Applied Materials Inc., Q4 2008 Earnings Call, Nov-12-2008 - SEHK:4336

SEHK:4336

During the Applied Materials fiscal 2008 fourth quarter and year-end earnings conference call, John Nunziati, the Director of Investor Relations at Applied Materials, made the following statements:

1. Introduction:

   • John Nunziati stepped in for Robert [Freeze], who was unavailable due to laryngitis.
   • He highlighted that Applied Materials would be hosting their 2009 analyst day on Wednesday, February 18th, in New York City.

2. Agenda:

   • John Nunziati introduced the speakers for the call, including Mike Splinter, President and CEO; George Davis, Chief Financial Officer; and Joe Sweeney, Senior Vice President, General Counsel, and Corporate Secretary.
   • He stated that the call would begin with Mike Splinter's commentary on the market environment and strategies for 2009, followed by George Davis discussing the financial performance for the full year and the fourth quarter of fiscal 2008, and then providing the target for the first fiscal quarter of 2009.
   • John Nunziati mentioned that after the presentations, the call would be opened for questions.

3. Closing Remarks:

   • John Nunziati thanked everyone for joining the discussion of the financial results.
   • He reminded attendees that a replay of the call and the supporting slide package would be available on the website starting at 5 pm on the day of the call and would remain posted until November 26th.

These statements provide an overview of John Nunziati's role in facilitating the earnings call and his involvement in setting the agenda for the discussion.

Michael R. Splinter, the Former Executive Chairman of Applied Materials, made a series of comments during the Q4 2008 Earnings Call. Here is a detailed summary of his statements:

Opening Remarks

• Thanked Employees: Started by thanking employees for their excellent work and meeting the challenges of a volatile quarter.
• Market Environment: Noted that the last six weeks of turmoil in the financial markets were unprecedented and that the weakening global economy would have a significant impact on all of Applied's businesses.
• Customer Spending: Mentioned that the current negative trend in consumer spending and economic uncertainty had led customers to reassess their spending plans.

Strategic Actions

• Focus on Core Strategies: Indicated that Applied Materials intended to focus on executing core strategies while improving efficiency and reducing spending.
• Investment in Technology: Announced plans to invest aggressively in technology, products, and customer relationships essential for emerging in a stronger market position.
• Strategic Acquisitions: Stated that the company would be disciplined, selective, and patient in pursuing strategic acquisition opportunities.
• Balance Sheet Strength: Emphasized maintaining focus on operational cash flow and asset management to preserve the strength of the balance sheet and maintain flexibility to support strategic business priorities.

Business Environment

• Silicon Systems: Noted that visibility was extremely limited but suggested that wafer fab equipment spending would be down more than 25% in 2009.
• Display Market: Expected cap ex to be down more than 40% year-over-year.
• Solar Business: Mentioned that the macroeconomic liquidity issues had had less media effect on the solar business, but expected a period of pullback and reassessment in early 2009.
• 2009 Outlook for Solar: Expressed confidence that 2009 would be a significant growth year for the solar business group.

Cost Structure Actions

• Restructuring Programs: Announced the implementation of restructuring programs designed to streamline the organization, reduce operating costs, and drive annualized cost savings of approximately $400 million.
• Workforce Reduction: Planned to reduce the global workforce by approximately 12%.
• Impact on Investment: Believed these actions would not impair investment in strategic priorities.

Business Updates

• Silicon Systems: Highlighted gains made and positioning for wins at the next technology node. Noted improvements in both R&D and operations.
• Semiconductor Market: Discussed ongoing memory oversupply resulting in weak pricing and numerous closures of 200-millimeter lines. For logic and foundry factories, noted utilization declining rapidly to less than 70% as demand for cell phones, TVs, and automobiles dropped off.
• Strategy for Semiconductor Devices: Focused on building strengths, leading on innovation through focused R&D investment, and winning key technology decisions as semiconductor devices scale to 32 and 22 nanometers.
• Applied Global Services: Noted solid gains throughout 2008, especially in Asia and with solar customers. Expected momentum for services to continue as customers moved to outsource in difficult times and looked for ways to maximize factory efficiency.
• Display: Acknowledged that softening consumer demand had delayed capacity expansions but that strategic investments for Gen10 were still moving forward. Highlighted the first revenue from the Pivot PVD array system at a leading customer, opening up a large new served available market.
• Solar Business: Mentioned the first customer sign-off of the SunFab production line in October, an important milestone. Noted that the company had five SunFab customers producing panels and had signed another major SunFab contract in Q4. Highlighted improvements in conversion efficiency and factory productivity across the SunFab network and progress with tandem junction technology development.

