Applied Materials Inc., Q4 2006 Earnings Call, Nov 15, 2006 - SEHK:4336

SEHK:4336

George Davis [Executives] 💬

George Davis made several statements during the Applied Materials Q4 and fiscal year-end 2006 earnings conference call. Here is a detailed summary of his comments:

Introduction and Transition: George thanked Randy Bane for introducing him and expressed his pleasure at being named Applied Materials' CFO. He acknowledged the strong finance team he inherited from Nancy Handel and thanked her for her efforts during the transition period and for her commitment to making the process seamless.
Praise for Nancy Handel: George praised Nancy Handel for her leadership over the past two years and for her two decades of service to the company. He wished her the best in retirement.
Segment Reporting Changes: George explained that after the acquisition of Applied Films, the company made changes to its internal financial reporting structure. As a result, Applied Materials began reporting four segments: Silicon, Fab Solutions, Display, and Adjacent Technologies. He provided a brief overview of each segment and noted that the company would limit its segment commentary on the call to fourth-quarter net sales.
Upcoming Detailed Segment Information: George informed the attendees that in mid-December, the company would present additional segment information, including orders and income from operations for the fiscal year, in its Form 10-K filing. This information would be made available on the company’s website and would be followed by a special conference call to answer questions.
Handover to Nancy Handel: George handed over the call to Nancy Handel to discuss the financial results for the quarter and fiscal year.
First Fiscal Quarter 2007 Targets: After Mike Splinter's CEO perspective, George provided the company's targets for the first fiscal quarter of 2007. He noted that while the company expected a positive growth year overall, the first quarter would experience a modest pullback due to adjustments in spending by silicon and display customers. He provided specific guidance for orders, revenue, and EPS.
Integration of Dilutive Deals: In response to a question about the integration of dilutive deals, George expressed confidence in the M&A activity that took place, stating that it was positive for the company's growth. He assured that the company remained committed to its financial model and did not anticipate any changes.
Brooks Automation Integration: When asked about the Brooks Automation integration, George stated that the deal had not yet closed, and thus there was nothing included in the forecast at that time.
Tax Rate for Q1 and Full Year: George clarified the tax rate assumption of 34.5% for the full year, noting that it assumed no extension of the R&D tax credit. He indicated that if legislative activity resulted in the extension of the credit, it could impact the tax rate by 1% to 2%.
Share Count for January: In response to a question about the share count for January, George corrected an earlier statement, clarifying that the share count would be around 1.48 billion.
Free Cash Flow Generation: George addressed a question about free cash flow generation, stating that the company had been generating around $500 million and that the caller could scale down from that figure for the first quarter.
Backlog Adjustments: When asked about backlog adjustments, George explained that they were mostly normal puts and takes and mentioned one large customer in the display area.
Closing Remarks: George participated in the closing remarks, thanking participants for their interest in Applied Materials and informing them about the availability of the call replay on the company’s website.

These are the detailed statements made by George Davis during the earnings call.

Randy Bane [Executives] 💬

Randy Bane made the following statements during the Applied Materials Inc. Q4 2006 Earnings Call:

Introduction:
- Thanked everyone for standing by and welcomed attendees to the Applied Materials Q4 and fiscal year-end 2006 earnings conference call.
- Provided operator instructions.
- Turned the conference over to Mr. Randy Bane, Vice President of Investor Relations, Applied Materials.
Opening Remarks:
- Thanked and acknowledged everyone for joining the call.
- Mentioned that he is joined by Mike Splinter, President and CEO; George Davis, Chief Financial Officer; Nancy Handel, Senior Vice President; and Joe Sweeney, Senior Vice President, General Counsel, and Corporate Secretary.
- Noted that the financial results for the period ending October 29, 2006, were released at 1:05 pm Pacific Time.
- Mentioned that the news release is available on Business Wire and the company's website.
- Announced that George Davis would open with remarks on new segmentation reporting and then hand over to Nancy Handel to discuss the financial results for Q4 and year-end.
- Stated that Mike Splinter would highlight company results for 2006 and outline the strategy for the upcoming year and provide insight into industry dynamics.
- Indicated that George Davis would close with commentary on the first fiscal quarter 2007 targets.
- Announced plans to open the call for questions after the prepared remarks.
Transition to George Davis:
- Turned the call over to George Davis, mentioning his role as CFO and thanking Nancy Handel for her efforts during the transition period and her commitment to making the process seamless.
Closing Remarks:
- Thanked everyone for joining the discussion on Applied Materials' financial results and outlook for the upcoming year.
- Reminded attendees that a replay of the call would be available on the company's website starting at 5:00 p.m. and would remain posted until November 30.
- Expressed gratitude for interest in Applied Materials and concluded the call.

