conference date: August 11, 2009 @ 1:30 PM Pacific Time
for quarter ending: July 26, 2009 (3rd quarter fiscal 2009)
Overview: Still struggling as semiconductor and display manufacturers have plenty of capacity. But looking much better than
Basic data (GAAP) :
Revenues were $1.13 billion, up 11% sequentially from $1.02 billion but down 39% from $1.85 in the year-earlier quarter.
Net income was negative $55 million, improved sequentially from negative $255 million, but down from positive $165 million year-earlier.
EPS (earnings per share) were negative $0.04, improving sequentially from negative $0.19, but down from positive $0.12 year-earlier.
Visibility is still limited. Orders are expected to rise. Revenue up 10% to 20% sequentially. Earnings to return to profitability, with GAAP EPS $0.00 to $0.04 per share.
For the first time in a long while we see positive trends in our business. The Chinese economy is growing, as is demand in China for semiconductors, flat panel displays, and solar cells. We are now seeing order growth, and believe the pickup in demand for wafer fabrication equipment will be followed by a ramp in display orders. We expect to see solar fundamentals to improve. But it is too soon to conclude that a broad-based economic recovery is at hand.
Despite the recession operating performance improved and significant cash flow was generated. Significant investments were made in new technologies for producing semiconductor chips, flat panel displays, and solar panels.
Non-GAAP results: Net income was negative $2 million or $0.00 per share, compared to positive $228 million and $0.17 per share in the year-earlier quarter.
Gross margins improved sequentially as there were higher revenues and less restructuring charges.
Cash flow from operations was $194 million. Cash and investments balance ended at $3.1 billion, up $64 million sequentially. $80 million was paid in dividends. Capital spending was $60 million. Inventory decreased by $150 million.
New orders in the quarter were $1.07 billion. The backlog at quarter's end was $2.95 billion, down sequentially from $3.16 billion.
Orders as a percentage of total orders by region: Southeast Asea and China, 25%; Taiwan 24%; Japan 14%; North America 14%; Europe 12%; Korea 11%.
Orders and revenues by segment: Silicon orders $542 million, revenue $498 million. Services orders $298 million, revenues $343 million. Display panels new orders $96 million, revenues $69 million. Energy (solar panels) new orders $136 million, revenues $224 millin.
Cost of products sold was $808.9 million. R&D expense $234.1 million. General and administrative $88.5 million. Marketing and selling $79.5 million. Loss from operations was $77.2 million. Impairment charge on investments $2.3 million. Interest net $5.3 million. Income tax benefit $19.3 million.
In semiconductors (silicon systems segment), we were encouraged to see demand increase by 15% inr revenue and 25% in units. Industry utilization increased to 75%. The DRAM industry will need to fully transition to DDR3 by the end of 2010, which should create about a $2 billion market opportunity for Applied Materials. NAND growth was about 6% y/y. For 2009 we have increased our estimate of wafer fab spending from previous $8 to $11 billion range to new range of $10 to $12 billion. There was a surge in orders in the last month of the quarter.
Despite depressed spending, we expect to gain market share across the board in silicon fabrication. Immersion lithography and other advanced technology are ramping. In etch we expect to hold share.
Applied global services saw orders increase by 26% sequentially; $343 million in revenue was up 7% sequentially. Much 200 mm capacity has been taken off line and wafer starts are down about 30% y/y. We expect moderate improvements in the next few quarters.
Display segment. A number of leading customers are operating at above 90% capacity. Customer profitability outlook has improved, with prices up about 15% from the spring trough. Unit demand is expected to increase about 20% in 2009 with growth driven by China and the U.S. First Gen 10 revenue was booked.
Strong solar growth in China and moderate growth in the U.S. and some European nations is offsetting declines in Spain. Utilization in China and Taiwan has risen to the 80% to 100% range. Customers need to increase efficiency and achieve economies of scale. Crystaline silicon is doing better than expected, but declined in line with the industry. In thin film startups are faster and material costs are falling. A 6th SunFab customer had a factory sign off. Some SunFab projects are still being delayed by financing and other issues.
Semiconductor equipment customer concentration in Q4? We see it to remain very concentrated. Q3 was dominated by foundries. We do expect new players, including in logic. The big thing would be DRAM bit growth. DDR3 is a technology push as opposed to a capacity push.
Display group orders looking forward? The few quarters are hard to predict, but we are gaining share with Pivot. We should do better than during the last cycle if total investment is the same as during that cycle. Operating margins would normalize at 25% to 35%. Chinese TV market is now converting to flat panels. The bigger surprise is the U.S. market is up this year.
One thing we are looking closely at is back-to-school sales. If it is strong, people will have confidence to build forward for Christmas. If not, all bets are off.
What would drive a large wafer fab build in 2010? If consumers comes back, particularly in Asia, we could see capacity replaced.
SunFab contracts? No new factory contracts were signed in the quarter.
Break even point? Our goal was $1.2 billion per quarter, which we achieved.
NAND capacity utilization in industry? Both NAND and foundry will go to 90% or more utilization, with logic less.
High brightness LED flat screens? This is more of a story for 2010; we are looking at how to help our customers.
To make the revenue guidance, we expect AGS and Display to be up, with silicon in line with overall guidance. EES (environmental/solar) would be the swing factor.
Cost of goods decline on increased revenue? It was a mix issue, with higher margin business taking a bigger share of the total.
A SunFab factory is expected to sign off in Q4; this would be a smaller factory. Sign offs are revenue events. We are still investing in developing SunFab, or in crystaline silicon products.
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