Applied Materials, Inc. Q3 2008 Earnings Call Transcript

Nov.13.08 | About: Applied Materials, (AMAT)

Applied Materials, Inc. (NASDAQ:AMAT)

Q3 2008 Earnings Call

November 12, 2008 5:00 pm ET

Executives

John Nunziati – Director of Investor Relations

Michael R. Splinter – President, Chief Executive Officer & Director

George S. Davis – Chief Financial Officer & Senior Vice President

Analysts

James Covello – Goldman Sachs

Stephen Chin – UBS

Patrick Ho – Stifel Nicolaus & Company, Inc.

Weston Twigg – Pacific Crest Securities

Analyst for Jay Deahna – J.P. Morgan

Kirsh Sankar – Banc of America Securities

Timothy Arcuri – Citigroup

Satya Kumar – Credit Suisse

C. J. Muse – Barclays Capital

Bill Ong – American Technology Research

Jesse Pichel – Piper Jaffray

Atif Malik – Morgan Stanley

Gary Hsueh – Oppenheimer & Co.

Mehdi Hosseini – Freidman, Billings, Ramsey & Co.

Mahesh Sanganeria – RBC Capital Markets

Operator

Welcome to the Applied Materials fiscal 2008 fourth quarter and year-end earnings conference call. During the presentation all participants will be in a listen only mode. Afterwards you’ll be invited to participate in the question and answer session. As a reminder this conference is being recorded today, November 12, 2008. Please note that today’s call will contain forward-looking statements which are all statements other than those with historical fact including statements regarding the economic and industry outlook, customer spending and utilization rates and applied performance, strategic plans, cost reduction action and participated savings, products, competitive position, R&D, foreign strategy, cash generation and deployment, operational efficiencies and financial targets.

All forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Information concerning these risk factors is contained in today’s earnings press release and in the company’s filings with the SEC.

Forward-looking statements are based on information as of November 12, 2008 and the company assumes no obligation to update such statements. Today’s call also contains non-GAAP financial measures, reconciliations of the non-GAAP measures to GAAP measures are contained in today’s earnings release and in our financial highlight slides which are on the investor page of our website at www.appliedmaterials.com.

I would now like to turn the conference over to John Nunziati Director of Investor Relations-Applied Materials. Please go ahead sir.

John Nunziati

Good afternoon and welcome to the Applied Materials fiscal 2008 fourth quarter and year-end earnings call. I am stepping in as Robert [Freeze] is sick today with laryngitis. I would like to highlight that we will be hosting our 2009 analyst day on Wednesday, February 18th, in New York City. More details on this event will be provided soon, but please note it on your calendar.

Joining me on the call today are Mike Splinter, President and CEO, George Davis, Chief Financial Officer and Joe Sweeney, Senior Vice President, General Counsel and Corporate Secretary. Today we will discuss our results for the period ending October 26, 2008. The financial results were released this afternoon at 1:05pm Pacific Time. A copy of the news release is available on business wire and on our website, www.appliedmaterials.com.

Mike Splinter will lead off the call with commentary on the market environment and our strategies for 2009. George will follow with a discussion on our financial performance for the full year and the fourth quarter of fiscal 2008 and then provide our target for the first fiscal quarter of 2009. After Mike and George’s remarks we will open the call for questions.

With that I would like to turn the call over to Mike. Mike.

Michael R. Splinter

Let me begin by thanking our employees for their excellent work and meeting the challenges of a volatile quarter. Their accomplishments throughout the year position the company well in both our core business and new markets.

The last six weeks of turmoil in the financial markets is unprecedented and the weakening global economy will have significant impact on all of Applied’s businesses. The market for semiconductors and flat panel displays depend largely on consumer demand and for growth. The current negative trend in consumer spending and economic uncertainty have led our customers to reassess their spending plans and we are seeing a pattern of multiple downward revisions as a severity of the situation sets in.

Applied Materials is taken action based on our view that this will be an extended downturn lasting a year or longer. There will be significant changes in our semi-conductor customer base as the industry emerges. First, we intend to focus on executing our core strategies while improving efficiency and reducing spending. Second, we will invest aggressively in the technology, products and customer relationships that are essential for us to emerge in a stronger market position.

Third, we will be disciplined, selective and patient in pursuing strategic acquisition opportunities and Fourth we have a strong balance sheet and we will remain focused on operational cash flow and asset management to preserve its strength and maintain our flexibility to support strategic business priorities.

In silicon systems although visibility is extremely limited, the trends we are seeing today suggest that wafer fab equipment spending will be down more than 25% in 2009. In display we expect cap ex to be down more than 40% year-over-year. Almost daily we are hearing customer reports of factory slowdowns, closures and capacity reductions as they deal with the dramatic falloff and demand or their products.

To date the macro-economic liquidity issues have had less media effect on our solar business, however, we expect a period of pullback and reassessment in early ’09. Our crystalline and silicon customers have a large exposure to consumer demand and even with strong government support we expect a reduction in consumer discretionary spending to impact demand and pricing for solar modules.

Our thin film solar customers have received equipment and are expected to continue their projects as planned. For our thin film solar customers in the process of securing financing, we are seeing some delays as those financing issues are sorted out. Overall, we do expect 2009 to be a significant growth year for our solar business group.

