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Applied Materials, Inc. (NASDAQ:AMAT)

F4Q09 Earnings Call

November 11, 2009 5:00 pm ET

Executives

Michael Sullivan – Vice President Investor Relations

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

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

Joseph J. Sweeney – Senior Vice President, General Counsel & Corporate Secretary

Analysts

Stephen Chin – UBS

James Covello – Goldman Sachs

[Chris Ransick] – JP Morgan

Atif Malik – Morgan Stanley

Kirsh Sankar – Banc of America Merrill Lynch

Steve O’Rourke – Deutsche Bank

[Peter Rice – Global Crown]

Patrick Ho – Stifel Nicolaus & Company, Inc.

Weston Twigg – Pacific Crest Securities

Gary Hsueh – Oppenheimer & Co.

Mehdi Hosseini – Freidman, Billings, Ramsey & Co.

Edwin Mok – Needham & Company

Mahesh Sanganeria – RBC Capital Markets

[Agadesh Ire – Argus Research]

Matthew Petkun – D. A. Davidson & Co.

Operator

Welcome to the Applied Materials Q4 and fiscal 2009 yearend conference call. During the presentation, all participants will be in listen only mode. Afterwards, you will be invited to participate in a question and answer session. As a reminder, this conference is being recorded today, November 11, 2009.

Please note that today’s call will contain forward-looking statements which are all statements other than those of historical fact including statements regarding Applied’s performance, cost structure, strategic position and initiative, products, operational improvements, growth opportunities, restructuring plans and Q1 and 2010 targets as well as industry outlooks. 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 11, 2009 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 or in our financial highlights slide which are on the investor page of our website at www.AppliedMaterials.com.

I would now like to turn the conference over to Michael Sullivan, Vice President of Investor Relations.

Michael Sullivan

Our earnings release was issued at 1:05 Pacific time over business wire. You can also find a copy of the release and the related slide presentation on our investor relations website on www.AppliedMaterials.com. Joining me today are Mike Splinter, our Chairman and CEO; George Davis, our Chief Financial Officer; and Joe Sweeney, our General Counsel and Corporate Secretary.

Today we’ll discuss the results for our fourth quarter and our 2009 fiscal year that ended on October 25th. We will also talk about our strategic actions and our business outlook for the current quarter and fiscal year. We have a lot of information to share with you today and we’ll do our best to deliver it quickly and make time for your questions. With that, I’ll hand the call over to Mike Splinter.

Michael R. Splinter

Applied Materials returned to profitability in Q4 achieving sales and earnings growth that exceeded our expectations. We saw progress across the company with sequential growth in orders, sales and operating profit in every segment. Notably our semiconductor business is in the early phase of a recovery with gross margins exceeding 50% in the quarter demonstrating the strength of the business model.

SSG is positioned to drive further profits as WFE expands in 2010. Our operations team responded well to the ramp in demand enabling the company to increase sales by 35% and generate operating cash flow of $241 million. Reviewing ’09 results, I’m pleased to say we made excellent progress on our strategic objectives for the year.

Last November at the onset of the global financial crisis we moved rapidly to lower our cost structure with a program that created $460 million in annualized savings. We aggressively managed working capital maintaining the financial strength to invest for growth. We grew share in our semiconductor equipment business let by gains in inspection, Epi and PVD. We grew our solar revenue by 40% year-over-year and took significant steps towards profitability.

We made substantial investments in our future with more than $900 million in R&D that resulted in new products across each of our markets. Applied was recognized as the number one equipment supplier across semiconductors, LCD displays a now solar PV. Each of our segments represents a substantial growth opportunity for Applied. Our business in multiple industries differentiates us from our competitors giving us unique opportunities for growth and scale.

I want to thank the entire Applied team for their extraordinary contributions during a very challenging yet productive year. They focused on satisfying on our customers’ needs and on meeting the ambitious goals we set. Over the past two years we’ve witnessed fundamental changes in the industries we serve including customer consolidation and moderating long term growth rates in WFE. We are focusing this year’s strategic plan on addressing the implementations of these changes to maximize our growth opportunities and improve our competitiveness and efficiency.

