Analyst Conference Summary

conference date: August 12 , 2008 @ 1:30 PM Pacific Time
for quarter ending: July 27, 2008 (3rd quarter fiscal 2008)

Forward-looking statements

Overview: A very slow quarter, particularly in the silicon production machinery business.

Basic data (GAAP) :

Revenues were $1.85 billion, down 14% sequentially from $2.15 billion and 28% from $2.56 billion year-earlier.

Net income was $165 million, down 46% sequentially from $303 million and down 65% from $474 million year-earlier.

EPS (earnings per share) were $0.12, down 45% sequentially from $0.22 and down 65% from $0.34 year-earlier.

Guidance:

Targets orders up 5 to 10%. Revenue up 2% to 10%, including first SunFab revenue. $0.12 to $0.15 EPS. Believes over time there will be substantial earnings upside as silicon semiconductor equipment purchases return to normal and solar becomes profitable.

Conference Highlights:

The semiconductor industry environment was "difficult." But revenues did increase in the display, services, and solar businesses. SunFab Thin Film solar ramped up. Revenues were at about midpoint of prior guidance, with silicon segment down 40% sequentially.

25 to 30% wafer fabrication equipment decline year-over-year due to overall economic uncertainty as memory prices weakened and investments were delays. We executed every opportunity for orders and revenue. Most challenging quarter for silicon segment since Q4 2003; performed well within that environment. Some specific equipment is selling well. Expects silicon segment sales will increase 30% from the bottom of Q3. However, we remain cautious in our expectations for a revenue recovery through the end of the year. We believe NAND capacity for solid state drives will ramp up in 2009.

65 nm capacity growth rates have been slower than expected, but utilization is approaching 90%.

Gross margin was 40.2%, down sequentially from 45%. Mainly from lower silicon revenues, which have the highest margins.

Non-GAAP net income was $228 million, or $0.17 per share, down sequentially from $362 million and from $518 million year-earlier.

New orders were $2.03 billion, down 16% sequentially from $2.41 billion, and down 11% from $2.28 billion year-earlier.

Orders by geography: Japan 21%, North America 19%, Korea 17%, China and SE Asia 17%, Europe 16%, Taiwan 10%.

The order backlog ended at $4.74 billion, up 3% sequentially from $4.59 billion. There were some memory customer cancelations.

By segment:

Silicon had $793 million in new orders and $756 million in sales revenue, down 40% sequentially. First quarter in some time where memory-related orders accounted for less than 50% of orders. Composition: logic and other 37%, DRAM 34%, foundries 20%, Flash 9%.

Services had $541 million new orders and $607 million revenue. Expansion in Asia is going well. Customers are tightly controlling spending on spares.

Display had $374 million new orders and $311 revenue, a record. Display orders were down 24% from Q2, as the current phase of investment peaked. Display orders likely to be down for a few quarters until Gen 10 becomes available. Revenues, however, should remain high.

Energy (EES, solar) had $322 million in new orders and revenues doubled sequentially to $174 million. We are building production capabilities and reducing the cost of silicon crystalline wafers. SunFab made great progress. Investment prospects remain strong; 2 new customers in quarter; customer pipeline is robust. Expect first SunFab to be signed off this quarter. 8 SunFab lines are in various stages of implementation.

Cost of goods sold was $1.106 billion. Gross margin was $742 million. R&D expense was $269 million, marketing and selling $116 million, general and administrative $129 million, restructuring and asset impairments $0.1 million. Operating income $228 million or 12% of revenue. Net interest income $20.5 million. Income tax provision $78 million.

Cash and short term investments ended at $2.30 billion. Inventories at $1.8 billion, up $270 million driven by display and solar. Long-term investments at $1.4 billion. $320 million cash from operations. $300 million spent repurchasing stock. $81 million cash dividends.

Expects to spend over $200 million on share repurchases in fiscal Q4.

Q&A:

Tandem junction panel timeline on track? We feel our technology is on track. Tandem junction European patent opinion aligns with our opinion that we are not infringing.

Acquisition costs? $30 million per quarter in acquisition related charges.

30% silicon equipment order increase sequentially? It is a matter of a few customers increasing Flash and DRAM orders. The question is how sustainable that will be into Q1, which depends on consumer demand in the meantime.

How much of silicon order increase is market share gain? It is mostly an industry increase, not a market share increase. These are customers that we have high market share with.

2009 capital spending? I expect it to be up year-over-year in 2009. Believes Q3 was bottom of trough. But my big question is still the first 4 months of 2009. Utilization is high and increasing, so if the economy gets better the 2nd half of 2009 should be good.

Environmental (EES) segment? Orders will be spread out over time, rather than frontloaded. Profitability will improve when spending on early projects tapers off.

How can flat panel orders decrease 75% with shipment revenues up? Revenues expected more or less flat in display. The backlog holds up revenues. Factories take a long time to start up, so they order early to be able to ramp up with demand.

Break even for solar business? Once you take out M&A charges we are already at break even. In 2010 we think we will see 25% or better operating margins. No forecast on when tandem junction revenue will get booked.

Q4 silicon equipment linearity? Orders are lumpy because they are big orders, but they are not all in the last month of our fiscal quarter (October).

120 micron capability? We are developing new products and working with customers, including saws, deposition, etc.

In solar, demand is exceeding supply, so there is no problem there.

Any credit concerns for solar customers? No actual impact so far, but the scrutiny is a lot higher.

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