Analyst Conference Call Summary

semiconductors

conference date: August 15, 2013 @ 1:30 PM Pacific Time
for quarter ending: July 28, 2013 (third quarter, Q3 fiscal 2013)

Forward-looking statements

Overview: Hit midrange of non-GAAP EPS guidance. Mixed results by segment. Accumulating a lot of cash.

Basic data (GAAP) :

Revenues were $1.98 billion, up 0.5% sequentially from $1.97 billion, but down 15% from $2.34 billion in the year-earlier quarter.

Net income was $168 million, up sequentially from negative $129 million, but down 23% from $218 million year-earlier.

EPS (earnings per share) were $0.14, sequentially from negative $0.11, but down 18% from $0.17 year-earlier.

Guidance:

Expects October quarter (fiscal Q4 2013) revenue to be flat sequentially. Non-GAAP EPS range $0.16 to $0.20.

Conference Highlights:

New orders were $2.00 billion, down 12% sequentially "as a seasonal decline in foundry bookings was partially offset by growth in memory and logic orders," display, and services. At the end of the quarter the backlog was nearly flat sequentially at $2.29 billion.

Gary Dickerson will be the new President and CEO.

Believes can gain market share during new technology transitions and is making the appropriate R&D investment. Looking to change to 300 mm wafers. Materials innovations are the key to driving performance gains for mobile semiconductor devices. Shift to 20 nm node will also result in market share gain, and further with 1x nm and 3D.

Non-GAAP numbers: operating income $312 million, net income $223 million, EPS $0.18, improved sequentially from $0.16, but down from $0.24 year-earlier.

Demand is being driven by mobile devices and larger TVs. Materials innovation pace is quickening due to competition for lower-power, higher capability chips.

Silicon Systems Group (SSG) segment sales were $1.27 billion, with orders of $1.20 billion, down 22% mainly on foundry orders. DRAM demand and pricing is improving, with NAND orders also up. PC sales remain challenged, resulting in a minor drop in logic demand.

Applied Global Services (AGS) revenue $497 million, with orders of $517 million, up 7%. Improved on higher customer utilization and wafer starts.

Display segment revenue was $161 million, up 27%. Booked its highest orders in over two years at $256 million, up 31%. Anticipates average display size to increase 2 inches this year, in comparison to 1/2 inch in a normal year. Also believes is gaining market share.

Energy and Environmental Solutions (EES) [solar] revenue was $45 million, but orders were $19 million. Reduced losses in the segment.

Cash and equivalents balance ended at $3.03 billion, up sequentially from $2.85 billion. $364 million cash flow from operations. $120 million was used for cash dividends. $50 million was used to repurchase shares. Long-term debt near $2.0 billion.

Gross margin was 42.9% non-GAAP, 40.8% GAAP.

Cost of goods sold was $1.169 billion, leaving gross margin of $806 million. Operating expenses of $556 million consisted of: research and development $334 million; selling and marketing, $111 million, general and administrative $97 million; restructuring $14 million. Leaving income from operations of $250 million. Interest and other expense net $22 million. Income tax $60 million.

Applied Materials has been working to shift expenses out of G&A into more R&D.

Q&A:

Memory business visibility? Depends on what happens with the PC market. The mobility market has had an aggressive growth rate in bits per box. The length of the DRAM run is hard to predict. NAND investment is more solid.

January quarter snapback, color? We can't forecast fiscal Q1 yet. But we are certain that foundry spend will come back to previous levels.

Margins in SSG? The biggest impact will be mix. In our strong business margins are holding pretty well. We are growing share in inspection, which is one of our highest margin segments. We have momentum in foundry and logic. "We have the best e-beam technology in the world." Making tremendous progress in etch share, including in 3D NAND, but the margins there are not as good.

We think logic spending will be down as a percentage of total spending. NAND and foundry up as a %. Mobility will continue to build out.

Evaluation tools? New etch technologies are a major focus, CVD is also building momentum that should continue into 2015. 300 mm is working out to be a great pipeline.

Downshift in consumer market mix, impact of? We are looking at process complexity increasing over the next few nodes. 10 nm and 7 nm patterns are going to be difficult to create. We believe the growth will continue until all phones are smartphones, which have significantly more silicon in them than cell phones. DRAM has seen underinvestment.

Are you seeing orders beyond first large customer at 20 nm? We are seeing orders from more than one customer at this time. Believes will be at 30 thousand wafers by end of 2013, to 100 thousand by end of 2014. That covers 14 nm to 22 nm; being specific would reveal particular customers.

E-beam new markets? We have not capitalized on it as much as we could. We can leverage that into litho and e-beam inspection.

"I don't think we have even been in such a good position for share gains."

New customers may mean some lower margins, but the incremental profitability is good.

3D NAND challenges and demand curve? The first phase is ramping and if that is successful they are going to be fairly aggressive.

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