Specifically, we are embedding our worldwide sales force within the business units, bringing us closer to our customers and making us more efficient. We are streamlining and consolidating our manufacturing and supply chain operations under one leader to drive best known methods, scalability and cost improvements throughout our businesses. We’re increasing our manufacturing and supply chain presence in Asia to be closer to more of our customers, reduce cycle times and increase the use of a more efficient supply base.

We’re also consolidating our solar business under one executive and aligning our activities with the evolving global market. We’re investing in common businesses processes and improved transaction processing capabilities that will make us leaner and faster and we’re improving our portfolio allocation process while focusing our R&D investments on our opportunities to grow market share.

As recently announced, I’ve also taken actions to align my executive team with the opportunities and challenges ahead. I’ll now comment on each of our businesses. In SSG we expect to grow revenue by at least 40% year-over-year. We estimate WFE to reach $18 to $20 billion in calendar 2010 up from $12 to $13 billion in ’09. Our customers have reported higher factory utilization across the board. DRAM and NAN prices have strengthened encouraging more of our memory customers to invest in our next generation of technology and our foundry customer are investing in capacity additions as well as technology transitions.

We gained share in ’09 with strength in a number of areas. PVD and Epi, benefitted from application wins in advance transistors and interconnect. We believe we doubled our reticle inspection share in the year and we recently won a new position at a major NAN manufacturer for in fab applications. Our reticle inspection solution is now in production at four large customers with repeat business at three. Our Brightfield inspection has won positions in advance memory applications while expanding in to immersion lithography at most foundries and we held share in etch.

We expect another year of share gains in calendar 2010 driven by product strength in our leadership areas and growth opportunities in inspection and etch where the outlook for stronger memory spending is a significant positive for Applied. Looking at technology trends, we’re focused on the DRAM conversion to copper, NAN transition to 3x using double patterning, advance transistors in logic and foundry and emerging capabilities like wafer level packaging and 3D memory cells.

We’re also focused on extending our strong market positions in PVD, CVD and CMP to the 22 nanometer node. In display we’ve seen strong demand for TVs and LCD monitors over the past several quarters particularly in China. Leading customers have returned to profitability and factory utilization remains high. These trends are leading customers to add capacity and we expect equipment spending in the industry to be up more than 40% in calendar 2010 with the bulk of the purchases concentrated at Gen 8.5.

We are now seeing proposals by major customers to build advanced fabs in China. This strategic shift reflects the growing importance of China’s domestic market which saw an 80% year-over-year rise in LCD TV demand. In 2010 we expect to grow or PiVOT PVD position expanding to more customers and gaining an estimated 10 points of share. During the quarter we launched copper capability on the PiVOT system and strategic investment in Gen 10 is moving forward with multiple systems in production.

In the [inaudible], while the solar market weakened substantially during the first half of the fiscal year, our revenue grew more than 40% driven by thin film sign offs and strength in crystalline silicon cell manufacturing. During the fourth quarter the solar PV marketplace showed signs of improvement as module price declines slowed and financing opportunities gradually improved. Germany remains a bright spot particularly in the crystalline silicon rooftop market. China and Taiwan are growing markets for our crystalline silicon equipment with capacity growth rates significantly above those of other geographies.

In crystalline silicon our customers want to increase automation and improve conversion efficiencies. While the crystalline silicon equipment outlook for 2010 is still uncertain, there is some positive sides for capacity additions in cell equipment primarily at Chinese customers. The drive towards ever lower costs moves the industry to require thinner wafers and thin wafer handling which provides growth opportunities for our MaxEdge wire saw and Baccini metallization systems.

Our plan is to address these needs and grow our served market share opportunity in cell equipment from 50% of the cap ex spend to 80% over the next three years. Steps in this direction include our double printing capability on the Baccini platform and our acquisition of Advent Solar last week. Our crystalline silicon install base now exceeds 2,500 systems creating a significant opportunity for service and aftermarket upgrades.

