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pww.comApplied Materials Inc., Q4 2007 Earnings Call, Nov-14-2007 - SEHK:4336

SEHK:4336

George Davis [Executives] 💬

George Davis provided extensive commentary during the Applied Materials Q4 2007 Earnings Call. Below is a detailed summary of his statements:

Financial Performance Overview

  • Fiscal 2007 was a strong year for Applied Materials, with record levels of revenue and earnings per share.
  • Revenue grew by 6% over 2006, led by semiconductor memory capacity expansion.
  • Earnings per share were up 24% year-over-year, and non-GAAP EPS was up 16%.
  • Cash from operations increased 13% from fiscal 2006, reaching a record $2.22 billion.

Q4 2007 Results

  • Orders totaled $2.21 billion, down 3% from Q3, with lower orders in silicon partially offset by increases in other segments.
  • Backlog increased to $3.65 billion.
  • Q4 revenue was 8% lower than Q3, primarily due to lower spending by foundry and DRAM customers.
  • Gross margin decreased by two points to 45.5% in Q4, primarily due to the impact of lower revenue and product mix.
  • Q4 operating expenses were $30 million lower than Q3, with headcount essentially flat at 14,550 employees.
  • The reduction in OpEx came from lower equity compensation expenses and amounts received from a research and development collaboration agreement.

Segment Results

  • Silicon Systems:
    • Orders for Q4 were down 17% from Q3, as customers decreased their capacity additions.
    • Net sales were down 15% compared to Q3, primarily due to lower spending by foundry and DRAM customers.
    • Operating income was $550 million or 36% of sales, down in line with lower revenue levels and lower factory absorption.
  • Fab Solutions:
    • Orders were up 14% over Q3 as customers’ fab utilization increased.
    • Net sales increased 3% over Q3 to $572 million, due to higher spares and refurbished equipment sales.
    • Operating income was up slightly, primarily due to higher revenue levels and product mix.
  • Display:
    • Orders for Q4 were up 80% from the low levels experienced in Q3, as panel makers began to experience more favorable market conditions.
    • Net sales were up 7% over the previous quarter.
    • Operating income increased slightly from Q3, reaching 26% of net sales.
  • Adjacent Technologies:
    • Orders totaled $98 million in Q4, up 83% from Q3.
    • Net sales of $62 million reflected increased solar and web equipment sales.
    • The Q4 operating loss of $30 million reflects charges related to the HCT acquisition and increased spending in solar research and development.

Balance Sheet and Cash Flow

  • Applied Materials generated $693 million in cash from operations, representing 29% of revenue.
  • Free cash flow in Q4 was $632 million or 27% of revenue, up from 22% in Q3.
  • Working capital performance benefited from a $191 million reduction in accounts receivable and a $49 million inventory decrease.
  • Capital spending for the quarter was $61 million, depreciation and amortization totaled $81 million, and DSO was at 79 days.
  • Cash and investments decreased by only $25 million despite several large cash outlays, including $463 million for the HCT acquisition and $200 million for a scheduled debt retirement.
  • Applied returned $483 million or 70% of operating cash flow to its stockholders, with $400 million for share repurchases and $83 million for cash dividends.

Outlook for Q1 2008

  • Orders are expected to be down in the range of 5% to 15%.
  • Revenue is expected to be down in the range of 13% to 18%.
  • EPS is expected to be down in line with revenue, in the range of $0.16 to $0.20.

Closing Remarks

  • George provided guidance for the first quarter of fiscal 2008, reflecting a softening in the semiconductor equipment markets for orders and revenue, compounded by a bottoming of display revenue.

  • He emphasized strict controls on costs across the company to manage near-term risks and accelerate productivity improvements designed to capture permanent cost reductions.

Randy Bane [Executives] 💬

Randy Bane, Vice President of Investor Relations at Applied Materials, made the following statements during the Q4 2007 Earnings Call:

  1. Opening Remarks:

    • Thanked participants for joining the call.
    • Introduced Mike Splinter, President and CEO, George Davis, Chief Financial Officer, and Joe Sweeney, Senior Vice President, General Counsel, and Corporate Secretary as attendees on the call.
    • Noted that the company would be discussing results for the period ending October 28, 2007.
    • Mentioned that financial results were released at 1:05 pm Pacific Time and are available on Business Wire and the company's website.
    • Provided a link to the slide presentation on the Investor Relations section of the website.
    • Announced an Analyst Day on January 17, 2008, in New York City, with details available on the investor page of the website.

  2. Forward-Looking Statements Disclaimer:

    • Reminded listeners that the call contained forward-looking statements, including those related to performance, growth opportunities, operational efficiencies, cash generation and deployment, business acquisitions, strategic positions, solar contracts, financial targets, customer's capital spending, and the outlook for the semiconductor, display, and solar industries.
    • Noted that these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially.
    • Directed listeners to the earnings press release and SEC filings for information on these risk factors.
    • Clarified that forward-looking statements are based on information as of November 14, 2007, and the company assumes no obligation to update them.
    • Mentioned that the call included non-GAAP financial measures, with reconciliations provided in the earnings press release and on the earnings call slides, both available on the investor page of the website.