As a result of the macro environment initial reductions we are seeing in capital spending, we are taking significant action on our cost structure. Applied will begin implementing restructuring programs in the first quarter of fiscal 2009 designed to streamline the organization, reduce operating costs and drive annualized cost savings of approximately $400 million.

As part of this program, the company plans to reduce its global workforce by approximately 12%. We believe these actions while significant in size and impact will not impair our investment in strategic priorities. I will now make a few comments on each of our businesses.

In 2008 silicon systems made gains and positioned etched for wins at the next technology node. At the same time efficiency in both R&D and operations dramatically improved, enabling solid financial performance throughout the year. In the semiconductor market, ongoing memory over supply is resulting in weak pricing and numerous closures of 200 millimeter lines. For logic and founder factories we are seeing utilization declining rapidly to less than 70% in many factories as demand for cell phones, TV’s and automobiles drop off.

We expect utilization to continue to fall through the first half of ’09. Our strategy going forward is to build on our strengths, lead on innovation through focused R&D investment and win the key technology decisions as semi-conductor devices scale to 32 and 22 nanometers. For Applied Global Services, we build solid gains throughout 2008, especially in Asia and with our solar customers. This momentum for service will continue as customers move to outsource in difficult times and look for ways to maximize their factory efficiency.

In display while softening consumer demand has delayed capacity expansions, it has many factories idling capacity strategic investments for Gen10 are still moving forward. While maintaining our leadership in CVD and color filter PVD, display also recognized its first revenue from the pivot PVD array system at a leading customer, opening up a large new served available market for us.

Our moves in solar this year culminated in the first customer signoff of the SunFab production line in October, an important milestone. We currently have five SunFab customers producing panels. We signed another major SunFab contract in Q4. Our conversion efficiency in factory productivity are improving in our uniform across the SunFab network. We are on track with our tandem junction technology development.

We are confident we can continue to lower the cost of solar energy to the scale and effectiveness of our SunFab Thin Film technology and over time make a solar meaningful part of the world’s energy supply.

I would also like to acknowledge the US Congress for approving a new and improved investment tax credit. The US incentive paves the way for utility scale investment over the next eight years in the world’s largest electricity market. While development of this market will take time, we expect investments to grow in the US during the next year and we look forward to the Obama administration’s focus on renewable energy.

None of us can predict how the global economy will eventually play out, but we are taking steps to ensure Applied Materials are appropriately restructured, operating efficiently and executing on our strategic priorities. I will now turn the call over to George to add operational and financial details to our results.

George S. Davis

As this is our year-end call, I will cover results for both the fourth quarter and the full year. In Q4 Applied performed at the high end of our target range for orders and exceeded our revenue and EPS guidance. Orders of $2.2 billion were driven by growth in silicon systems and energy and environmental solutions, offset by an expected significant order decline in display and an 8% decline in Applied Global Services.

Backlog increased to $4.85 billion, backlog adjustments were negative at $65 million and comprised $20 million of the bookings primarily related to cancellations and adjustments from non solar EES customers and $45 million of unfavorable currency adjustments. Revenue growth of 11% quarter-over-quarter was led by EES with strong sales and crystalline silicon solar. Earnings per share of $0.17 was up over 40% and reflected strong operating performance in our core businesses and cost management.

Approximately $0.03 resulted in the gain on sale of our administrative office building in Singapore and certain other non-recurring items. In our segment results, silicon systems orders in Q4 increased 40% over Q3 in line with our call for our orders to be up more than 30%. Expected strength and logic was augmented by a few large orders from DRAM customers. This was a highly concentrated order quarter coming off a low base in Q3.

Our order composition was DRAM 48%, logic and other 40%, foundries 9% and flash at 3%. While SSG net sales were essentially flat in Q3, operating income improved to just under 24% of net sales. In AGS, orders and revenue were impacted by a lower factory utilization in semi-conductor and display factories and dropped 8% and 13% respectively versus Q3.

Sales of spares and refurbished systems were most heavily impacted in this environment. In display orders fell significantly as forecasted dropping over 80% in Q3 as display customers pushed out capital investments. Display achieved record net sales of $334 million during the fourth quarter, a 7% increase from Q3. Operating profits were up in line with revenue.

Energy and environmental solutions had a strong fourth quarter with orders up 52% and revenue up 151% driven by strength in crystalline silicon and thin film solar. As Mike indicated Applied recognized the first revenue on a SunFab integrated production line in the fourth quarter. Revenue in crystalline silicon benefitted by approximately $100 million, from a combination of deferred revenue capture and the inclusion of an extra month of PWS results, to align with Applied’s fiscal period.

The absence of these benefits will be a factor in Q1. Operating cash flow for the quarter was 6% of revenue. Cash flow from operations was impacted by the required bill in inventory for EES and display and during the quarter we spent $300 million on share repurchase and $80 million on dividends.

We are planning to temporarily put our stock and purchase program on hold until the economic situation moderates. We see this as a prudent step to ensure that we maintain our strong balance sheet and financial flexibility in this environment.