Our progress in thin film this year culminated in the seventh customer signoff of a SunFab production line and ENN in China. This was our second tandem junction line. For existing and future SunFab customers we have driven economies of scale with leading suppliers to reduce the cost of materials by 22% and this improved process flow has received IEC certification. With steady gains in panel efficiency and factory productivity across the SunFab network we are on track to our 2010 goal of 10% efficiency and $1.00 per watt cost.

In the near term market conditions are challenging for many of our thin film customers as discounted crystalline silicon panels are impacting and demand for thin film technology. In calendar 2010 we expect worldwide solar PV installations to be up over 40% with solar representing one of Applied’s key growth opportunities over the next several years.

We recently opened a solar R&D center in Xi’an China which demonstrates our substantial commitment to thin film and crystalline silicon technology and is advantageously located in China, the solar market’s fastest growing geography. We’ve become number one in solar equipment and in less than three years we’ve built a billion equipment business that has the scale and global reach of no other competitor. Now, we are on track for EES to deliver breakeven or better operating results during this fiscal year.

In services our orders and revenue increased with 300 millimeter starts returning to prerecession levels. While 200 millimeter wafer starts are down roughly 25% from last year. We expect virtually all of our future service growth to come from 300 millimeter starts expansion. Our spares run rate is up significantly from the trough in Q2 though it is not yet approaching the previous peak. Operating margins are improving and we are focused on driving further efficiencies in services delivery as part of our 2010 strategic initiatives.

In semiconductor services, the number of tools under contract grew 7% year-over-year with notably high growth in Asia. A key to growth in AGS is expanding our services in spares position in Asia where over 80% of new wafer starts will be.

In summary, Applied’s goal is to lead the industry and gain share in our core semiconductor markets, drive growth in display and services and greatly expand our opportunities in energy solutions. We will also take advantage of our global footprint and scale to deliver outstanding profitability. After a challenging 2009 we expect sales growth of at least 30% in fiscal 2010 and significant benefits from structuring the company for future success.

I will now hand the call over to George for more details on our results and targets.

George S. Davis

Applied completed a challenging fiscal year with a solid fourth quarter including revenue and earnings well above our targets. We enter our new fiscal year with momentum in our highest margin businesses and a strong operating model and improved market share. First, let me summarize our full year performance in a very difficult 2009. We had orders of $4.1 billion which were down 55% from 2008 and net sales of $5 billion which were down 38%. We reported a GAAP net loss of $305 million or $0.23 per share. We were profitable for the year on a non-GAAP basis earning $37 million or $0.03 per share.

We took early action on cost reductions and surpassed our objective of $400 million of structural cost savings by 15%. In addition, we have $340 million in annualized savings from temporary cost measures related to employee salary and variable compensation. Approximately 70% of those temporary savings were in op ex with the remainder in cost of goods. We began these temporary cost measures in the latter half of 2008 and approximately two thirds of those savings were already in effect by the end of Q4 ’08.

Beginning in fiscal Q1 2010, we have eliminated shutdowns other than our normal holiday shutdowns and will resume accruing for variable compensation. This will result in an increase in Q1 op ex versus Q4 as the anticipated savings from our new actions will not fully offset these added costs until later in the program. We generated $333 million of operating cash flow in 2009 and ended the year with cash and investments of $3.3 billion.

Looking at our businesses in 2009, SSG and AGS revenue bottomed in our second fiscal quarter and both segments returned to operating profitability in the second half of the year. Revenue in our display business declined almost 50% from fiscal 2008 but its flexible business model limited operating losses to one quarter. Despite the severe business conditions, SSG, AGS and display each delivered positive operation margin overall in fiscal 2009.

In the EES we grew revenue by 41% year-over-year led by customer acceptance of six SunFab lines. We invested to extend our crystalline silicon and thin film solar technologies and to expand our portfolio of new products. In EES we expect to move from a loss position of $240 million in 2009 to breakeven or better on an operating basis in 2010.

