Analyst Conference Summary

conference date: November 12, 2008 @ 1:30 PM Pacific Time
for quarter ending: October 26, 2008 (4th quarter fiscal 2008)

Forward-looking statements

Overview: Actually had sequentially up revenue in Q3 as new solar technology products ramped up. But predicting a dire 2009.

Basic data (GAAP) :

Revenue was $2.04 billion, up 10% sequentially from $1.85 billion, but down 14% from $2.36 billion year-earlier.

Net income was $231 million, up 40% sequentially from $165 million, but down 45% from $422 million year-earlier.

EPS (earnings per share) were $0.17, up 42% sequentially from $0.12, but down 43% from $0.30 year-earlier.

Guidance:

Demand will remain uncertain. Based on limited visibility, we see overall orders in Q1 down by more than 30%. We will temporarily discontinue order guidance.

Fiscal Q1 targets are: revenue down 25% to 35%, EPS zero to $0.04 per share.

Conference Highlights:

Quarter results "demonstrate effective performance in a very challenging environment." Will do further cost-reductions while investing in strategic priorities. Markets for semiconductors and flat-panel displays depend on consumer end market growth, so economic slowdown will have an impact. Customers have re-assessed their spending plans. We believe this will be an extended downturn, lasting a year or longer. We will maintain our strong balance sheet. Stock repurchase program will be put on hold until economy moderates.

The first SunFab thin film solar line began volume production. We currently have 5 SunFab customers producing panels. We signed another contract in Q4. The U.S. Congress approved an improved tax credit.

Trends we are seeing today indicate that wafer fab equipment spending will be down by more than 25% in 2009. In display we expect spending to be down over 40% y/y. To date economic issues have had less immediate effect on our solar business, but we expect a period of reassessment in early 2009. There is an oversupply in the memory market, while in logic we are seeing utilization declines.

New orders were $2.21 billion, about flat from year-earlier but up from $1.85 billion at the end of Q3. Backlog ended at $4.85 billion, up sequentially from $4.74 billion and up from $3.65 billion year-earlier.

Restructuring program for Q1 fiscal 2009 should reduce annual costs by about $400 million. This will include a 12% reduction in the workforce.

Non-GAAP net income was $264 million or $0.20 per share.

By segment:

Silicon system revenues were $744 million and new orders were $1.16 billion. Strength in logic was complimented by DRAM orders; grew off a low Q3.

Applied Global Service revenues were $528 million and orders were $496 million. Dropped due to lower factory utilization rates.

Display revenues were $334 million and orders were $65 million. Capital investments were pushed out by customers.

Energy solutions revenues were $438 million with new orders of $490 million (up 52%). Included $100 million of deferred revenue capture in crystalline solar and an extra month of PWS results; this won't recur in Q1.

By geography: new orders from Taiwan were 26% of total, north America 22%, China & Southeast Asia 22%, Europe 11%, Korea 10%, Japan 9%.

Cash and short term investments ended at $2.1 billion. Inventories were $1.99 billion. Long term investments $1.37 billion. Long term debt was $201 million. Operating cash flow was 6% of revenue, impacted by required inventory build. Spent $300 million on share repurchases and $80 million for dividends.

Cost of products sold was $1.245 billion. Gross margin was $799 million. Operating expenses were: R&D $275 million, marketing $100 million, administrative $138 million. There was a $10 million credit for restructuring and impairments. Leaving income from operations at $295 million. Net interest income was $14.1 million. There was a $22 million gain on sale of a facility and a pre-tax loss of equity method investment of $10 million. Income taxes were $92 million.

Q&A:

DRAM changes? In Taiwan it will depend on what the government does, but we see 2 or 3 fewer companies in this space at the end of the downturn. This could make for more rational pricing.

SunFab improvements still needed? First factories are single-junction. We learn a lot from each factory startup.

Solar profitability? Operating profit partly came from additional crystalline revenue, that will reverse next quarter. 2009 will give us the full learning curve. We have strong backlog in crystalline solar.

32 nm ramp? Of course the 32 nm ramp helps. That is in part why our Q4 looked as good as it did.

Revenue recognition on solar equipment shipments? We are fully secured for everything that is shipped.

Crystalline silicon run rate is about $200 million per quarter.

End of stock repurchases is a matter of caution, not a change in belief about the value of the stock or long-term profitability.

2009 chip sales? Estimate down 5% to 10%, but visibility is low. Also capacity utilization is down.

Cost per watt of panels that have actually been produced? Early result is about $1.5 per watt, but we will see that come down, we are where we thought we would be.

Was quarter back-end loaded for silicon? That is fair.

How fast will expenses be cut back? We would like to have half the cuts halfway through the year.

For customers we have already shipped equipment to, we see those solar projects staying on schedule. For those securing finances, we may see delays. Price of oil may drop, but tariffs are increasing in Europe and Japan. Oil prices will not affect the solar business much; it is mainly competing with coal.

If you strip out the $100 million (deferred revenue capture), would solar segment have been profitable? No.

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