Cash flow performance for fiscal 2008 was strong and we generated $1.7 billion in cash from operations or 21% of revenue. This performance is notable given the reduced level of earnings and increases in inventory of almost $700 million to meet the ramps in our solar and display businesses. For fiscal 2008, orders were down 5% at $9.2 billion and revenue was off 16.5% at $8.1 billion.

Our results reflected strong performance in EES and display that partially offset the impacts of a memory led cyclical downturn in silicon systems. The company’s fiscal 2008 operating profits were $1.33 billion or 16.4% of revenue with non-GAAP basis operating profits of $1.69 billion or 20.8% of revenue. This is very strong performance in a year where our most profitable segment was in a deep cyclical downturn and EES experienced an operating loss of nearly $200 million to support the startup of our solar business.

GAAP net income of $961 million was down 44% from the prior year due to the reduction in revenue and the mix effects of revenue losses in SSG. Earnings per share for the year were $0.70 down 42% in line with lower net income. Now, I will briefly summarize the segment performance for the full fiscal year. SSG delivered strong financial performance despite a negative order in revenue trend.

Operating margin performance was 31% or six points higher in fiscal 2005 when SSG’s annual revenue was 10% higher. This stronger performance reflects continuing improvement in manufacturing productivity and material cost reductions as well as lower operating expenses. Despite a decline in our core semiconductor markets over the year, AGS maintained revenue at the $2.3 billion level.

The fall off in refurbished equipment and spares was partially offset with higher contract service revenues resulting from improved market penetration in Asia. Strong end market demand for flat panel televisions going in to fiscal 2008 led to a record year for display in orders, revenues and operating profit. Revenue increased by 38% driven primarily by our leadership position in CVD.

Operating profits increased considerably from 23% of revenue in 2007 to 32% in 2008. In fiscal 2008 EES revenue grew to more than $800 million, up from $165 million in 2007. The major drivers for this increase were the crystalline and silicon solar products obtained in the HCT and Baccini acquisitions.

Going in to fiscal 2009, as Mike outlined, a deterioration of the global financial markets has led to a rapid slowdown in many of our customer’s investment plans. Our cost reduction program is targeted to generate overall annualized savings of $400 million with global headcount reductions of 1,800 positions or approximately 12%. We believe this will lower annual operating expenses by approximately $325 million and cost of sales by $75 million.

We intend to move swiftly on this program and to capture the reduction in our run rate by fiscal year end. These savings are incremental to the actions we took early in 2007 that resulted in annualized spending reductions of $150 million. Before I outline our Q1 targets, I’d like to reiterate some of the key market issues that impact our outlook. We expect that the environment for semiconductor and display equipment demand will remain uncertain for quite some time and that volatility in our customer forecast will be very high.

Based on today’s limited visibility and given the strong order performance in our fourth fiscal quarter, we see overall company orders down in Q1 by more than 30% as customers put spending plans on hold. Going forward, we intend to discontinue our practice of providing company order guidance until the level of volatility subsides. We will continue to provide actual orders in our reporting.

This quarter we will also be widening the ranges somewhat for revenue and EPS where we are also subject to uncertainty but have better visibility than we do for orders. Overall, we expect that the silicon segment will face further weakening in its markets and that revenue will fall 25% or more over the next quarter. We also see display revenues dropping off substantially as customers push out equipment on order.

AGS sales will be down although less than the equipment markets but demand for spares and refurbished equipment will be impacted by low utilization rates. We see healthy growth for EES in fiscal ’09 but are forecasting some revenue fall off in Q1 in our EES segment due to the absence of $100 million of positive adjustments in Q4 that I mentioned earlier and also from softening demand in crystalline and silicon.

We do expect to receive at least one and possibly two SunFab signoffs in Q1. With that as a backdrop our fiscal Q1 targets are we expect overall revenue to be down in the range of 25% to 30%. We expect EPS to be in the range of $0.00 to $0.04 per share. John, let’s open up the call for questions.

John Nunziati

Please note that during the Q&A we ask that you limit your request to one question and one follow up per firm. Let’s begin with the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Covello – Goldman Sachs.

James Covello – Goldman Sachs

My first question would be on the DRAM segment and Mike you referenced in the beginning that you think coming out of the other side of this your customer base in semiconductors could look very different. Do you have any thoughts about how DRAM and particularly Taiwan DRAM comes out of the other side of this given the severity of this down turn and what your customer base could look like again, particularly in Taiwan DRAM on the other side of this cycle.

Michael R. Splinter

Well, I think it’s really a worldwide question Jim and in part in Taiwan it will depend a little bit on what the government does there but I think we see two fewer, maybe three fewer companies in this space at the end of the down turn. I think initially in this last year we expected consolidation, this kind of global recession is going to pretty much ensure it happens.

James Covello – Goldman Sachs

Obviously customer consolidation isn’t usually great for suppliers, but what’s your take on that?

Michael R. Splinter

Well, it will I think make things more rational. You know what the pricing is like in the DRAM world over the last two years. I think if there’s fewer suppliers the market will be a little more orderly and I think that, in the long run is a positive.

