Analyst Conference Call Summary

semiconductors

conference date: May 15, 2014 @ 1:30 PM Pacific Time
for quarter ending: April 27, 2014 (second quarter, Q2 fiscal 2014)

Forward-looking statements

Overview: Strong quarter, but weak July quarter guidance.

Basic data (GAAP) :

Revenues were $2.35 billion, up 7% sequentially from $2.19 billion and 19% from $1.97 billion in the year-earlier quarter.

Net income was $262 million, up 3.5% sequentially from $253 million and up from negative $129 million year-earlier.

EPS (diluted earnings per share) were $0.21, flat sequentially from $0.21 and up from negative $0.11 year-earlier.

Guidance:

Fiscal Q3 2014 (July quarter) revenue expected to be flat to down 5% sequentially (mainly from SSG) which would still be up 13% to 19% from Q3 2013. Non-GAAP EPS $0.25 to $0.29, up 39% to 61% y/y. These figures included known acquisition charges of $0.03 per share.

Conference Highlights:

Tokyo Electron merger is making progress. Believes regulatory approval will be given in the second half of 2014. Already preparing to integrate the companies.

Increases in the Display and Silicon Systems segments led increased orders. Applied Materials "gained 1.4 points of wafer fab equipment market share in 2013." Earnings were near the high end of guidance.

Foundries are also already investing in FinFET technology. Foundries are expected to increase spending by 10% to 20% in 2014.

Mobility and cloud computing are driving demand for NAND memory; Applied expects about 40% bit growth this year. Believes total NAND spending could reach $7 billion this year. However, 3D NAND adoption is slower than anticipated. DRAM customers are also upgrading to more advanced nodes.

Adoption of new inspection technology tools is rapid. Will be introducing new, disruptive products in the future.

GAAP gross margin was 42.5%. This is the higher operating margin in 3 years and is expected to continue to improve in 2014.

Non-GAAP numbers: operating income $482 million; net income $348 million, up 25% sequentially from $279 million, and up 75% from $199 million year-earlier. EPS $0.28, up 23% sequentially from $0.23, and up 75% from $0.16 year-earlier. 44.2% gross margin.

$2.63 billion in overall orders, up 16% y/y. The backlog grew to $2.74 billion, consisting of SSG 53%, AGS 24%, display 17%, and EES 6%.

Silicon Systems Group (SSG) segment sales were $1.58 billion, up 7%. New orders were $1.66 billion, up 6%. DRAM and logic orders increased while foundry and flash declined. SSG backlog is at the highest level in 6 years.

Applied Global Services (AGS) revenue $534 million, up 5%. Orders were $537 million, down 10%.

Display segment revenue was $147 million, down 8%. Orders were $340 million, up 330% sequentially. The orders were primarily for TV production, where average screen sizes are expanding more rapidly than in the past. Mobile displays are also driving demand; multiple new Gen 6 factories are expected to be built in the next 2 years.

Energy and Environmental Solutions (EES) [solar] revenue was $88 million, up sequentially. Orders of $88 million were up.

Cash and equivalents balance ended at $3.4 billion, flat sequentially from $3.4 billion. Cash flow from operating activities was $437 million. Capital expenditures were $65 million. $122 million was used for cash dividends. Long-term debt was $1.95 billion. No cash was used to repurchase stock in the quarter. Non-cash share-based compensation was $42 million.

Cost of goods sold was $1.35 billion, leaving gross margin of $1.00 million. Operating expenses of $614 million consisted of: research and development $355 million; selling and marketing, $107 million; general and administrative $152 million. Leaving income from operations of $387 million. Interest and other expense net $22 million. Income tax $103 million.

Orders as % of revenue by region: U.S. 20%, Europe 7%, Japan 8%, Korea 14%, Taiwan 25%, China 23%, other Asia 3%.

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:

Controversy re trends in industry major suppliers, your view? Positionally we are doing well during these NAND and FinFet transitions. Our customers are committed to getting there on FinFet. There are pushes and shoves, a bit of softness, but we feel good about our position. Foundries are serving additional customers. Still in 10% to 20% range, maybe could be towards bottom of range.

Margin progress? It is by segment. Solar is doing better, display is up, services are improving. SSG should make progress, we should be up on the year.

Order visibility? We feel the business environment is okay. Believe the players below the top three are stronger, just looking at the top three looks weaker.

Device architectures are dramatically different; Applied's market share should grow during these transitions.

There will be some improvement in the tax rate in Q3 vs. Q2.

Market skepticism about closing the Tokyo Electronics deal? The process is proceeding as expected and it should close in 2014. Our level of engagement is great.

Etch market share? We are making good progress, with 6 points of share gain last year. In Q2 we had the highest conductor etch revenue in seven years. We expect to continue to grow share. Etch is our strongest market position, and we are able to help customers transition from planar to 3D NAND.

Spend by nm? FinFet abound 25%, bulk of the rest in 2014 is 20nm.

We anticipate gaining several points of share this year in CVD, and part of that is this new cobalt CVD film.

In mobile there is a race for the best technologies to produce the lowest-power devices. We see increasing capital investment intensity.

The foundry segment is our strongest segment across the board. You have more epi steps and other new technologies that are being broadly adopted across all the foundry customers. We have strong share at all the foundries and we give them enabling technologies.

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