Analyst Conference Call Summary

conference date: August 15, 2012 @ 1:30 PM Pacific Time
for quarter ending: July 29, 2012 (third quarter, Q3 fiscal 2012)

Forward-looking statements

Overview: Down sequentially and y/y.

Basic data (GAAP) :

Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter.

Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier.

EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.

Guidance:

"For the fourth quarter of fiscal 2012, Applied expects net sales to be 25 percent to 40 percent lower sequentially. The company expects non-GAAP EPS to be in the range of $0.00 to $0.06. The non-GAAP EPS outlook excludes known charges related to completed acquisitions of approximately $0.05 per share but does not exclude other non-GAAP adjustments that may arise subsequent to this release."

Orders and revenues expected to bottom in fiscal Q4.

Conference Highlights:

"Economic uncertainty is weighing on top of a seasonal pullback to produce weaker near-term demand." Demand has dropped dramatically since the first half of the year. Believes orders and revenue will recover in December quarter. Mobility remains a driver of growth, but demand is becoming more seasonal in line with seasonal consumer spending. Lower that expected PC sales means bit growth has been under what is needed for new capital equipment. SSD (solid state drive) growth has been slower than expected.

Believes significant 28 nm capacity will be needed to fuel mobile device growth next year.

Non-GAAP results: net income $300 million, down 14% sequentially from $349 million. EPS $0.24, down 11% sequentially from $0.27 and down 33% from $0.36 year-earlier.

Orders in the quarter were $1.80 billion.

Silicon Systems group revenue was $1.55 billion, down 13%, with orders dropping to $1.17 billion, with foundry and logic customer demand particularly weak.

Global Services revenue was $579 million, up 5%, with orders of $531 million.

Display segment revenue was $142 million, up 6%, with orders of $67 million. TV end sales are below the level needed to trigger capital equipment purchases. Expect display to shrink another 25% in Q4.

Energy and Environmental Solutions (EES, Solar) revenue was $77 million, down 3%, with orders of only $35 million. End market demand is still robust, but supply chain still has overcapacity. Believes will revive in long term.

The backlog decreased by $551 million to $1.82 billion.

Cash and equivalents ended at $3.22 billion sequentially from $3.24 billion. Operating cash flow $656 million, capital expenditures $45 million, share repurchase $500 million, dividend $115 million.

450 mm die roadmap becoming clearer.

Lowering operating expense run rate.

Q&A:

Calling for recovery in Q1, basis of? We believe this based on discussion with customers. 28 nm buildout still needed in 2013, with some 20 nm as well. There is some dependence on macroeconomics.

Wafer fabrication equipment (WFE)? We believe foundries will lead the way out of the slump. To get to the top end of our guidance range we would need to see all foundries pushing, for the bottom end even weaker NAND demand.

Operating expense is being driven by Varian acquisition and need to invest in 450 mm transition.

Thinking since Semicon West on foundry spending? Foundry is where we thought it would be back then, but at lowest end of range. NAND has been weaker than expected in the second half. DRAM and logic are both well down sequentially in the quarter.

January quarter outlook for WFE? Earlier in the year we thought foundries needed to power through the seasonal slump, but they added a lot of capacity in Q2. Chip equipment capital expense plans include buildings as well as equipment.

Structural changes in TV demand? Buildout in emerging markets for flat panel TVs still has a long way to go. We have been disappointed with end demand in China. Technology changes can also drive equipment sales and even shorten the replacement time for TVs. So there are factors out there that will push demand going forward, but it is no longer propelled by increasing screen sizes.

Exiting product segments? We will look at each product and make sure they are solving high-value problems for our customers. Everything is on the table.

Seasonality drivers? Primary is introduction timing of new smartphones and tablets, with highly seasonal consumer demand. It has been visible the last 3 years, with higher Q2 peaks each year.

Memory in 2013 after disappointing 2012? It is still largely tied to PCs. If PCs are strong, memory could be strong. Flash factories are underloaded today. We have seen investment pullback in both DRAM and NAND. Not predicting an early change in the situation.

There are a lot of changes in the way semiconductors are being produced which are going to drive demand for new technologies and new capital equipment.

When will the NAND market get bigger than DRAM? That would be totally dependent on Solid State Drives. We have been surprised at how slow SSD has ramped. The next upside could be from SSD in ultrabooks, but we are not seeing it yet.

Biggest issue for foundry pushouts? Primarily digestion of installed equipment. They need to meet their peak demand for production for the holiday selling season. Some facility issues have caused pushouts. Only a more pronounced macroeconomic slowdown would head off a recovery in 2013.

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