Nancy Handel [Executives] 💬

Nancy Handel provided details on the financial results for the fourth quarter (Q4) and the fiscal year 2006. Here’s a summary of her remarks:

Orders: Totaled $2.69 billion for the quarter, up slightly from the prior quarter. Key drivers included:
- Industry-leading interconnect solutions, such as advanced patterning films.
- Gains in Etch.
- Record orders for Fab Solutions.
- Strong demand for the new generation 8.5 flat panel display system.
Bookings Mix for New Silicon Systems:
- DRAM: 34%
- Logic and Other: 31%
- Flash Memory: 19%
- Foundry: 16%
Geographic Distribution of Orders:
- Japan: 22%
- Taiwan: 21%
- North America: 19%
- Korea: 15%
- Southeast Asia and China: 13%
- Europe: 10%
Backlog: Increased to $3.4 billion for Q4, compared to $3.32 billion for Q3 2006. This included backlog adjustments totaling $97 million, primarily due to orders from a display customer that were rescheduled for shipment beyond 12 months.
Revenue: $2.25 billion for Q4, 1% lower than the previous quarter, with particular strength in system sales to memory customers and record revenue from Fab Solutions.
Net Sales by Segment:
- Silicon: $1.61 billion
- Fab Solutions: $590 million
- Display: $296 million
- Adjacent Technologies: $20 million
Gross Margin: Decreased by 100 basis points to 47.1%, compared to 48.1% for Q3 2006. The decline was primarily due to charges related to the amortization of purchased technology and lower margins on certain Applied Films products.
Operating Expenses: Consisting of R&D, marketing and selling, and general and administrative (G&A), were $550 million, 1% higher than the last quarter. These expenses included $20 million for Applied Films and increased spending on the company's multi-year business transformation initiative, offset by adjustments in incentive compensation and benefits.
Operating Income: $635 million or 25.2% of revenues, 160 basis points lower than the 26.8% reported for Q3 2006.
Net Interest Income: $28 million for the quarter, $13 million lower than the previous quarter due to lower average cash balances after the $2.5 billion accelerated stock buyback.
Effective Tax Rate: 32% for Q4, in line with expectations and 3% higher than Q3. The company anticipated the effective tax rate for the next quarter to be approximately 34.5% due to decreases in the export tax credit.
Net Income: $449 million or $0.30 per share, compared to $512 million or $0.33 for Q3.
Non-GAAP Net Income: $482 million or $0.33 per share, slightly lower than the financial model. Excluding the impacts of a higher effective tax rate and Applied Films, the company would have met its model.
Balance Sheet and Cash Flow Highlights:
- Cash, cash equivalents, and investments decreased by $1.95 billion to $3.21 billion.
- The company used $2.64 billion in cash for share repurchases, which included the accelerated stock buyback, and paid cash dividends of $77 million.
- Cash generated from operations was $660 million.
- Accounts receivable decreased by $268 million, and days sales outstanding decreased by 9 days to 73 days.
- Inventory increased by $65 million.
- Capital spending for the quarter was $59 million.
- Depreciation and amortization totaled $73 million.
- Free cash flow generation for the quarter was $600 million, up from $322 million in the prior quarter.
Head Count: 14,072 regular employees at the end of the quarter.
Fiscal 2006 Performance:
- New orders: $9.89 billion, a 55% increase from $6.39 billion for fiscal 2005.
- Net sales: $9.17 billion, a 31% increase from $6.99 billion for fiscal 2005.
- Net income: $1.52 billion or $0.97 per share, up from $1.21 billion or $0.73 per share for fiscal 2005.
- Non-GAAP net income: $1.8 billion or $1.15 per share, up from $1.12 billion or $0.68 per share for fiscal 2005.

Nancy Handel concluded her remarks by thanking the employees for a great quarter that finished an outstanding year and also thanked the investment community for their support during her years as Chief Financial Officer.

Michael R. Splinter [Former Executive Chairman] 💬

Michael R. Splinter, referred to as Mike Splinter, made several comments during the Applied Materials Q4 and fiscal year-end 2006 earnings conference call. Here is a detailed summary of his remarks:

Mike Splinter's Remarks

Opening Remarks

Acknowledgment of Strong Results: Mike thanked the employees for their dedication and commitment, acknowledging their contributions to the strong results achieved in 2006.
Review of Objectives:
- Objective 1: Extend leadership in core business through differentiated products.
  - Improved position across multiple product lines, driven by technology-leading solutions.
  - Gained market share in the memory area, particularly with advanced patterning films, selective EPI, and strained silicon.
  - Improved overall Etch market share, growing faster than the competition.
  - Progress with the UVision Brightfield inspection system, with repeat orders at three companies.
  - Gained share in display with PECVD and EV tester products.
  - Record revenue, bookings, and profits for AKT.
  - Acquired Applied Films to provide significant growth in the PVD arena.
  - Expanded environmental solutions portfolio.
- Objective 2: Grow in new markets utilizing nano manufacturing technology.
  - Entered markets for flat panel color filter and array PVD, photoresist coaters, and solar photovoltaic cells.
  - Chamber performance systems expanded through the acquisition of ChemTrace.
  - Proposed acquisition of Brooks Software to further expand opportunities in fab software solutions and enhance core service offerings.
- Objective 3: Deliver world-class operational and financial performance.
  - Made good progress operationally over the year, delivering higher margins and improved asset utilization.