Renewable Energy Incentives

• US Congress Approval: Acknowledged the US Congress for approving a new and improved investment tax credit, paving the way for utility-scale investment over the next eight years in the world's largest electricity market.
• US Market Development: Expected investments to grow in the US during the next year and looked forward to the Obama administration's focus on renewable energy.

Global Economy

• Uncertainty: Noted that none could predict how the global economy would eventually play out but that the company was taking steps to ensure it was appropriately restructured, operating efficiently, and executing on strategic priorities.

Q&A Session

• DRAM Customer Base: Responded to a question about how the DRAM customer base, particularly in Taiwan, might look after the downturn. Suggested that there would likely be two to three fewer companies in the space at the end of the downturn and that the severity of the downturn would ensure consolidation.
• Solar Segment and SunFabs: Addressed questions about the solar segment, particularly regarding the SunFabs. Stated that signups didn't relate to tandem junction technology, emphasizing that the first number of factories were single-junction factories. Noted that the learning curve was being navigated and that each factory would be faster as the company moved through time.
• DRAM Market: Commented on the rationalization of the DRAM market, suggesting that fewer suppliers could make the market more orderly in the long run.
• Solar Business Model: Addressed questions about the solar business model, indicating that the company's strategy was to focus on its equipment and turnkey technology business. Mentioned potential downstream demonstrations as more marketing-focused rather than a shift in the business model.
• Solar Pricing: Addressed questions about the rapid decline in crystalline module pricing, stating that the company's strategic thinking about the solar business hadn't changed, as pricing had to come down 20% annually to become competitive with other forms of electricity generation.
• Solar Business Model Reconsideration: Addressed questions about potentially going more vertical in the solar business, emphasizing that the company wanted to avoid competing with customers and that there was still sufficient interest in its products and turnkey factories.
• Single Junction Panels Production: Mentioned that customers were producing single junction panels at roughly $1.50 per watt, noting that costs would continue to come down as production volumes increased and factories ran more efficiently.
• Solar Backlog Protection: Addressed questions about the protection of the solar backlog, stating that the company had policies in place to be fully covered as equipment was shipped and that it secured credit where necessary with customer commitments.

These comments provide insights into Applied Materials' strategic direction, market outlook, and responses to the challenging economic conditions at the time.

George S. Davis, the Chief Financial Officer of Applied Materials, discussed various aspects of the company's financial performance and future expectations during the Q4 2008 earnings call. Here is a detailed summary of his statements:

Opening Remarks

• Financial Performance:
  • Orders of $2.2 billion were driven by growth in silicon systems and energy and environmental solutions (EES), offset by a significant order decline in display and an 8% decline in Applied Global Services (AGS).
  • Backlog increased to $4.85 billion.
  • Revenue growth of 11% quarter-over-quarter was led by EES with strong sales in crystalline silicon solar.
  • Earnings per share (EPS) of $0.17 was up over 40%, reflecting strong operating performance and cost management.

Segment Results

• Silicon Systems Group (SSG):
  • Orders in Q4 increased 40% over Q3, driven by strength in logic and a few large orders from DRAM customers.
  • Order composition: DRAM 48%, logic and other 40%, foundries 9%, and flash 3%.
  • Net sales were essentially flat in Q3, but operating income improved to just under 24% of net sales.
• AGS:
  • Orders and revenue declined due to lower factory utilization in semiconductor and display factories.
  • Sales of spares and refurbished systems were most heavily impacted.
• Display:
  • Orders fell significantly, dropping over 80% in Q3 as display customers pushed out capital investments.
  • Achieved record net sales of $334 million during the fourth quarter, a 7% increase from Q3.
  • Operating profits were up in line with revenue.
• EES:
  • Had a strong fourth quarter with orders up 52% and revenue up 151% driven by strength in crystalline silicon and thin film solar.
  • Recognized the first revenue on a SunFab integrated production line in the fourth quarter.
  • Revenue in crystalline silicon benefited by approximately $100 million from deferred revenue capture and the inclusion of an extra month of PWS results.

