Analyst Conference Call Summary

conference date: May 17, 2012 @ 1:30 PM Pacific Time
for quarter ending: April 30, 2012 (second quarter, Q2 fiscal 2012)

Forward-looking statements

Overview: Good sequential growth quarter with improved full-year guidance.

Basic data (GAAP) :

Revenues were $2.54 billion, up 16% sequentially from $2.19 billion but down 11% from $2.86 billion in the year-earlier quarter.

Net income was $289 million, up 147% sequentially from $117 million, but down 41% from $489 million year-earlier.

EPS (earnings per share) were $0.22, up 144% sequentially from $0.09, but down 41% from $0.37 year-earlier.

Guidance:

Fiscal Q3 revenue expected flat to down 10% sequentially. Non-GAAP EPS $0.21 to $0.29.

Full fiscal 2012 near high end of $9.1 billion to $9.5 billion. Non-GAAP EPS at high end of $0.85 to $0.95.

Conference Highlights:

Quarter performance was driven by semiconductor equipment products needed to supply global demand for smartphone and tablet chips. "Applied's semiconductor products are enabling the next generation of more powerful and feature-rich devices." Foundries are aggressively creating capacity at leading edge nodes; spend should contribute through Q3 and Q4.

In fiscal Q2 the dividend was increased 13% and $3 billion was allocated for share repurchases over 3 years. Earnings were at high end of target range.

Non-GAAP results: operating income $490 million, net income $349 million, EPS $0.27, all up sequentially but down y/y.

Varian (acquired this year) generated $366 million in orders and $333 million in sales.

Silicon Systems group revenue was $1.78 billion, up 32% sequentially. Orders were $1.97 billion, up 39%. Order composition was 72% foundry, 12% logic and other, 12% flash, 4% DRAM. Top 3 customers represented 72% of orders. In Q3 sales are expected to drop about 5% sequentially after an unusually strong Q2.

Global Services revenue was $551 million, with orders of $650 million, up 26%, including a thin film solar order. Q3 revenue expected flat to up 10%.

Display segment revenue was $134 million, up 29%, with orders of $84 million. Believes will pick up again in Q4 and into 2013. Expects Q3 revenues from -20% to +20% sequentially off this low base.

Energy and Environmental Solutions (EES, Solar) revenue was $79 million, down 62%, with orders of $62 million. There is currently excess capacity in the solar industry. Restructuring EES. Believes demand will increase over time due to lower costs of solar panels. But scaling back investment in LED and solar. Expects Q3 revenues from -20% to +20% sequentially off this low base.

On the whole new orders were $2.77 billion, up 38% sequentially, with a book to bill ratio of 1.09. The backlog ended at $2.37 billion, up 10%. In the next 2 quarters 80% of current backlog should turn over.

Gross margin was 39.8% GAAP, 42.1% non-GAAP.

Cash and equivalents ended at $3.24 billion, up $289 million in the quarter. Cash flow from operations was $603 million. $200 million was used to repurchase shares. $104 million was paid in dividends.

Cost of goods sold was $1.53 billion, leaving gross profit of $1.01 billion. Operating expenses of $602 million included $321 million for R&D and $281 million for selling, general and administrative. Income from operations was $409 million. Interest and other expenses were $22 million. Income tax provision was $98 million.

Believes logic and memory spend will resume growth in late 2012 with introduction of Windows 8.

28 nm node is generating high revenue for certain equipment types. This should continue at 20 nm.

Cash use strategy is to continue increasing the dividend but using share repurchases as the preferred means to return excess cash.

Q&A:

WFP, foundries, second half vs. first half? You have to think about what the foundries need for wafer fab equipment. The result is flat H1 to H2 after the peak in Q2. In DRAM area we expect a low level of spend. We previously thought NAND flash spend would be better in 2H, but now we see it as flat. But we expect logic spending to increase at the very end of the year, preparing for the next technology node.

28 nm transition? This is going to be the largest node. Demand is very high and supply is still constrained. The speed of the ramp is much faster than for 40 nm. It will result in 40% higher spend when it peaks in the next few years. Result was higher demand in Q2 than we had predicted. This has not resulted in more lead time on orders. With some customers the time between ordering and shipping is very tight.

What would keep you in the EES business? At $1 billion annual revenue it starts to show positive contributions.

What might cause NAND equipment spend to pick up? There is about a 75% bit growth rate. On the supply side the legacy demand is falling off, for cameras, MP3 players, etc. The tablets and phones are not contributing as much to bit growth as you might think because the number of bits per device is staying relatively flat. Part of that is pricing, but part is just what consumers demand for storage.

The increased guidance is due to the silicon solutions segment.

To see higher than expected growth we would need to see a faster pickup in display segment orders. There are factories already built in China, but they are building capacity within them gradually. Investment in display has been under the growth rate of end demand, which is catching up with current capacity. In 2013 we could see display revenues get back to 2011 levels.

We expect 20 nm to be a very big node for the foundries. In Q4 this year we see some equipment installed for R&D, but the bigger ramp will be later. The technology is good for Applied because the transistors require more steps than in past nodes.

The real lift on the margin side would not come until the non-semiconductor segments start showing strength again in 2013.

Can you explain why you did better than competitors in orders? Aside from what has been discussed, we do have a different fiscal quarter, with a strong month (April) which our competitors will have included in their second quarter.

Effects of new solar cell tariff announced today? The rates are higher than we expected. It will certainly cause changes in the supply chain. Global companies will adjust. Taiwan manufacturers and American manufacturers will see opportunities. We sell to almost every crystaline silicon solar cell manufacturer. Our goal is to drive the cost down so that governments don't have to intervene with either purchasing incentives or tariffs. We worry that tariffs will reduce end demand, which would be bad for the industry.

The second quarter was a record quarter for Varian, but we would not expect it to necessarily repeat.

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