Looking at our Q4 results, orders were 37% higher sequentially led by EES and display. Net sales increased 35% driven by foundry customers and SSG a leading edge capacity expansion in display. The added revenue came with strong margin flow through contributing to earnings of $138 million or $0.10 per share. Our lower effective tax rate for the quarter of 21% contributed approximately $0.01 per share compared to Q3.

Gross margin improved eight points to 37% which is close to the 39% level achieved in Q4 of last year despite revenue being 25% lower. Our eight point sequential margin expansion was primarily driven by revenue growth in our higher margin businesses. Turning to the balance sheet, cash and investments of $3.3 billion were up 4% from Q3. Cash from operations was $241 million or 16% of revenue. Our working capital results were strong with days sales outstanding of 62 days and a net inventory reduction of $121 million compared to Q3 levels despite a substantial increase in net sales.

Our ending backlog was $2.7 million down 7% from the previous quarter end. 41% of the backlog is now related to our EES business with display and SSG each at 20% and AGS at 19%. The low percentage of SSG backlog reflects our shorter cycle times and our ability to respond to our semiconductor customers short lead time on orders. In fact, our SSG turns business in Q4 was 61% of revenue in that segment. Backlog adjustments totaled $171 million and reflected the volatility of some of our customers’ investment plans. Backlog adjustments including $168 million in cancellations and $3 million of currency and other adjustments.

Next, I’ll summarize segment results for the quarter. Our silicon systems business performed very well. Orders increased 16% over Q3 at $629 million. Foundry customers were 37% of the order book and have led in that category for three consecutive quarters. SSG revenue increased 32% again, led by foundry along with strong demand from logic and memory customers. SSG operating profits were $158 million up substantially from Q3 and represented an impressive 24% of sales.

In AGS orders increased 13% to $335 million and revenue increased 14% relative to Q3 to $390 million. Operating profit was $64 million or 17% of sales reflecting an accelerating recovery in spares sales. Display orders increased 58% to $151 million as robust end market demand fueled Gen 8.5 capacity investments. Revenue grew to $200 million as we signed up multiple leading edge systems. Display operating margins benefited from the revenue improvement reaching $43 million or 21% of revenue.

In EES, orders were $357 million up significantly from Q3 as a SunFab project in China entered our 12 month booking window. EES revenue of $280 million was up 25% driven by the sign off of a tandem junction SunFab line which offset a slight decline in crystalline silicon sales. EES posted an operating loss of $30 million, an improvement of more than 40% from Q3. Over half of the EES operating loss was attributable to M&A charges and non-solar R&D. EES’ quarterly results will continue to be volatile based on the timing of factory sign offs.

Next, I’ll comment on our financial expectations for the strategic actions Mike announced earlier. Total savings from these actions are expected to be $450 million over the next 18 months of which we expect approximately $250 million to be from op ex. These actions will also include work force reductions of approximately 10% to 12% or 1,300 to 1,500 employees over the same period. The pre-tax cost from employee severance is expected to be between $100 million and $125 million and we are forecasting a $0.06 to $0.07 a share charge in the first quarter.

Next, I’ll talk about some of the key assumptions behind our expectations for next sales to be up greater than 30% in fiscal 2010. Our forecast assumes that wafer fab equipment cap ex will be $18 to $20 billion for calendar year 2010. Display capital spending for equipment will be up at least 40% for the year. EES net sales are expected to be plus or minus 10% from 2009 levels. Solar growth is expected to be impacted by absorption of significant capacity additions in crystalline silicon over the past two years.

Upside to this view would be driven by better than expected capacity additions in crystalline silicon and from new product penetrations. Finally, we expect that services will continue to recover although at a somewhat lower rate than the underlying equipment businesses. Now, before I discuss our Q1 guidance I want to review some housekeeping items that will take effect in our Q1. First, marketing and sales expenses that were previously reported in corporate will now be reported in the business segments. This is consistent with embedding our sales teams in our businesses.