James Covello – Goldman Sachs

If I could get my follow up, it would be around the solar segment particularly with the SunFabs. What kinds of things do you think need improvement in order to get quicker customer sign off going forward? What kinds of things do you guys still believe you need to work on other than the tandem junction technology, maybe logistical support as you install the SunFabs or whatever other issues you guys still feel that you need to improve to get quicker sign up.

Michael R. Splinter

Signups doesn’t really have anything to do with tandem junction, the first number of factories are single junction factories. Just moving up the learning curve Jim. You start up factories, you learn an awful lot of detailed issues, every one of them has to be resolved but the good thing is we resolve them once, we learn, we move it to the next factory and each one will be faster and faster as we move through time.

Operator

Our next question comes from the line of Stephen Chin – UBS.

Stephen Chin – UBS

Two questions on the solar profitability, I guess the first is do you think it’s reasonable to model improving operating margins in that solar division as we go through fiscal 2009? And, the second question to that is, is today’s restructuring program impact applied solar division and if so with the solar workforce reductions be similar to the rest of the company?

George S. Davis

In terms of the operating profit, I think we saw this quarter that you had a fair amount of additional revenue coming in, in the area where we’re having the highest margins right now in the solar in the crystalline silicon group so that was a positive that we said will reverse itself in next quarter when we get to a more normalized revenue level.

2009 is still going to be a working out year for us because it’s when we’re going to be going through and experience essentially the full learning curve as we roll through the initial SunFab sign offs. So, I think we’ll just have to see for the full year where the crystalline silicon side comes out. We have strong backlog in that area and then depending on how well demand holds up in that regard. That will be a positive for profitability or if we see a big pull back that will have an impact negatively.

Then in terms of the cost reduction programs, every one of our operating executives has a target. They’re working their programs right now. I’m not going to comment on the waiting. Obviously, certain areas have more end market demand issues to sort out than others but we’re confident that we can execute on this cost reduction program and we’ll have plans out this quarter.

Operator

Our next question comes from Patrick Ho – Stifel Nicolaus & Company, Inc.

Patrick Ho – Stifel Nicolaus & Company, Inc.

In terms of your cash flow going forward you mentioned that you’re going to be focused on strategic investments. Just given where the stock price is at are you still not finding any I guess use for it in the near term in terms of the stock buy back?

George S. Davis

Clearly we think there’s value in our stock and we have great confidence in our long term business plan. We just think that it’s prudent at this time to preserve the cash that we would spend in share repurchase to make sure that we have basically control of our own destiny. We have a very strong balance sheet coming in to this situation. We’re probably better positioned than we’ve ever been and we want to make sure that as we go through this thing until we really see how deep an how difficult it is to navigate this particular economy that we have the flexibility to maintain that we have going in.

Patrick Ho – Stifel Nicolaus & Company, Inc.

In terms of your semicap orders, we have one logic customer that’s beginning its next generation ramp on the 32 nanometer node. Without I guess giving exact details of how they’re going to order, does that provide you any near term support over the next few quarters on that business front?

Michael R. Splinter

Well it does of course and you can understand if you kind of look at our picture that a big part of the overall orders and revenue are from the top four customers and really that was in part why our Q4 looked as good as it did.

Operator

Our next question comes from Weston Twigg – Pacific Crest Securities.

Weston Twigg – Pacific Crest Securities

I just wanted to go back to solar for a minute, specifically on sun [bed] revenue, looking at Best Solar which was the first 1 gigawatt fab I believe, news of a delay at that facility has been circulating around for a while but what I don’t think is well understood is if some equipment has already shipped there, my question is what happens to revenue on equipment if a customer delays its ramp plan? And specific to Best Solar, would equipment there if there’s a long delay be revenue returned or redeployed?

George S. Davis

Let me just clarify something, there hasn’t been equipment shipped to Best Solar. Now, Best Solar is building out their factories and that may be what you’re thinking about. Equipment that is shipped to our customers, and we shipped basically full shipped to seven customers and are in the process of shipping to eight, those are all secured by letters of credit, that customers are moving ahead. They had to have their financing in place to be at this stage so they’re moving ahead on schedule.

Weston Twigg – Pacific Crest Securities

I guess just sort of following on, what if a customer is unable to complete a SunFab project? You say you have letters of credit but do you get a substantial portion up front as a down payment that might offset potential [inaudible]?

George S. Davis

Yes, we are more than fully secured for everything that is shipped today so our basic structure for these, they’re working capital intensive as you know, is deposits up front and then prior to shipment to have everything fully secured.

Weston Twigg – Pacific Crest Securities

Then just on the crystalline silicon solar side, last quarter you mentioned you were around a $200 million a quarter shipment run rate. It sounds like potentially weakening demand on the crystalline silicon side. What do you think might be a low point for the shipment rate through next year?

George S. Davis

I’m not ready to make that call. We haven’t had cancellations as you saw from the debookings, you didn’t see anything there from the crystalline silicon side. What’s really been the phenomena is recently trying to catch up revenue with the shipment rates. That’s really where we are now, we’re caught up and so it will be, as we work through our backlog we’ve been running it at about the $200 million rate a quarter and until there’s cancellations that’s our assumption.

