Analyst Conference Call Summary

semiconductors

conference date: February 12, 2014 @ 1:30 PM Pacific Time
for quarter ending: January 26, 2014 (first quarter, Q1 fiscal 2014)

Forward-looking statements

Overview: Good sales and EPS, but the big what-if is the planned merger with Tokyo Electron in later this year.

Basic data (GAAP) :

Revenues were $2.19 billion, up 10% sequentially from $1.99 billion and up 39% from $1.57 billion in the year-earlier quarter.

Net income was $253 million, up 38% sequentially from $183 million and up 549% from $34 million year-earlier.

EPS (earnings per share) were $0.21, up 40% sequentially from $0.15 and up 600% from $0.03 year-earlier.

Guidance:

For fiscal Q2 2014 (ending in April) revenue is expected to be up 3% to 10% sequentially, with non-GAAP diluted EPS of $0.25 to $0.29. This excludes known charges related to acquisitions and integration of 3 cents. $550 million non-GAAP operating expenses, plus or minus $10 million.

For 2014 as a whole a 10% to 20% revenue increase.

Margins are expected to continue to improve sequentially through Q3.

Conference Highlights:

Tokyo Electron merger should accelerate profitable growth with an expanded set of precision material engineering tools for the industry. Integration planning is already underway. Believes approval for merger will take place in mid to second half of 2014; will be ready to execute when it does.

Applied Materials had good performance reflecting "healthy investment by our semiconductor and display customers and major technology trends that are playing to our strengths in precision materials engineering." In 2013 more spending was shifted to product development, while etch, inspection and display businesses began to show their potential.

Expects semiconductor equipment investments to be up 10% to 20% in 2014 over 2013 led by foundry and memory. About half of foundry spend will be on 20 nm technology. Orders in Q1 from Taiwan set a record. Foundries are also already investing in FinFET technology. NAND should also show growth in 2014.

Non-GAAP numbers: operating income $380 million; net income $279 million, up 22% sequentially from $228 million; EPS $0.23, up 21% sequentially from $0.19, and up 283% from $0.06 year-earlier. 42.5% gross margin.

$2.29 billion in overall orders, up 9% y/y. The backlog grew to $2.44 billion, consisting of SSG 56%, AGS 27%, display 12%, and EES 5%.

Silicon Systems Group (SSG) segment sales were $1.48 billion, up 19% y/y. New orders were $1.57 billion, up 13% y/y. Foundry and flash memory showed growth, logic and DRAM were down.

Applied Global Services (AGS) revenue $507 million, down 6% y/y. Orders were $597 million, up 9% y/y on 200mm equipment services.

Display segment revenue was $159 million, down slightly y/y on customer push-outs. Orders were just $79 million, down 31% y/y. TV unit growth rate in low single digits, but size is growing in the 15% range. Mobile screen resolution is becoming a differentiator, so multiple Gen 6 factories are expected to be built going forward.

Energy and Environmental Solutions (EES) [solar] revenue was $40 million, down 9% y/y. Orders of $40 million were flat y/y.

Cash and equivalents balance ended at $3.1 billion, up $226 million sequentially from $2.9 billion. Cash flow from operating activities was $372 million. Capital expenditures were $48 million. $120 million was used for cash dividends. Long-term debt was $2.0 billion.

Cost of goods sold was $1.3 billion, leaving gross margin of $891 million. Operating expenses of $561 million consisted of: research and development $356 million; selling and marketing, $109 million, general and administrative $89 million; restructuring 7$ million. Leaving income from operations of $330 million. Interest and other expense net $13 million. Income tax $62 million.

Orders as % of revenue by region: U.S. 18%, Europe 5%, Japan 7%, Korea 11%, Taiwan 43%, China 14%, other Asia 2%.

Applied has made capital investments to improve laboratories, as well as adding employees. This has helped with share gains in etch, wafer inspection, and e-beam. There is a strong pipeline of new, highly-differentiated products. Selected materials removal offers a multi-billion opportunity in the future.

Q&A:

Pipeline for SSG later in 2014? We think the year will be up 10% to 20%, but with bumps along the road due to the size of our customers. 2H should be fine. 20 nm and FinFET transitions will be important. Their should be a broadening beyond the foundries as well.

Operating expenses in 2nd half? Basically we should be flat in Q2. In H2 could be up a little bit, but not much.

20 nm foundries ramps look on track. FinFET is a strategic battle for customers, but not with high-volume production buying in 2014. 3D NAND will be another important strategic spend, but it is a tough transition, so it will depend on yield ramp and end-customer adoption of the devices.

Are you down further from peak on RAM than competitors? This last quarter was the highest NAND level we've seen in seven years. We have great product for critical processes. DRAM periphery is becoming more logic-like, which should help us going forward. Memory overall has been better for us than it has been in a long time, and we have good opportunities going forward.

Is there a second 3D NAND customer production on the horizon for 2014? One customer is planning to convert one factory from planar to 3D, but it is a difficult transition. Customers are making good progress, but it is too early to call for 2014, it is more of a 2015 capacity ramp.

2014 will have a lot of challenging but compelling technology inflections. Spending will be broader by foundries. We can gain share on the inflections, particularly when they involve materials innovation. Interconnect is becoming more difficult. Scaling DRAM cost-effectively requires materials changes that will favor Applied.

Planar vs. 3D decisions? All of the customers are focused on transitioning to 3D. We see a 25% increase in our total available market, and we are gaining share as well.

Their is very little overlap between Tokyo Electronic and Applied Materials. Even in etch, we do different kinds of etch. Materials innovation is the big challenge for the industry. Innovation can come from complementary technologies for new solutions for our customers. We are pretty excited about our interactions so far, so we are looking forward to closing the transaction.

Your share, 20 nm vs. 28 nm? We have strong pull from customers and are making investments in products and applications support. We are extending our leadership in ebeam review. Layer penetration for us in increasing. So we are pretty optimistic.

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