Second, we’re moving the cost of certain segment related bonus accruals out of corporate and in to the segments for better visibility. Historically, we accrued target variable compensation in the segments and then took any adjustments in corporate. The third and final change is that we will no longer include stock option expenses in our reconciliation for non-GAAP results. Our GAAP results already reflect these costs so there is no net change. None of these changes will have a financial impact on the company’s financial results.

Next, I’ll review our outlook for fiscal Q1. We see further recovery in our first quarter particularly in semiconductor capital equipment. We expect SSG revenue to be up by more than 20% due to strong investment in wafer fab equipment by foundry and memory customers. AGS is expected to grow modestly quarter-over-quarter. Display is still in a ramp mode although we expect Q1 net sales to be down relative to a very strong Q4. This is a timing issue as we had a major shipment pull in to Q4 ’09. We expect EES revenue to be up by more than 20% due to both factory and bonus sign off opportunities.

For Q1 we expect net sales overall to be up 10% to 25%. We expect earnings to improve to somewhere in the range of $0.10 and $0.14 per share before taking in to account the impact of restructuring charges. This improvement reflects the benefit of higher revenue and SSG, AGS and EES partially offset by the restoration of base salaries, the phasing in of variable compensation, a 14th week of cost in the quarter and a decline in display revenue relative to Q4. The tax rate is expected to be approximately 29% with a $0.01 negative impact relative to last quarter. The impact of the restructuring charge will be in the range of $0.06 to $0.07 per share which brings our GAAP EPS target for Q1 to between $0.04 and $0.08 per share.

Now Mike, let’s open the call for questions.

Michael Sullivan

To help us reach as many of you as we can, please ask just one question and no more than brief follow up. Operator, let’s begin.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Stephen Chin – UBS.

Stephen Chin – UBS

A question on the linearity for the fiscal 2010 sales, it looks like fiscal 2010 sales are pretty heavily front end loaded here with conservatism built in to the second half of the year. Is that the right way to think of it? And, just as a follow on, can you share any color on normalized operating margin targets after this restructuring?

Michael R. Splinter

I’ll try to answer your question on linearity Steven and then let George answer the question on targets. I think it’s very hard for us to tell what’s going to happen in the second half of the year at this point. I think we’re pleased to see what we perceive as strength in the first half of the year and have it be pretty broad based and particularly with upticks from foundries and DRAM makers. Now, how strong it will be in the second half, I really think that depends on how the market goes in the first half and how strong we think the economy is as we head in to selling season next year.

George S. Davis

Steven, on the margins I would say that we still see 2010 as a period of recovery. We obviously are very pleased with the structural changes that we have made in our cost structure over the past two years we think that’s going to serve our business model well and when we get back in to a normalized environment we certainly expect to be back at the 20% to 25% plus margins for the company overall.

Operator

Your next question comes from James Covello – Goldman Sachs.

James Covello – Goldman Sachs

I guess if I could focus first on silicon systems group and of the top 10 customers in SSG, with the guidance that you gave for the first quarter, how would you characterize the top10 customers? Are most of them active now, are half of them active or only a few of them active again, kind of thinking about the top 10?

Michael R. Splinter

Most of them are active now to some degree. I would say the top five are certainly very active and account for a big part, certainly substantially more than 50% of the revenue in SSG.

James Covello – Goldman Sachs

Do you think they can continue to grow or would you expect them to stay at that higher level and further growth be dependent upon the rest of the top 10 and beyond the top 10 coming in?

Michael R. Splinter

I think really the issue is when do the memory guys get in the capacity expansion? Today, it’s primarily technology transition and that’s about all we’re seeing out of the memory guys. Just to kind of give you an idea, we estimate something close to a million memory wafers are going to move from one node to the next. That combines DRAM and NAN. While we’ll have maybe 10% of that number in capacity expansions so we’ve got to see bit growth higher than it is in both DRAM and NAN to really drive some substantial additional capacity expansion.

Operator

Your next question comes from Satya Kumar – Credit Suisse.

