conference date: May 16, 2013 @ 1:30 PM Pacific Time
for quarter ending: April 28, 2013 (second quarter, Q2 fiscal 2013)
Overview: Excellent improvement, but GAAP looks bad due to impairment charge on solar cell business.
Basic data (GAAP) :
Revenues were $1.97 billion, up 25% sequentially from $1.57 billion, but down 22% from $2.54 billion in the year-earlier quarter.
Net income was negative $129 million, down sequentially from $34 million, and down from $289 million year-earlier.
EPS (earnings per share) were negative $0.11, down sequentially from $0.03, and down from $0.22 year-earlier.
Fiscal Q3 2013 ending in July sales expected to be up slightly sequentially. Non-GAAP EPS between $0.16 and $0.20.
Non-GAAP EPS exceeds high end of outlook. GAAP results included $278 million in goodwill and intangible asset impairment charges for the Energy and Environment Solutions (EES, or solar) segment. Another $10 million charge was for restructuring. Fulfilled request for accelerated orders. Demand for equipment is healthy and utilization at customers is increasing.
Non-GAAP numbers: operating income $285 million; net income $199 million, up 188% sequentially from $69 million, but down 43% from $349 million year-earlier. EPS was $0.16, up sequentially from $0.06, but down from $0.27 year-earlier. Gross margin 43.2%.
R&D programs are focused on key priorities. Other operating expenses can continue to be reduced.
Orders in quarter were $2.27 billion, up 7% sequentially. Backlog ended at $2.30 billion, up 9% sequentially.
Silicon Systems Group (SSG) segment sales were $1.29 billion, up 33% sequentially. Orders were $1.55 billion, up 14% sequentially. Growth was primarily driven by memory equipment. New order composition was: foundry 66%; logic & other 13%; flash 11%; DRAM 10%. Mobility trend continues to strengthen. Smartphone & tablet silicon has surpassed that used by PCs, fueling foundry investment in 28 nm and 20 nm. Applied's clear leadership in the transistor module is allowing it to make share gains. Memory supply and demand is well-balanced, so sales should increase in second half. But PC segment plans are being reduced. Foundry orders were highly concentrated in a few customers.
Applied Global Services (AGS) revenue was $517 million. Orders were $481 million, down 12% sequentially due to timing of contracts.
Display segment revenue was $127 million, up 46% sequentially. Orders were $195 million, up 41% sequentially. Improvement was due to a recovery in investment in TV manufacturing. Increasing share of display PVD market. Demand is increasing from emerging markets and 50" and larger displays are gaining share. Orders are coming in from China for equipment that should be installed in the fall.
Energy and Environmental Solutions (EES) [solar] revenue was $38 million, down 17% sequentially. Orders were $39 million. Continues to suffer from global overcapacity. Applied is scaling back its investment. Operating expenses should be below $25 million by the end of the year.
Cash and equivalents balance ended at $2.85 billion. $224 million cash from operations. $108 million was paid in dividends and $100 million was used to repurchase 8 million shares.
Expects to grow wafer fab share this year and beyond.
Cost of goods sold was $1.165 billion, leaving gross margin of $808 million. Operating expenses of $876 million consisted of: research and development $344 million; selling, general and administrative $244 million; restructuring $10 million; impairment of goodwill and intangible assets $278 million. Leaving income from operations of negative $68 million. Interest and other expense net $28 million. Income tax $39 million.
New orders by geography: United States 18%; Europe 8%; Japan 8%; Korea 11%; Taiwan 40%; China 12%; Southeast Asia 3%.
Largest customers are collaborating earlier and deeper with Applied in the process for transitions that will happen in process technology in 2014 and 2015. Precision materials engineering market leadership should allow Applied to grow share during transitions. Atomic level customization of precision films and materials will be critical to yield and other challenges.
Sees 20 nm served market as 25% larger than 28 nm served market. FinFet should add another 5% to 10%. FinFet has more CMP steps.
3D NAND equipment should ship in the 4th quarter of 2013. CMP (chemical mechanical planarization) is another area of growth and share gains.
In 2nd quarter received 100% of CDD and PDD display equipment at a factory in China. Lots of momentum, transition to OLED will also help. This segment has operating leverage as revenue ramps.
Plans to increase dividend in line with growth of the business.
EES op ex run rate in quarter? $30 million in quarter.
Gross margin trend? There were pretty good this quarter, partly from drop in inventories. The chances of improvement this quarter are good.
Bookings guidance modest? We don't give bookings guidance. We are incrementally more optimistic. It depends on a few customers in foundry and memory. The transistor inflection and 3D memory are big opportunities for us to grow share.
SSG revenue guidance? Increase is more in SSG and Display.
Record high R&D expense? The key focus is technology transitions. The R&D investments are in response of customers to new technologies. Even inspection and etch, which we have been traditionally weak in, are generating customer demand.
Pull ins in memory? On WFE (wafer fabrication equipment) we believe second half will be stronger, 55 to 45. Foundy is still a major part of the overall makeup, but we are seeing increased NAND flash and mobile DRAM in the second half.
Logic spending decline? We believe we have seen the bulk of decline. We want to see the back to school spend. We see utilization moving up.
Process diagnostics? We had highest ever quarter in wafer inspection.
In Q3 we will get some lowering of op ex from the usual 1 week shut down, but we are also working on decreasing other expenses.
20 nm production in the second half of the year will be pilot production. We will be working with customers on technology and yield problems. We don't see anyone slowing down on 20 nm or thinking it will be a small node. It is a real race.
We are projecting $800 million in display orders for the year, double last year, and mostly from China.
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