Analyst Conference Call Summary

conference date: November 15, 2012 @ 1:30 PM Pacific Time
for quarter ending: October 28, 2012 (fourth quarter, Q4 fiscal 2012)

Forward-looking statements

Overview: Down sequentially and y/y. GAAP net income hard hit by goodwill impairment charge from solar energy segment.

Basic data (GAAP) :

Revenues were $1.65 billion, down 29% sequentially from $2.34 billion and down 24% from $2.18 billion year-earlier.

Net income was negative $499 million, down sequentially from $218 million and also down from $361 million year-earlier.

EPS (earnings per share) were negative $0.42, down sequentially from $0.17 and down from $0.34 year-earlier.

Guidance:

First quarter fiscal 2013 ending January 28 revenues expected flat to down 15% sequentially. Non-GAAP EPS from $0.00 to $0.06.

But SSG sales flat to up 10%.

Will reduce level of share repurchase program in Q1 due to need for cash for severance pay and other

Conference Highlights:

Believes business conditions will improve in 2013 after new orders bottomed in the fourth fiscal quarter. Believes changes in device technology and new materials will allow Applied Materials to gain market share. Results were at the high end of outlook, and cash flow was strong.

Non-GAAP results: operating income $114 million, net income $70 million, EPS $0.05, all down significantly from the previous quarter and the year-earlier quarter. This excluded, in addition to the usual, the $421 million goodwill impairment charge and $124 million in charges for restructuring and for integration with Varian.

Fiscal Q1 wafer starts expected to trend lower for the second consecutive quarter, impacting service segment revenue.

Plans to increase R&D to pursue greater market share in technology transitions, including to 300 mm wafers. But also identified $200 million in programs that can be cut. Will restructure workforce with retirements and reduction in force, and recorded $106 million in charges this quarter for this, with more to come mostly in Q1 and Q2.

Varian revenue in the quarter was $195 million, with orders of $152 million. Varian contributed only $0.01 to non-GAAP EPS, and that excludes $0.03 in acquisition-related charges.

Silicon Systems Group (SSG) segment sales were $870 million, with orders of $741 million down 36% y/y. Foundry and memory orders led the decline. New order composition: foundry 47%, flash memory 8%, logic and other 40%, DRAM memory 5%. Growth in 2013 would be driven by smartphone and tablet unit growth, as well as move to 20 nm technology and gate-last transistors. But overall wafer fab spending seen as down 10% y/y.

Applied Global Services (AGS) revenue was $621 million, up 7% sequentially, with orders of $576 million.

Display segment revenue was $93 million, with orders of $83 million, up slightly sequentially. This was the weakest quarter in years, but supply and demand are coming back into balance and the average TV size is now increasing. Emerging market demand is also growing. Mobility related markets represented 80% in the year, and this subsector is expected to remain robust.

Energy and Environmental Solutions (EES) [solar] revenue was $62 million, with orders of $65 million. Expects end-market double digit growth to continue, and is beginning to catch up with supply. But so far investment in new capacity if very low.

The overall backlog decreased by $215 million to $1.6 billion and included negative adjustments of $42 million.

Cash and equivalents balance ended at $3.0 billion. Cash provided by operating activities $411 million. $516 million was used to repurchase stock and $111 million paid in dividends.

Cost of goods sold was $1.06 billion, leaving gross profit of $586 million. Operating expenses were $1.085 billion, consisting of: $303 million for research and development; $237 million for selling, general and administrative; $421 million impairment of goodwill; $124 million restructuring and asset impairmnet. Leaving operating income of negative $499 million. Other expenses $33 million. Income tax benefit $17 million.

Operating expense should be flat 2013/2012.

Inspection and etch products also are growth opportunity areas.

Q&A:

Order rebound in January quarter, color on? SSG business has been seasonal. Uptick is mainly in foundry and logic spending.

Dielectric etch? We are shifting R&D in etch to areas of largest opportunity. It is a large multi-segment market. We are strongest in conductor etch. Some applications within dialectric are strong for us. We have an opportunity to grow share in the etch market.

Wafer fab equipment share growth is the primary goal of the company. The 20 nm transition for transistors is in our sweet spot.

We have little visibility for wafer fab equipment spending in second half of 2013. It depends partly on PC demand. Generally, we see a stronger first half.

Solar, what is the difference between getting out of the business entirely? We believe capacity will expand over time, so it could be a good business for Applied. We have some important technologies. We know we need to reduce the short-term drag on earnings.

Korea? The seasonality is mainly consumer driven, especially by smartphones. For increased capacity for 2013 we will see those sales in the first half of 2013.

Our bit growth projection is about 50% for 2013, but to get signicant flash memory factory expansion you need a 70% growth rate. We would love to see SSDs take off next year, which would require more investment, but that is not our view, which is based on talks with customers. In 2012 there was a lack of bit growth per device.

There is a real chance for Windows 8 and PC spending to be higher than we are planning for at present.

3D NAND represents an opportunity to grow our addressable market 25%.

28 nm wafer expectation? 2012 will be 200,000 per month. 75,000 to 100,000 incremental at that node in 2013. About 1/3 of foundry budget will be for 20 nm because of its greater capital intensity over 28 nm. Our business can grow if we gain market share, but we don't have visibility in the second half of the year.

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