Satya Kumar – Credit Suisse

George, how should we think about the pace of the cost reduction in fiscal 2010? And, why did you not guide EPS also for fiscal 2010?

George S. Davis

I think we’re very confident that earnings will be up strongly in line with the growth in revenues. So, we certainly feel good about the earnings outlook for 2010. We think there’s a lot of mix issues that still have to be sorted out over time. We’ll certainly update our views and help people sort that through but in general I think people can see that over the past year and really two years, we’ve taken substantial structural costs out so as you model the growth rates and we’re saying significant growth rates in display and SSG over that time period there will be a lot of earnings leverage to the upside in 2010.

Satya Kumar – Credit Suisse

On EES, the last time you provide the guidance for breakeven or better in solar you had not yet announced the restructuring. Now that you have and also the run rate in EES is clearly higher than your billion dollar guidance for fiscal 2010, why not a better profitability target in the EES?

George S. Davis

We think that this is the right forecast for EES right now. As we said, there’s still some uncertainty in their end markets because of what we’re seeing in the crystalline silicon area so we think breakeven or better operating is still the right forecast.

Operator

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

C. J. Muse – Barclays Capital

I guess the first question is just to clarify in terms of EES breakeven or better in fiscal ’10, George you’re talking about operating levels so I guess if we want to think about it on a GAAP basis excluding stock comp and the amortization on the M&A side, what kind of run rate could we see?

George S. Davis

When we say operating basis remember going forward that we’re not going to include stock ops in expenses so you don’t have to adjust for that. Really, we’re talking about approximately $50 million of M&A related charges that we expect to see in 2010 that we would take out.

C. J. Muse – Barclays Capital

Then just if I could clarify also, on the EPS guidance of $0.10 to $0.14, does that include stock-based comp?

George S. Davis

Yes, it includes everything accept for the restructuring charges.

C. J. Muse – Barclays Capital

Then I guess the meaty question on the restructuring side, how should we think about I guess the base level? You’ve talked about op ex lower over 18 months by about $62 million plus, COGS by $50 million. I guess what’s the kind of baseline rate we should think of as a starting point and then see the reductions thereafter?

George S. Davis

I think ongoing op ex coming out of FY ’09 was about $1.6 billion and you had roughly $50 or $60 million of what we would call temporary op ex in there so if you adjust for that that is a reasonable starting point. Again, we took out in the plan last year, we took about $310 million of what I would call structural op ex costs and so roughly $80 million a quarter came out of our run rate.

Operator

Your next question comes from [Chris Ransick] – JP Morgan.

[Chris Ransick] – JP Morgan

I wanted to kind of get an idea of how long it’s going to take for you to start capitalizing on the purchase of Advent Solar?

Michael R. Splinter

I think that will really be 2011 before we see real meaningful sales from that technology. We need to finish up the development of the capability and then get it in to the marketplace. So, I think before we see meaningful output is 2011.

[Chris Ransick] – JP Morgan

Then kind of again on solar, I think Mike you indicated you thought volume growth our install capacity for solar would be up more than 40% in the next year. I wanted to understand your view of the German subsidy reduction risk when you put that number out there?

Michael R. Splinter

I think this risk has been overblown. I believe that when you look at what will happen in Germany next year, I think it will be flat to up and then increases in Italy, China and the US will drive the rest of the upside.

Operator

Your next question comes from Atif Malik – Morgan Stanley.

Atif Malik – Morgan Stanley

You guys mentioned that the foundries have been a big contributor to the Silicon strength in the last three quarters and 37% foundry orders is probably the highest we have seen for Applied in a long time. [Inaudible] spending at $1 billion, $1.2 billion [inaudible] so my question is if foundries trend starts to come down in the first half and memory capacity orders are not back, could we see a scenario where we could see overall orders start to come down in first half?