Outlook for 2007 and Beyond

Market Opportunities in the Silicon Segment:
- Semiconductor industry sees strong unit growth, particularly in the memory segment.
- Revenue growth expected in the 5% to 10% range, with accelerated DRAM bit growth driven by factors like Microsoft's Vista operating system.
- Expectation of a short-term order pause in Q1 but believes 2007 will see an increase in wafer fab equipment spending, forecasting an increase of approximately 6%.
- Confidence in growing Silicon business by more than 10% in 2007 despite a slow start.
- Projection of memory customers representing more than 50% of Silicon Systems orders for the foreseeable future.
Product Pipeline:
- Over 50 products and application projects in development.
- Improving parts commonality to enable faster new product development and reduce material and development costs.
- Development centers in Bangalore, India, and Xi'an, China, enabling round-the-clock development.
- New products like the recently introduced Producer GT, the industry's most productive and cost-effective CVD platform.
Business Segments:
- Fab Solutions: Expected to be up in 2007, capturing an increasing amount of fabs' operational spend.
- Display: Market forecasts predict a declining equipment investment in 2007 as the industry rationalizes its current capacity and assesses the holiday sell-through. Expect to perform better than the industry in this area.
- Solar: Large-scale PVD and PECVD systems will provide the speed, conversion efficiency, and factory productivity to lower the cost per watt. Expect significant traction in the solar market as demand grows for cleaner, more environmentally friendly power solutions. Customer contracts in excess of $200 million in 2007.

Closing Remarks

Reflection on 2006: Acknowledged that 2006 was a very good year for Applied Materials, executing on strategies and poised to continue positive momentum in 2007.
Thanked Nancy Handel: Thanked Nancy Handel for her long and excellent service to Applied Materials, as a leader in finance for more than 21 years and for the last two years as CFO. Wished her the best in retirement and thanked her for her many contributions to making Applied Materials a great company.

Questions and Answers

Response to Gary Hsueh (CIBC World Markets):
- Confirmed that the order decline is primarily in the display segment, with a much more modest drop on the Silicon side, and a seasonal uptick in the Fab Solutions segment.
Response to Satya Kumar (Credit Suisse):
- Confirmed that the order book will be over 50% on memory, consistent with the last quarter, and that memory will continue to be over 50% of orders.
Response to Edward White (Lehman Brothers):
- Focused on making progress in Etch, investing heavily in inspection from the PDC unit, and continuing to invest across a broad array of products.
- Expanding in display and entering the solar area, requiring significant new product ideas and concepts.
Response to Jay Deahna (J.P. Morgan):
- Discussed the separation of trend lines in memory and logic/foundry, noting that the foundry and logic guys are approaching the bottom of the downturn in spending, while memory continues to increase investment.
Response to James Covello (Goldman Sachs):
- Addressed concerns about excess capacity in NAND, noting that capex-to-revenue ratios are not as high as they were in the past, and that bit growth continues.
Response to Harlan Sur (Morgan Stanley Dean Witter):
- Discussed the status of 65 nanometer in 2007, noting that designs are being done by major fab companies and that the foundry spending in the second half of the year is expected to align with the ramp-up of 65 nanometer production.
Response to Timothy Arcuri (Citigroup):
- Addressed the scenario of a downturn, emphasizing that there is no expectation of a memory downturn, and that memory is expected to remain strong.
- Addressed the stock performance and the company's strategy, noting that the company is always evaluating its products to ensure they meet profitability objectives.
Response to Steven Pelayo (HSBC):
- Confirmed expectations for growth in the Silicon business, service business, and display business, and that growth resumes starting in the April quarter.
Response to Mark Bachman (Pacific Crest Securities):
- Discussed share gains in the Etch segment, particularly in the less intense areas of Via and Bondpad opening, and noted gains in dual damascene as the machines show good uniformity, better uptime, and lower cost of ownership.
Response to Brett Hodess (Merrill Lynch):
- Noted that the growth rate in FPD was similar to the Silicon business, and that the 45 nanometer decisions have started to be made, with leading logic companies already making major decisions.
Response to Steve O’Rourke (Deutsche Bank):
- Addressed the backlog by reporting segment, indicating that the company does not plan to break it down.
- Discussed market share in ion implants, noting that the company continues to work hard in the area, focusing on beam purity and high dose implant.
Response to Robert Maire (Needham & Company):
- Addressed the shift in the memory segment away from flash to DRAM, noting that some manufacturers are moving more of their investments to DRAM due to factors like the rollout of Vista and shortages in supply.
- Confirmed that the order book mix has shifted more towards DRAM, particularly from Korean manufacturers.