by thanking attendees for their interest in Applied Materials.

Nancy Handel [Executives] 💬

Nancy Handel provided the following information and insights during the Applied Materials Inc. Q1 2006 Earnings Call:

  1. Financial Performance Highlights:

    • Strong order performance and an 8% increase in revenue.
    • Gross margin reached 56%.
    • Orders of $2.04 billion, surpassing targets and 21% higher than the fourth quarter of 2005.
    • Revenue for the first quarter was $1.86 billion, 8% higher than the previous quarter.
    • Operating income was $144 million or 8% of revenue.
    • Net income was $143 million or $0.09 per share.

  2. Charges and Adjustments:

    • Asset impairment and restructuring charges of approximately $215 million or $0.08 per share.
    • Equity-based compensation expenses of $52 million or $0.02 per share.
    • Excluding these charges, the company would have reported net income of $312 million or $0.19 per share.

  3. Gross Margin Details:

    • Reported gross margin for the first quarter was 45.1%.
    • Equity-based compensation programs decreased this quarter's gross margin by 1.5%.

  4. Order Composition:

    • DRAM orders represented 28% of silicon systems orders.
    • Flash memory orders were 18%.
    • Foundry orders were 19%.
    • Logic and other orders comprised the remaining 35%.
    • 300-millimeter orders represented approximately 84% of total systems orders.
    • 89% of the systems orders were for 100-nanometer and below processor technology.

  5. Geographic Distribution of Orders:

    • Taiwan: 24%
    • North America: 22%
    • Korea: 18%
    • Europe: 15%
    • Japan: 13%
    • South East Asia and China: 8%

  6. Backlog and Adjustments:

    • Backlog increased to $2.73 billion, up from $2.57 billion.
    • Backlog adjustments totaled $30 million, consisting primarily of currency adjustments and a few cancellations.

  7. Operating Efficiency and Cost Reduction Initiatives:

    • 20% reduction in cycle times on 300-millimeter products delivered utilizing an integrated to order manufacturing process.
    • Applied’s financial performance exceeded targets and netted out the company model.
    • Operating expenses of $694 million included asset impairment, restructuring charges, and equity-based compensation expenses totaling $258 million.
    • Excluding these charges, operating expenses increased approximately $27 million primarily due to increases in variable compensation.

  8. Tax Rate and Return on Invested Capital:

    • Effective tax rate for the first quarter was 22.4%, lower than forecast.
    • Anticipated effective tax rate for the second quarter would be approximately 31.5%.
    • Excluding asset impairment, restructuring charges, and equity-based compensation expenses, Applied’s return on invested capital would have been 34%.

  9. Cash Flow and Share Repurchase Program:

    • Free cash flow generation for the quarter was $372 million.
    • Cash, cash equivalents, and short-term investments decreased by $127 million to $5.8 billion.
    • Repurchased $27 million shares of common stock for $500 million.
    • Planned to repurchase shares in the range of $400 to $600 million during the second fiscal quarter of 2006.

  10. Focus Areas for Improvement:

    • Driving gross margin improvement through material cost reduction initiatives such as common platform architecture, lower-cost sourcing, integrated to order initiatives, and continued cycle time reduction.

  11. Second Quarter Targets:

    • Orders should be up approximately 15% to 20% from Q1 levels.

    • Revenues should be up 13% to 16% from Q1 levels.

    • Earnings per share targeted at $0.22 to $0.23, including an estimated $0.02 per share for equity-based compensation.

    • Expect strong customer demand for Flash, DRAM, and Logic orders.

    • Service and parts orders expected to be below last quarter's seasonally high contract renewals.

    • Flat panels expected to be at a lower level as customers absorb equipment deliveries.

Michael Splinter [Executives] 💬

Michael Splinter provided several insights and updates during the earnings call:

  1. Business Overview:

    • Applied Materials experienced a significant increase in customer demand at year-end, which extended through the quarter and translated into higher-than-expected order growth and strong financial performance.
    • Service orders were up primarily due to annual renewals of service and parts contracts.
    • Semiconductor systems orders significantly exceeded expectations.

  2. Market Environment:

    • Optimistic about the prospects for 2006, with stable global macroeconomics, growing economies, and booming emerging markets like China and India.
    • Demand for semiconductors and semiconductor-related technology continues to increase, fueled by the ramp of broadband, pervasiveness of PCs and cell phones, and new consumer products with increasing amounts of digital content.
    • The popularity of consumer applications directly translates into strong chip demand and the need for new fabs.
    • The Olympics and adoption of high-definition TV are driving a surge in new generations of flat panel TVs.
    • Corporate investment in IP is strengthening, with an emphasis on security, server consolidation, and robust IP infrastructures.
    • Strong demand for memory, with customers investing to produce increasing quantities of NAND, BIOS, and DRAM.
    • Continued double-digit growth in PCs, strength in cell phones, and the shift of game consoles to cell architecture are expected to positively impact the market in 2006.

  3. Industry Outlook:

    • Third-party forecasts for semiconductor industry revenue have an upward bias, with an outlook of 7% to 10% year-over-year growth.
    • Revised view for CapEx to be up between 10% and 15%, and WFE spending rising 15% to 20% in 2006.
    • Increasing equipment intensity in the industry.
    • Opportunities for market share gains in memory, logic, flat panel, and service solutions.

  4. Strategic Position:

    • Focus on driving more through law by offering solutions that enable customers to shrink from technology node to technology node.
    • CVD business has expanded applications significantly, with gains in low-k dielectrics and leadership in advanced patterning films, strain engineering, and other CVD films.
    • Won every major PVD runoff since last August in both Memory and Logic.
    • Thin-film technology development and capability to do differentiated contact and via cleaning optimizes contact resistance, reliability, and yield.
    • Etch business order growth expected to be significant, driven by conductor etch and increasing acceptance of dielectric etch processes and systems.
    • Momentum for both UVision and ComPlus products, winning repeat business at advanced nodes.
    • Significant growth in bookings and revenue, with renewed confidence about the strength of the year.

  5. Product and Technology Highlights:

    • Quantum X single wafer implant has increased its share in flash and DRAM.
    • Investments in transistor performance over the last few years, with products in and around the transistor growing rapidly.
    • Chamber Performance Services line created through the acquisition of ChemTrace and its integration with Metron.
    • Joined effort with IMEC to develop 32nm and 22nm interconnects.
    • Deployed Ventures program launched to support breakthrough technology for future products.

  6. Second Half of the Year:

    • Continued investments in flash and DRAM in the second half.
    • Expect foundries to increase their investments in the second half.
    • Service and flat panel orders and revenues should grow in the second half.
    • Renewed confidence about the strength of the year as end-market demand is strong.

  7. Response to Questions:

    • Provided insights into the breakdown of orders by customer segment and geography.
    • Discussed the foundry investment landscape and the balance of power between DRAM and flash.
    • Addressed questions about etch business, including differentiation and customer wins.
    • Provided details on the integration of order process and its impact on cycle times and gross margin.
    • Commented on the outlook for DRAM and flash, including technology adoption and product offerings.
    • Clarified the impact of the service division on gross margins.
    • Addressed questions about the flat panel business and the outlook for spending.
    • Provided updates on the ion implant business and high current market share.
    • Addressed questions about the UVision product and customer orders.

These insights and updates provided a comprehensive overview of Applied Materials' performance, strategic direction, and outlook for the industry.

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