Michael R. Splinter

Our view of what’s going to happen with the foundry spending and kind of maybe a little bit more color on the overall capital spending, we think foundries for the year, we made a projection of $18 to $20, we think foundries are going to be between 25% and 35% of that number. Exactly how it’s going to be loaded I really can’t quite say yet. But, when we look at the number of customers that are going to reach the billion dollar range, in 2009 I think there were three customers that reached $1 billion in cap ex, we think there will be at least eight in 2010 and we do think, as I said, if there’s more bit growth there can be substantial investment in capacity. But, we have to see that bit growth first.

Operator

Your next question comes from Timothy Arcuri – Citigroup.

Timothy Arcuri – Citigroup

A couple of things, first of all George does the $450 million in savings, does that cannibalize any of your current revenue or is that just straight savings?

George S. Davis

Now, we’re taking cost savings that we think will not interfere with our ability to drive revenue growth. These are really structural changes that will take place over time as we go through many of the elements which Mike talked about which includes moving sales in to the businesses, consolidating our field resources as our customer bases change, global manufacturing and supply chain consolidation and movement, more manufacturing and supply chain activity in Asia which has a lot of cycle time and cost benefits. So, all the things that we talked about really we think are a combination of better competitive positioning and also more efficient not from reducing or selling off a product that is generating revenue.

Timothy Arcuri – Citigroup

As a follow up, the last two quarters you’ve worked off backlog a bit, you’ve booked a bit less than you’ve revenued and I’m wondering if I take sort of a midpoint of the revenue guidance, roughly $1.8 billion do you think the same thing is going to fiscal Q1 i.e. you’re going to book less than you will revenue or will you book more?

George S. Davis

Not guiding, we do expect to [inaudible] to be up but we’re not going to guide orders. But, that is one of the best ways of backing in to it that I’ve seen so a good question.

Michael R. Splinter

Tim on the overall restructuring I’d just say that we really tried to go through every aspect of the way we do business and ask ourselves how we’re doing it, how we could do it more efficiently, are we doing it in the right place, if we’re not how do we get to the right place for doing that. That’s really what the number reflects and what both the headcount and the savings number reflect.

Operator

Your next question comes from Kirsh Sankar – Banc of America Merrill Lynch.

Kirsh Sankar – Banc of America Merrill Lynch

Two questions, actually a question and a follow up. First one, lead time in the SSG business how are they right now in 4Q and 1Q and any visibility beyond the Jan quarter? My follow up question is once the cost reductions are done, how do we think of the incremental margin for the company and if possible segment by segment?

Michael R. Splinter

I think lead times have shrunk quite a bit. We’re putting a bit of stress on our supply chain right now. Our suppliers are responding, they’re working very closely with us. But, as George said 61% of our revenue in Q4 was orders within the quarter so you kind of get an idea we’re moving products to customers very, very quickly. George, do you want to comment on incremental flow through of profits?

George S. Davis

I think you saw very high flow through this quarter. It gives you an idea of how we’re already impacting our performance from the actions that we’ve taken to date. We certainly see an additional $450 will have a positive impact. These actions are broad based, they cut across the company so they will positively impact every units margins and at the annual analyst meeting we will go in to more details about how you can see that overtime.

Operator

Your next question comes from Steve O’Rourke – Deutsche Bank.

Steve O’Rourke – Deutsche Bank

Two questions, could you say if the headcount reduction is net of new headcount that you’ll be adding in Asia and the second question, you mentioned that the SunFab line, the bookings, came within the 12 month time horizon. Are those rebookings and do you feel confident that they may push out or not push out further?

George S. Davis

On the headcount yes, those are net numbers. Then in terms of the 12 month booking window, the way we book SunFab lines is we may sign a contract but because the lead times are longer than our 12 month booking window we actually wait until we get to within 12 months of what we believe will be factory sign up which is the revenue event and that’s what’s happened now with this so there’s no rebooking at all. We just are now within 12 months of what we believe will be the revenue event.

Operator

Your next question comes from [Peter Rice – Global Crown].