Michael R. Splinter

And remember, if people are going to bring on silicon capacity, they have to saw and shape the wafers and it has to be able to process them. I don’t think that says much about what the end demand is going to be like or when an adjustment would take place but I don’t think we’re in a position to make a solid forecast out a couple of quarters.

Operator

Our next question comes from Analyst for Jay Deahna – J.P. Morgan.

Analyst for Jay Deahna – J.P. Morgan

Just two quick questions, first, how many SunFab lines did you book this quarter? And, how many do you expect next quarter? Then, I have a follow up.

George S. Davis

We don’t forecast but we booked one SunFab line this quarter.

Analyst for Jay Deahna – J.P. Morgan

And would you expect that or more next quarter?

George S. Davis

We don’t forecast out on the SunFab orders.

Analyst for Jay Deahna – J.P. Morgan

Then could we get some more specifics on your tandem junction [inaudible] line? Do you have working panels at 8% efficiency and when do you expect [inaudible]?

Michael R. Splinter

Well, do we internally to Applied Materials? Yes. But, we can’t comment on what a customer has working. But, we’re happy with where our technology is moving and how fast it’s moving ahead. The schedule for that factory sign off is in our second quarter. We think that’s very much on schedule and going to happen.

Operator

Our next question comes from the line of Kirsh Sankar – Banc of America Securities.

Kirsh Sankar – Banc of America Securities

I had two questions, one is given the dislocations in the solar market can Applied capitalize on those and move downstream like leveraging [inaudible] and investing in other things? Or, is the plan in ’09 just to focus on executing on the equipment part of the business?

Michael R. Splinter

Our strategy first and foremost is to focus on our equipment and turnkey and technology business. We think this is the fastest way to scale solar energy around the world and drive the pricing down. Will we do some downstream demonstrations, those kinds of things? They’re for us, at this point, more marketing than business process to help create the demonstration that this is a business people can make money at and as cost effective to install and I think we’re demonstrating those things around the world.

Kirsh Sankar – Banc of America Securities

In terms of your guidance for orders down over 30% can you just give us some granularity on the breakout between how low silicone could be?

George S. Davis

We think it will be down significantly but we’re not going to break it out much more than that for the same reason we’re not giving order guidance. The ability to forecast at the start of a quarter when our own customers forecasts are dropping or is as volatile as we’re seeing them. We wanted to give you some indication directionally of where it looks overall, but I think we’re going to just leave it at that at this point.

Kirsh Sankar – Banc of America Securities

Just a quick follow on, how many $100 million plus orders did you have in the October quarter?

George S. Davis

Let me just put it to you this way, we had four orders, four customers I should say that comprised 70% of the total orders that we had in silicone. That was the big piece. We had a SunFab order that was also larger than $100 million. I think that should give you an idea of the concentration.

Operator

Our next question comes from Timothy Arcuri – Citigroup.

Timothy Arcuri – Citigroup

Two things, first of all it looks like pricing for crystalline modules was thought to come down about 20% next year but really it looks like it’s going to be about 20% just in Q1. So, I’m wondering the pricing rabbit and the cost rabbit that you thought you were chasing, i.e. where you thought pricing would be for crystalline modules out two or so years from today, does that rapid rate of pricing decline change how you think about solar and how you might have to get more aggressive in terms of cutting price to get cap ex per watt down?

Michael R. Splinter

Actually no. You know, crystalline silicon pricing has been very stable for a long time. Any approach, any modeling that we’ve done in this business, we’ve always thought that pricing had to come down 20% a year on average to really start getting this technology in to the space where it can eventually be competitive with other forms of electricity generation. So, the fact that because of silicon shortage, pricing has been stable for multiple years really doesn’t change how strategically we think about this business or the targets that we’ve set internally for ourselves.

We know where we have to get to. The target is other forms of electricity generation, it’s not some internal solar target necessarily. As far as pricing, we know we have to keep driving the technology to get more efficient, more productive and that’s where we’re going to keep the market growing.

Timothy Arcuri – Citigroup

I guess as a quick follow up, I’ve actually asked you this before but, given the current credit issues, does it make you rethink your business model in solar at all potentially going more vertical and not relying on customers that are in turn so reliant on financing?

Michael R. Splinter

Well, it’s hard for us to think about crossing the line of competing with customers. If that’s what you’re inferring Tim. I think there’s lots of opportunity in the solar market in various bases to help increase demand but I think for right now we want to stay focused. If we really see the business change maybe we’d reevaluate but I think we still see enough interest in our products and turnkey factories that we’re going to do quite well in this market over time.

George S. Davis

Also, at the end of the day Tim, it’s not our balance sheet that would drive the value equation there. It’s ultimately what’s the end market demand and do you have the utilities coming in, do you have the broader government subsidies. These are very financeable arrangements if the demand is right and if the demand isn’t right there’s no amount of balance sheet that’s going to solve that problem.

Operator

Our next question comes from Satya Kumar – Credit Suisse.

Satya Kumar – Credit Suisse

George and Mike, I’m a little surprised that you saw significant increase in Taiwan DRAM orders. I was wondering if you could give me some color on whether these orders are for technology buys or capacity, some kind of trends to stack conversions or just stack capacity? Are you looking to ship these products in the next one or two quarters or do the ship dates extend beyond the next couple of quarters?

