Analyst Conference Call Summary

Applied Materials

conference date: November 16, 2011 @ 1:30 PM Pacific Time
for quarter ending: October 30, 2011 (fourth quarter, Q4 fiscal 2011)

Forward-looking statements

Overview: Record fiscal year but slump in Q4.

Basic data (GAAP) :

Revenues were $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter.

Net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier.

EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.


Fiscal Q1 2012 revenue expected down 5 to 15% sequentially. That includes acquisition of Varian. Non-GAAP EPS of $0.08 to $0.16, including about $0.10 charges related to the acquisition. Wider than usual ranges reflect economic volatility.

Conference Highlights:

The challenging environment for Applied Materials is expected to continue into the first half of fiscal 2012. Varian Semiconductor was acquired on November 10, 2011 was the most successful year in Applied history. Established a leadership position in the mobile device display equipment market. Believes in second half of 2012 capacity will be absorbed and demand for semiconductor fabrication equipment will grow.

Believes is past the bottom of the order cycle for the company overall. Believes will continue to gain market share.

Applied is committed to increase the dividend, but the preferred method of returning cash to stockholders is share buy backs.

Foundry utilization is high at the leading nodes for NAND and mobile application processors. DRAM however, is not capacity constrained, so spending in that segment is expected down in 2012.

Non-GAAP numbers: operating income $384 million. Net income $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21.

Cash flow from operations of $698 million included a one-time $276 million tax refund that was also included in GAAP net income and EPS.

Cash, equivalents and investments ended at $7.17 billion, up $366 million sequentially. Since the end of the quarter used $4.2 billion to acquire Varian Semiconductor. Issued $1.75 billion of unsecured notes on June 8 to help fund the acquisition. $175 million of shares were repurchased in the quarter.

Silicon Systems Group (SSG) orders were $925 million, down 25 percent sequentially primarily due to weak flash and DRAM demand. Revenues were $1.07 billion, down 24 percent. New order composition was: foundry 46 percent; logic and other 32 percent; flash 15 percent; and DRAM 7 percent. Released new products in 2011.

Applied Global Services (AGS) orders were $564 million, down 8 percent sequentially. Revenues were $629 million, up 4 percent. Total wafer starts fell for the third consecutive quarter. Seeing 200 mm products being shifted to 300 mm.

Display orders were $20 million, down 91 percent sequentially due to lower demand for TV and mobile display equipment. Revenue was $171 million, down 23 percent. Margins decreased from a higher proportion of lower-margin products. New capacity was not needed for TVs in 2011. Believes at bottom of LCD capital equipment cycle, but does not know how fast demand will increase.

Energy and Environmental Solutions (EES) orders were $86 million, down 73 percent sequentially, as customers continued to absorb recent capital additions. Revenue was $315 million, down 44 percent. 2011 was up about 25% from 2010, and panel production should grow further in 2012, with panel prices falling. But that won't be enough to increase demand for capital equipment, except when it increases efficiency, so sales in 2012 might be only 50% of 2011.

Orders in the quarter dropped 33% sequentially to $1.60 billion.The overall backlog of orders decreased by $851 million to $2.79 billion. Gross margin dropped sharply to 39.0% from 42.5% in Q3.

Cost of goods sold was $1.33 billion, leaving gross margin of $852 million. Operating expenses of $491 million included: research and development $269 million; selling, general and administrative $222 million. Income from operations was $361 million. $3 million impairment of strategic assets. Other interest and expense $14 million. Income tax benefit of $112 million.


What are you seeing right now for orders? We think we bottomed out in SSG. We expect a bounce in orders, including Varian. Display should show a bounce in Q1. EES is likely to continue down. SSG orders would be driven by foundries and Flash.

Cost reduction plans? In display and EES we have acted to get our capacity to the right size. We will continue, however, to spend to drive our technologies. Varian is very well run, but we can reduce some costs by eliminating overlap.

Do you need to restructure your EES business? Our solar businesses are about making the manufacturing processes more efficient. The organizations are lean. It will take some time to adjust to the rapid falloff in the second half of 2011, but as the business recovers we should see good margins.

Varian revenue was about $245 million per quarter. We will make some revenue recognition adjustments, so the first full quarter we would look at $200 million.

Believes EES will operate near break-even in the next 2 quarters.

Varian solar? We will carry their solar activities in SSG segment until the technology gets more mature.

SSG recovery scenario, NAND? It will be more broadbased than 1 customer, but our overall NAND customer base is very consolidated. Tablets and smartphones are driving NAND. Application processors are getting bigger, so that is driving demand too.

We expect to see some solar companies go out of business because of over capacity built last year. Yet consumer end demand is still growing rapidly. Within 5 years we should see cost parity with other methods of electricity generation.

Process technology, 28 nm needs? We look for 2012 wafer fab equipment spending down substantially. NAND will be up, DRAM flat, Logic down more than average. Most current spending is on 32, 28, and 20 nm technologies. Utilization at those nodes is quite high. As the economy strengthens we would expect to see fill in on older nodes. The focus in 2012 spending will be on 28 nm. Because of the capital costs, we are not seeing over-investment at this point.

Logic spending? The decline we foresee in 2012 will be mitigated by moving to smaller process nodes. In first half of 2012 logic will still create a floor under overall demand.

OLED displays? We do expect some revenue from organic LED displays in 2012, we are working with some customers to move from small mobile devices to larger screens. But we don't know if this technology can be cost effective in the TV market. We are also investing in a new type of metal oxide transistor for TVs.

Order backlog breakdown? 38% SSG, 28% AGS, 20% EES, 14% display.

Elasticity, why not more end demand at these lower prices? 25% demand increase in 2011, but demand is largely from government incentives, which vary by country and year. The tough question to answer is when does capacity get in line with that demand. That might happen in the next 12 months, depending on events.

We are confident we can grow the AGS (services) business over the next few years. 200 mm was good in 2011, but is expected down in 2012. But many applications will remain on 200 mm.

If there were a wild card going forward, it would be strong bounce back in the DRAM market.

Varian focus on DRAM? They have good share across the board. We see the big opportunity coming up is in material modification.

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Copyright 2011 William P. Meyers