  3. Call Agenda:

    • George Davis would lead the call with a discussion of the company's financial performance for the full fiscal year and the fourth quarter.
    • Mike Splinter would follow with comments on company progress in 2007 and the outlook on the industry environment.
    • George Davis would conclude the commentary with targets for the first fiscal quarter of 2008.
    • The call would then open for questions.

  4. Closing Remarks:

    • Thanked participants for joining the discussion on Applied Materials' financial results.

    • Reminded listeners that a replay of the call and the supporting slide package would be available on the company's website starting at 5 p.m. on November 14, 2007, and would remain posted until November 30.

    • Expressed hope to see participants at the Analyst Day on January 17, 2008, in New York City.

    • Concluded the call.

Michael R. Splinter [Former Executive Chairman] 💬

Michael R. Splinter provided extensive commentary during the earnings call. Here is a detailed summary of his remarks:

  • Summary of 2007 Achievements:

    • Applied Materials surpassed prior peak revenues and delivered double-digit increases in profitability and earnings per share.
    • Despite weakness in display capital expenditure (CapEx) and modest growth in wafer fab equipment spending, the Silicon Systems business grew by approximately 10%.
    • In Display, the served market nearly doubled with the release of the PiVot Physical Vapor Deposition (PVD) system, and the company gained share in Chemical Vapor Deposition (CVD) and testing product lines.
    • The solar business within the Energy and Environmental Systems group started strongly with over $700 million in contracts.

  • Strategic Focus for 2008:

    • The company will focus on execution and efficiency in all businesses and on expanding its presence in the solar market.

  • Silicon Systems:

    • Share gains in etch and inspection were top priorities.
    • Applied won nine out of 14 run-offs at the leading edge of technology nodes and gained share driven by applications for silicon and metal etch.
    • The company beat its target for repeat orders for UVision, winning at four of the top five memory makers.
    • The Productivity and Development Corporation (PDC) division delivered record revenue and profit.
    • The Silicon Systems Group was formed to improve performance and enhance customer satisfaction, streamlining the organization and enhancing capabilities with the addition of Hans Stork as Chief Technology Officer.

  • Fab Solutions:

    • Customer factory utilization was lower than expected, impacting the service business.
    • There is confidence in growth opportunities due to an expanding installed base and fab-wide breadth of services.
    • The company is earning a larger share of the business in Asia, traditionally a challenging region for service penetration.
    • The software product portfolio was expanded to offer a complete application stack for customers to manage and optimize fab performance.
    • Capabilities were broadened for chambered cleaning, a growing market as smaller geometries require more stringent control.

  • Energy and Environmental Solutions:

    • 2007 was a year of establishing the company's position in solar.
    • The SunFab integrated production line for thin-film solar was launched, and significant contracts were announced.
    • HCT was acquired, and there is increasing traction with the ATON deposition system.
    • Bookings and revenues in the adjacent technology segment are starting to reach meaningful levels as crystalline silicon glass products grow.

  • Operational Success and Efficiency:

    • Key technologies and capabilities were successfully acquired and integrated into the company.
    • Portfolio management activities included exiting beamline implant and electrochemical plating.
    • Over $1 billion was invested in Research and Development (R&D) to grow market position and shareholder returns.

  • Outlook for 2008:

    • The first part of fiscal 2008 is expected to be challenging, particularly in the silicon businesses.
    • Semiconductor CapEx is expected to be down roughly 5% to 15%.
    • Investment in DRAM is expected to pull back, while flash should remain strong.
    • Foundries were weak in 2007, and caution is expected to continue until demand clarity is gained.
    • Logic and foundry are expected to follow a similar trend as in 2007, with a focus on ramping production volumes in 65-nanometer and completing development of 45-nanometer technology.
    • The Silicon Systems business is targeted to outperform the market at a similar pace as the previous year.
    • The new organizational structure in Silicon Systems is expected to improve operating expenses and margins through various projects, including further globalization of the supply chain.

  • Display Market:

    • The environment for display is recovering, with high demand for large-sized flat-panel TVs.
    • Industry spend is expected to increase more than 20% in 2008, with considerable upside and an approaching product transition to Generation 10 (Gen 10) systems.
    • Orders are already improving, but revenue recovery is expected to begin in the second quarter.
    • Leadership is expected in all four product categories.

  • Solar Business:

    • Broad customer demand exists as thin-film solar becomes a compelling value proposition.
    • The announcement of a new SunFab contract with XinAo in China signifies the adoption of the 5.7 square meter format.
    • The team is focused on execution and shipping machines to start up SunFabs around the world.
    • The goal is to create a worldwide solar farm standard with the 5.7 square meter module format.
    • The company is developing its product portfolio in crystalline silicon by enabling thinner wafers and higher factory productivity in module efficiency.

  • Closing Remarks:

    • Applied delivered a record year in 2007 and set the stage for 2008.

    • The company expects the Silicon Systems business to perform better than the market in a difficult environment.

    • Fab solutions will expand share in Asia.

    • Display will grow faster than flat-panel display (FPD) CapEx.

    • Solar will effectively execute SunFab start-ups around the world.

    • 2008 is the time to demonstrate the power of applying nanomanufacturing technology to grow the company in both core and new markets.

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