Analyst Conference Call Summary

semiconductors

conference date: February 13, 2013 @ 1:30 PM Pacific Time
for quarter ending: January 28, 2013 (first quarter, Q1 fiscal 2013)

Forward-looking statements

Overview: Strong order growth and guidance against a backdrop of sequentially and y/y lower revenues.

Basic data (GAAP) :

Revenues were $1.57 billion, down 5% sequentially from $1.65 billion and down 28% from $2.19 billion in the year-earlier quarter.

Net income was $34 million, up sequentially from negative $499 million, but down 71% from $117 million year-earlier.

EPS (earnings per share) were $0.03, up sequentially from negative $0.42, but down 67% from $0.18 year-earlier.

Guidance:

Q2 fiscal 2013 revenue up 15 to 25% sequentially. Non-GAAP EPS between $0.09 and $0.15.

Conference Highlights:

Results were at high end of prior guidance. Believes Q4 was bottom of industry cycle. Reducing investments in solar. Aims to expand share in wafer fab equipment.

Non-GAAP numbers: operating income $112 million; net income $69 million down 1% sequentially from $70 million and way down from $240 million year-earlier; EPS $0.06, flat sequentially and down 67% y/y.

The good news was that orders of $2.11 billion were well above revenue and up 31% from orders in Q4, as well as up 5% y/y. "2013 looks to be another strong year for mobile products like smartphones and tablets," resulting in demand for Applied's technology, per CEO Mike Splinter. The backlog also ended at $2.11 billion.

Gross margin was 37.0% GAAP, 39.8% non-GAAP, up.

Silicon Systems Group (SSG) segment sales were $969 million, up 11% sequentially, and orders were $1.36 billion, up 84%. Lower orders in logic were more than offset by higher foundry and memory orders. Expects 3D memory to drive the next up cycle, along with new materials and lower-power products.

Applied Global Services (AGS) revenue was $471 million, down 24% sequentially. Orders were $544 million, down 6% sequentially.

Display segment revenue was $87 million, down 6% sequentially. Orders rose 66% sequentially from depressed levels, to $138 million. Believes second half of year will see a resumption of demand as ultra-high definition and 60" screens become more affordable.

Energy and Environmental Solutions (EES) [solar] revenue was $46 million, down 26% sequentially. Orders were $68 million, up 5%, and were mostly for web coating equipment. Supply change is challenging although end demand continues to ramp.

Cash and equivalents balance ended at $2.82 billion, down $177 million in the quarter. Just $16 million cash from operations due to severance and variable workforce payment timing. $108 million was used for dividends. $48 million was used for share repurchases. Long-term debt was about $2 billion. Capital spending was $49 million, depreciation and amortization $106 million.

Cost of goods sold was $991 million, leaving gross margin of $582 million. Operating expenses of $543 million consisted of: research and development $304 million; selling, general and administrative $230 million; restructuring $9 million. Leaving income from operations of $39 million. Interest and other expense net $21 million. Income tax benefit $16 million.

Orders by region: Taiwan 43%; China 11%; U.S. 19%; Japan 9%; Korea 9%; Europe 6%; SEA 3%.

Book to bill was 1.3.

Share repurchases will remain the preferred way to return cash to shareholders, but will raise the dividend in line with increased profits.

Q&A:

Foundry spending 3/4 of orders, vs. memory? Yes, in Q1 3/4 of orders are from foundries. We need to see logic and NAND spending pick up in the second half, bringing foundry down as a percentage.

FINFET? Key enabling technologies for this we have 70 to 75% market share. Higher in gate-last technology. It is a great opportunity to grow share. We gained some share in 300 mm in 2012, and have an opportunity to accelerate that into 2014 as more gate-last is adopted.

Seasonality this year? This year appears to be different from 2012. The Q4 seasonality will still be there. But more logic and NAND investment is likely to mute that. We appear to be gaining momentum.

3D NAND TAM (addressable market) expansion? We see it as a 2014 timing. There are a number of very long deposition steps in 3D. We see a 25% potential TAM increase.

DRAM spending, we expect it to remain flat at the low level of 2012.

20 nm node? Our order momentum includes the current 28 nm and the coming 20 nm. The discussions we have had with customers are very positive, but it is not done until the tools are in the factories.

NAND optimism? A variety of factors make us optimistic: stronger pricing, bit growth, and discussions with customers.

Reduction in solar business, are you exiting any part of that business? We have driven the cost down pretty dramatically, but we are not dropping any major product at this time.

We expect gross margin to improve in Q2, as we should with increased volume. We will need to increase operating expense particularly in Silicon Systems group.

We are optimistic in wafer inspection, with some major opportunities ahead in 2014, including bright field inspection

3D is a huge trend, not just in NAND but in transistors and packaging. It is a move away from lithography defined shrinking to process-defined, where with precision engineering AMAT has a considerable advantage. First the device and reliability issues have to be solved, then shrinks and bit expansion can happen quickly.

What would drive logic spending? It is changing to the next level of technology, which requires 25% to 30% more capital intensity. We may see some growth in PCs this year, if touch ultrabooks and Windows 8 start to catch on.

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