Cash Flow and Balance Sheet

• Operating Cash Flow:
  • For the quarter, 6% of revenue.
  • Impacted by required build-in inventory for EES and display.
  • Spent $300 million on share repurchase and $80 million on dividends.
  • Temporarily putting the stock repurchase program on hold to maintain a strong balance sheet.
• Cash Flow Performance:
  • Generated $1.7 billion in cash from operations or 21% of revenue in fiscal 2008.
  • Performance is notable given the reduced level of earnings and increases in inventory to meet the ramps in the solar and display businesses.

Full Fiscal Year 2008

• Orders:
  • Down 5% at $9.2 billion.
• Revenue:
  • Off 16.5% at $8.1 billion.
• Operating Profits:
  • $1.33 billion or 16.4% of revenue on a GAAP basis.
  • Non-GAAP basis: $1.69 billion or 20.8% of revenue.
• GAAP Net Income:
  • $961 million, down 44% from the prior year.
• Earnings Per Share:
  • $0.70, down 42%.

Segment Performance

• SSG:
  • Delivered strong financial performance despite a negative order and revenue trend.
  • Operating margin performance was 31%.
• AGS:
  • Maintained revenue at the $2.3 billion level.
  • Fall off in refurbished equipment and spares was partially offset by higher contract service revenues.
• Display:
  • Record year for orders, revenues, and operating profit.
  • Revenue increased by 38% driven primarily by the company’s leadership position in chemical vapor deposition (CVD).
  • Operating profits increased from 23% of revenue in 2007 to 32% in 2008.
• EES:
  • Revenue grew to more than $800 million, up from $165 million in 2007.
  • Major drivers were the crystalline and silicon solar products obtained through acquisitions.

Fiscal 2009 Outlook

• Cost Reduction Program:
  • Targeted to generate overall annualized savings of $400 million.
  • Global headcount reductions of 1,800 positions or approximately 12%.
  • Intend to move swiftly on this program and capture the reduction in the run rate by fiscal year-end.
• Market Outlook:
  • Uncertainty in the environment for semiconductor and display equipment demand.
  • Volatility in customer forecasts will be very high.
• Q1 Targets:
  • Overall revenue expected to be down in the range of 25% to 30%.
  • EPS expected to be in the range of $0.00 to $0.04 per share.

Q&A Session

During the Q&A session, George S. Davis addressed various questions, including:

• Solar Profitability:
  • Noted that the operating profit for the quarter included a fair amount of additional revenue from crystalline silicon, which would reverse in the next quarter.
  • 2009 would still be a working-out year for the company as it goes through the full learning curve for initial SunFab sign-offs.
• Cash Flow and Strategic Investments:
  • Stated that the company thinks there’s value in its stock and has great confidence in its long-term business plan.
  • Temporarily suspending the stock repurchase program to preserve cash and ensure control of the company’s destiny.
• Solar Revenue Mix:
  • Crystalline silicon dominates the revenue picture in EES, and it should even out by the end of the year.
• Breakeven Guidance:
  • Not ready to provide breakeven guidance for the EES segment due to the uncertainty in the crystalline silicon market.
• Revenue Guidance:
  • Clarified that the guidance for silicon systems to be down more than 25% in Q1 was not a 50% decrease.
• Operating Expenses:
  • Actions taken to keep operating costs as low as possible, expecting operating expenses to come down as the company rolls through cost savings.
• Gross Margin:
  • Not guiding to gross margin, but actions are being taken to keep operating costs low.

These statements provide a comprehensive overview of the company's financial performance and strategic direction during the Q4 2008 earnings call.