Michael R. Splinter

Well, there’s a complex question but, yes it’s for both technology and capacity in Taiwan. Some of the orders are for conversion so kind of the answer to your question is all of the above.

George S. Davis

As I said, these were very concentrated orders and as I said 70% came from four customers but 30% of the total order book that we got for Q4 in silicon turned in the quarter and another 25% of it is going to turn in the next quarter so we’ve got a big piece of the flow through just in basically the first quarter of ’09 and then some will stretch on out to the later part of the year.

Michael R. Splinter

But our aging and our backlog is not particularly moving.

Satya Kumar – Credit Suisse

Mike, I think earlier on your prepared comments you made a comment that you’re suspending the buyback and you might look to be more aggressive on the acquisition front? I was wondering if you could add a little bit more color to that? Are you primarily looking in the silicon part or are you looking to make more acquisitions in the EES as you look to grow the business longer term?

Michael R. Splinter

I’ll comment on the acquisition and let George comment on the buyback. Actually, what I said was we’re going to be disciplined and patient about acquisitions. I’m quite happy with the capability we’ve developed in the company to do acquisitions and I think we want to be very selective. I think we’re going to say no many more times than we’ll say yes.

We think that there’s going to be lots of opportunity for acquisitions but what we’re going to try to do is be very strategic in both our semiconductor space and our solar space to see where there’s technology or products that will add to our offering and really make a strategic difference to the company. As you know, doing an acquisition takes a lot of management bandwidth. We want to make sure the ones that we do are really going to have impact.

I wouldn’t say that we’re going to be overly selective on one business unit or another. We’re going to weight it on strategic impact to the company.

George S. Davis

On share repurchase I’ll just reiterate the fact that as you know we have been a strong proponent of share repurchases as a way of returning excess cash to shareholders so no change in that philosophical bias. Also, no change in our view that we’re a very attractive long term investment and certainly at the kind of levels today you just feel very comfortable.

The fact is we want to use the balance sheet and maintain a very strong balance sheet to make sure that as we emerge from this that we are as strong as we can be in terms of the technology that we’ve maintained or acquired, in terms of the investments that we’ve made through this difficult period and we think prudence on preserving cash at this time, particularly since it’s really not known how deep this economic set back can go. We think it makes more sense to be prudent and hold off until that sorts itself out.

Operator

Our next question comes from C. J. Muse – Barclays Capital.

C. J. Muse – Barclays Capital

I guess first question, on the solar front how should we think about the revenue mix between crystalline and silicon and thin film as we progress throughout calendar year ’09?

George S. Davis

Today crystalline silicon dominates the revenue picture in EES and it should even out by the end of the year, be more of an even mix. Again, I think that’s assuming that things play out the way we see them today. Forecasting has been a very difficult process in this environment but that’s how we see it today.

C. J. Muse – Barclays Capital

Then I guess second follow up questions there, when you look at 2009 and clearly it looks like solar is possibly the only growth area within your different segments, and that becoming more important in terms of an earnings driver and without the benefit of this $100 million deferred revenue that was supported this quarter. When should we see that segment reach profitability?

George S. Davis

I think honestly we have to take a look at how customers react to this environment to answer that question. I mean we believed last time we updated on this that 2009 would be the year that we would be GAAP breakeven. Just to remind you we carried in ’08 $120 million of acquisition charges in the EES segment so there’s a big nut there that has to be worked through on a GAAP basis. On an operating basis performance has been obviously substantially better than what you see in the reported segment.

So, we’ll have to see really how the demand situation plays out whether that forecast is still valid and we certainly will have a complete update and view on that at the analyst meeting scheduled for New York. But, we’ll also have more information obviously as we get in to the end of next quarter.

C. J. Muse – Barclays Capital

Is there a certain revenue level that would drive breakeven that you could share with us?

George S. Davis

No, I think what you’re seeing today with the mix that they have today, that kind of revenue level they were clearly breakeven. But, again I think it will depend on mix and we’ll just have to see. But, we feel very good about the long term business model for the solar group. Inherently the products are profitable and the SunFab model we think is an excellent one and once we get through the basic learning costs should generate the kind of operating margins that we forecasted for 2010 and beyond.

C. J. Muse – Barclays Capital

Your next question comes from the line of Bill Ong – American Technology Research.

Bill Ong – American Technology Research

Based on your conversations with your chip customers, do you have an industry forecast of what global chip revenue should be next year? Flat, down, someway of quantifying it? Then more importantly do you have a sense of what the base line type of spending is needed just to keep the global fabs running?

Michael R. Splinter

Bill, you’re asking for our forecast on chip sales?

Bill Ong – American Technology Research

If you understand the chip revenue and then you sort of get a sense of capital intensity for a way of figuring out what type of spending is needed.

Michael R. Splinter

We think that in 2009 chip sales will be down some place 5% to 10%. That’s kind of our view at this point. Obviously, I’d say our visibility on that is pretty low but that’s our view at the current time. When there’s less sales in the chip world there’s little need for added capacity.

Bill Ong – American Technology Research

Do you think the capital intensity will probably still be at the 16% to 18% of revenue?

