Analyst Conference Call Summary

conference date: August 24, 2011 @ 1:30 PM Pacific Time
for quarter ending: July 31, 2011 (third quarter, Q3 fiscal 2011)

Forward-looking statements

Overview: Results were at upper end of expectations. Orders and guidance for October quarter are weak.

Basic data (GAAP) :

Revenues were $2.79 billion, down 2% sequentially from $2.86 billion, but up 11% from $2.52 billion in the year-earlier quarter.

Net income was $476 million, down 3% sequentially from $489 million, but up almost 4x from $123 million year-earlier.

EPS (earnings per share) were $0.36, down 3% sequentially from $0.37, but up 4x from $0.09 year-earlier.

Guidance:

Fiscal Q4 2011 revenue expected down 15% to 30% sequentially. Non-GAAP EPS range $0.16 to $0.24, excluding acquisitions charges. That would make fiscal 2011 a record year.

Conference Highlights:

Non-GAAP results: net income $467 million, down sequentially from $501 million but up y/y from $234 million. EPS $0.35, down sequentially from $0.38, but up from $0.17 year-earlier. 42.8% gross margin.

Orders in the quarter were $2.39 billion. "We are seeing softness in our business resulting from the uncertain economic environment and overcapacity in solar." The last six weeks has seen customer order reductions. Yet $599 million in operating cash flow was generated in the quarter. $1.75 billion long term debt was issued to acquire Varian, which should close in October.

Acting to align expenses with the current business environment.

Silicon Systems Group (SSG) orders were $1.24 billion, down 28% due to weak foundry demand. Sales were $1.40 billion, down 4%. New order composition was: foundry 37%; logic and other 25%; flash 23%; DRAM 15%. Back to school PC sales were disappointment. Smartphone growth has been strong, but not enough to offset PC and other consumer economics weakness. Sees at least 2 quarters of weakness, but believes clean rooms are in place to pick up the pace quickly when end demand increases.

Applied Global Services (AGS) orders were $613 million, up 2%. Sales were $603 million, down 2%.

Display orders were $220 million, down 14% on lower demand from LCD TV customers. Sales were $223 million, up 41%. Investments in TV capacity are being pushed out to 2012, but mobile display capacity remains tight, and accounted for 80% of orders in the quarter.

Energy and Environmental Solutions (EES) orders were $318 million, down 48% "as customers digested record capital additions in recent quarters." Sales were $563 million. End customer panel demand should accelerate in China in 2012. Bullish on long term growth in this market. Customers are mainly making efficiency improvements rather than capacity expansion.

Backlog decreased to $637 million to $3.24 billion. Book to bill below 1.

Cash and equivalents ended at $6.81 billion, which includes the $1.75 billion cash from new notes slated for acquiring Varian. $105 million was used for dividends, $25 million was used to repurchase stock.

Expects to limit hiring, but believes headcount is appropriate.

Cost of goods sold was $1.603 billion. Gross profit was $1.184 billion. Operating expenses of $497 million included $282 million for $&D and $240 million for selling, general and administrative, plus $3 million for restructuring and minus a $28 million gain on sale of facilities. Income from operations was $687 million. Interest and other expense was $18 million. Income tax provision was $193 million.

Q&A:

DRAM market in 2012? The DRAM market depends on PC growth. If PCs get back to normal, that would take care of the current oversupply and price weakness. But we see little investment in DRAM capital equipment for the remainder of the year.

How much foundry capacity is still in the pipeline that has not come online yet? Each customer has different timing. In general, with wafer starts flat, utilization will drop about 3% in the quarter.

Microprocessor segment? Consumer electronics and PCs are causing the supply vs. demand imbalance. Partly it is the shift to tablets.

Capital expense for next year? We still think the current environment is pretty healthy. More like 2005 than 2008. People really want the new products, the macroeconomics is what is keeping them from spending. In solar we are already seeing an increase in demand, partly because module retail prices have come down.

What about solar subsidy cuts in U.S. and Europe? The U.S. will go up next year, with PV (photovoltaic) being substituted for concentrated solar. The lowering of incentives is actually helpful.

28nm foundry spend? No one is slowing down on technology improvements. But because 65 nm is underutilized, they are repurposing that equipment. We are hearing robust discussion already about 20 nm and even 14 nm.

NAND market? We see the NAND market as continuing to grow due to tablets and solid state drives. It remains the strongest segment. In Q4 we expect NAND down sequentially, but customers are confident with their spending plans for 2012.

We have been increasing capital expense because there is an inflection point now for new technologies, and we need to be prepared for the long term.

We expect the January quarter to be weak, but maybe not much weaker than our usual seasonality. But much depends on when global consumer demand ramps again and absorbs inventory. We are making new technology products and continue to sell equipment that increases efficiency at current installations.

No increased DRAM per PC yet (box loading)? No, but many computers still ship with less than 4GB, and with new processors we could see more box loading in the future.

Cancellations and debookings? About three-quarters were in SSG. Customers are hesitant to cancel in case demand returns, because they would lose their place in line. So pushbacks more than true cancellations.

Foundry utilization right now? In the high 80's, but varies by node, with most of the capacity excess in 60 nm.

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