Michael R. Splinter

I don’t even know how to forecast that when units are down.

George S. Davis

Plus, capacity utilization is down so much.

Operator

Our next question comes from Jesse Pichel – Piper Jaffray.

Jesse Pichel – Piper Jaffray

Are you starting to see some production of single junction panels from some customers and I’m wondering what type of cost per watt these customers are seeing relative to the cost road map you communicated the analyst community?

George S. Davis

In the initial phases here we’re seeing roughly $1.50 a watt. This is very early as these panels start getting in to higher volumes and the factories run more efficiently we’ll see that continue to come down. We’re pretty happy with where we are, we’re pretty much on track with where we thought we would be.

Jesse Pichel – Piper Jaffray

As a follow up, another solar equipment company demonstrated that a good chunk of its solar backlog is backed up with revocable LCs and cash deposits and I think the number was about 50% of their backlog and this is GT Solar I’m talking about. I’m wondering is there any kind of metric that you can share with us of how your solar backlog is protected there with LCs or deposits?

George S. Davis

We have, as we talked about for SunFab, we have a policy of being fully covered as we ship in and all of our eight factories where we’ve shipped equipment so far were fully secured for all of the equipment and the sign off value for the factories. Then it’s been a practice on the crystalline silicon side to take deposits and to secure credit where credit is necessary, customers commitments.

Operator

Our next question comes from the line of Atif Malik – Morgan Stanley.

Atif Malik – Morgan Stanley

If I look at your orders over the two quarter period, your orders on an absolute basis are actually in line with your peers so is it fair to assume that your quarter was a backend loaded for silicon?

George S. Davis

I think that’s fair because I think we would expect some of our competitors to have seen some of these orders in there next quarter they report.

Atif Malik – Morgan Stanley

George, can you comment on the linearity of the operating expense cut over the year, how should we think about modeling it?

George S. Davis

We’re going to try and obviously address the headcount reductions as expeditiously as possible and other spending reductions but we don’t have it scaled out obviously. But, I would think in the first half of the year we would try and get at least half way out the gate and we’ll see.

Operator

Your next question comes from Gary Hsueh – Oppenheimer & Co.

Gary Hsueh – Oppenheimer & Co.

Mike, just your kind of general comment about thin film continuing their projects as planned despite some financing delays. That’s kind of tough to believe given where oil is right now and given the difficulties with kind of bigger mainstream companies getting financing. Are you really referring just to the near term and kind of your basket of five to seven customers? Or, are you indeed really talking about the entire industry as a whole?

Michael R. Splinter

Let me clarify there, what I said was for those customers that we’ve already shipped equipment to, we see those projects staying on schedule. For those that are still working through their financing I said that I thought there would be some delay as they both have financing issues and maybe they have other project issues but I tend to focus right now on more of the financial situation.

But, remember also that the feed in tariffs in Europe have not subsided and they’ll be increasing tariffs in Japan. We have obviously a new incentive tax credit in the US. We have a new administration in the US. China will do something on renewable energy in their infrastructure package so how all these things play out over the next year exactly I’m not sure but I don’t expect that oil prices specifically are going to have a whole lot of affect on solar energy.

Very little electricity is generated by oil, most is generated by coal and natural gas. But, it doesn’t matter, in the end we’ve got to keep driving the cost down and get the cost competitive with all forms of electricity. That’s in the end the goal.

Gary Hsueh – Oppenheimer & Co.

One question here for George real quick, George I really don’t understand the hesitancy in reiterating your profitability guidance for solar next year and basically also the sort of secrecy surrounding what your breakeven is. You look right now and obviously you’re trying to guide us to not model a breakeven at roughly around $450 million but given obviously a 50/50 mix that you really kind of talked about in ’09 and kind of rolling off this benefit I guess off of slightly higher margins off that $100 million in deferred revenue recognition, I mean what is the kind of ballpark number we should be looking at, at more a 50/50 crystalline silicon mix? Is it $500, $600, $700, just give us some help there?

George S. Davis

Clearly, you saw a breakeven this quarter. First off, I think we’ve been exceedingly transparent in our discussion on this and so my view is forecasting the profitability for 2009 when there’s a key dependency on crystalline silicon when we’re not prepared to forecast crystalline silicon for the full year, is just premature. So, we’ll keep you posted, we know it’s an important issue.

Again, we’re very interested in reaching profitability as rapid as possible and we’re taking whatever steps necessary to get there. We’ll keep you posted, it’s really more of a hesitancy to try and forecast a full year of crystalline silicon.

Gary Hsueh – Oppenheimer & Co.

Just a quick follow up, I can understand the hesitancy and visibility, I mean Intel just basically cut their guidance one more time here. But, if I strip out that $100 million in deferred revenue out of EES in the October quarter, what would have been the profitability there?

George S. Davis

It would not have been profitable.

Operator

Our next question comes from Mehdi Hosseini – Freidman, Billings, Ramsey & Co.

Mehdi Hosseini – Freidman, Billings, Ramsey & Co.

This morning one of these cell manufacturers talking about shutting down 40% of their lines, I expect some of the other public silicon crystalline based manufacturers to also start shutting down lines. Is that already been factored in to your comment that crystalline and thin film bookings are going to even out by sometime next year.

Michael R. Splinter

I don’t know whether we’ve incorporated something that happened this morning but we certainly incorporated everything that we know from the customers that we have and what they’ve order from us at the current time.

George S. Davis

Right. It’s really more a reflection of current backlog and the fact that we didn’t have any customer cancellations in Q4. The mix of that can change as our forecast could change based on things that we learn over the next several months.

Mehdi Hosseini – Freidman, Billings, Ramsey & Co.

I guess the better question is, is booking for silicon solar business declining or would you expect it to go up?

George S. Davis

We expect bookings for silicon systems to go down in Q1, clearly.

Michael R. Splinter

He’s asking about crystalline [inaudible].

George S. Davis

On the bookings side I’m not going to guide to the individual areas at this point.

Mehdi Hosseini – Freidman, Billings, Ramsey & Co.

Then when I look at your guidance for the [inaudible] as you’re up to $0.04 and the kind of revenue range that you’re guiding to kind of gives you a sense of what the EPS breakeven is. I do understand you don’t want to provide any guidance on the breakeven point but for the purpose of modeling as we try to factor in the 12% workforce reduction, how should we think about the drop through or incremental change in op ex?

George S. Davis

Sure, no. The other question was about breakeven for EES segment. We are happy to talk about breakeven for Applied Materials overall. I mean, you can see from our guidance today that if you look at the low end of our EPS guidance range and you match that up with the low level of our revenue range, that gets you a breakeven level of around $1.3 billion a quarter.

We think by the time we fully implement the cost savings programs you can reduce that breakeven by another $150 million to $200 million.

Operator

Our next question comes from Mahesh Sanganeria – RBC Capital Markets.

Mahesh Sanganeria – RBC Capital Markets

I have a question on silicon systems, did your revenue guidance imply that silicon systems will be down close to 50% and that puts you in the $400 kind of revenue range. It’s not an exact science but your silicon system backlog for me is coming out somewhere between $1.8 billion and $1.9 billion.

George S. Davis

Let me just correct you on that, we were specific and said that we thought it could be down more than 25%. We did not use a 50% number. I’m not sure where you got that number.

Mahesh Sanganeria – RBC Capital Markets

But, still your backlog for silicon system will still be much higher than what your peers have reported. Most of the companies have reported that their backlogs are running that level of their revenues. Yours is still a nice multiple of your revenue run rate.

George S. Davis

Yes, I think number one you have to take a look at the fact that we had a very strong order quarter this quarter that they have not yet experienced or put in to their backlog and I think that’s probably what would account for virtually all of the difference of what you’re seeing.

Mahesh Sanganeria – RBC Capital Markets

So you think that you got some new orders which will probably book in the December quarter for other companies?

George S. Davis

No, our backlog reflects a strong Q4 ’08 and I would say that we have an extra month relative to many of our competitors and these were backend loaded orders in some cases.

Mahesh Sanganeria – RBC Capital Markets

Yes, but that’s what I’m saying is that would imply that your peers will have that booking so their backlog should increase in December quarter for them but nobody has guided their ’09.

George S. Davis

Yes.

Michael R. Splinter

We don’t want to speak for our competitors.

George S. Davis

You can talk to them.

John Nunziati

Operator, we’ll take one more question and then make our closing remarks.

Operator

Your final question comes from Raj Seth – Cowan & Company.

Raj Seth – Cowan & Company

George, forgive me if I missed this earlier but next quarter sequentially what does op ex do or can you talk about gross margin and we can figure out the other one obviously.

George S. Davis

I’m not going to guide to gross margin. Obviously we’re taking actions to keep our operating costs as low as possible so we would see them coming down and continuing to come down as we roll through the cost savings.

Raj Seth – Cowan & Company

One, if I might for Mike. Mike, given the magnitude of what’s going on do you see any of your customers, at least those you expect to survive, are they changing their pace of technology transitions in a significant way or are we still following [Moore’s] law here?

Michael R. Splinter

I think that especially in a down turn people are going to actually focus on moving to the next generation of technology faster to get products that will maybe attract more buyers. They’re going to work hard to get to that next generation of technology so I think we’re going to see [Moore’s] law continue. Maybe a slightly slower pace but nothing significant here at this current time. Everybody is going to use this time to move ahead and find new products to sell.

Raj Seth – Cowan & Company

Just a follow up to one of the earlier ones, somebody asked about capital intensity, you said last quarter in a normalized environment, clearly that’s not what we’re in, that you expected capital intensity to return to 20%ish. A couple of your peers have suggested a lower number. Any change to that 20% number that you gave last quarter?

Michael R. Splinter

Well, I think when we come out of this on the other side, if there are fewer customers the factor efficiency and the capital intensity will be down a few points. But, I think the industry will be in better shape because of it. So, I think we have to see what happens during this period before we solidify any prediction but in general that’s what I’m thinking.

John Nunziati

We’d like to thank you for joining us in the discussion of the financial results. We’d like to remind you that a replay of this call and the supporting slide package will be available on the website starting at 5pm today and will remain posted until November 26th. Thank you for your interest in Applied Materials.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!