[Peter Rice – Global Crown]

Mike, I was hoping you could comment, across the board it seems some of the equipment companies are taking a more defensive posture despite kind of going in to a cyclical recovery, cutting heads, cutting costs, what’s different in this upturn that’s allowing the customers to support this? As the follow up, I was hoping you could comment in the second half of the year the recovery has largely been driven by technology spending. I was hoping you could share kind of your outlook for when the next phase of new fabs will be built out and what customer segments will be driving this initial recovery?

Michael R. Splinter

Peter I think the view of the future is different than other recoveries. This particular recovery, and I would say we certainly haven’t recovered yet, is one that the environment is quite different. We still have a very fragile global economy, we have a customer base that is consolidated substantially and I think will continue to consolidate some as we go through time. We have to ensure that our cost structure and our ability to invest for the future is really intact and that’s a big part of what we are doing and we also have to align the financials and pro form for any of our groups to be consistent with the way we see the market.

So, I think that’s pretty much – it sort of gets down to really a focus if we look at AGS and SSG, in AGS 25% of the 200 millimeter wafers are gone, they’re not coming back. So, we have to ensure that AGS is set up to be profitable and effective at growing share but also be realistic about the market they’re serving. The same as in SSG. I think when do new fabs get moving again, I really think that depends. First of all, I don’t know that we’ll see new buildings before late in 2010 but there’s plenty of space to fill up for the foreseeable future in both memory and in foundry. I think 2010 is going to be a year of filling up existing fabs.

But also, I think we’re looking for those inflection points primarily in memory that are going to key them to say, “Okay, we have confidence to build capacity.” What we think those are is DRAM bit growth greater than 50% and we’re hoping and want to watch this very carefully that investments from industry and emergence of Windows 7 and growth in cell phones really does drive that bit growth in DRAMs. In NAN flash we have to see bit growth above 100% and maybe even substantially above 100%. Again, that will be SmartPhones and MP3 players and the like that drive the flash bit capacity. We’ll see SSDs also but that’s not going to be a big mover this year. Maybe in 2011 it will be the next phase of this build out.

Operator

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

Patrick Ho – Stifel Nicolaus & Company, Inc.

I know you didn’t give any quantitative guidance to orders but can you discuss which customer segment will drive orders or at least on the semi side of things in the January quarter? Is it going to be memory that takes the lead or will you still see foundries comprising your largest percentage?

George S. Davis

We think foundries will continue to be strong but it’s really we think DRAM is going to be the big driver in Q1.

Patrick Ho – Stifel Nicolaus & Company, Inc.

The second question is in terms of the cash generation now that you’re starting to put together as you’re making money again, what do you plan to do with it? Are you going to plan to sit on the sidelines or are you going to reinitiate stock buyback like you did in the last up cycle?

George S. Davis

We still believe that share repurchases is the best way of returning excess cash flow so we will begin to share repurchase again as soon as we’re comfortable that things have stabilized in the economy, we get more than just one or two strong quarters of cash flow. I think our view of how much cash we would hold is probably a little bit higher than we had going in to the year 2009 although we feel we’re in a very strong position right now. We want to see a little more continuity in the economic recovery but we’re still a believer in share repurchase.

Operator

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

Weston Twigg – Pacific Crest Securities

I just wanted to dig in to the EES group a little bit. You talked about expanding your tam, you mentioned it as one of the key growth opportunities over the next several years yet you guided revenue flat for 2010 with 2009 plus or minus 10% so I’m just wondering when do you expect the growth to come and what would be the key catalyst to look for?

Michael R. Splinter

I think we’re quite excited about this space in particular but during those comments I was referring to crystalline silicon and we’re coming out with a number of new products there that should expand our tam. What we’re concerned about right now is wafering and how fast wafering expansion is going to occur and that’s really what we look for is as wafering orders start to come in we know that the cell orders aren’t far behind because those wafers have to go to a manufacturing line someplace. That’s our caution side, if we see that grow I think we’re going to have a very good year in crystalline silicon.

Weston Twigg – Pacific Crest Securities

With a $50 million in M&A charges is that for acquisitions you’ve already made or should we expect more perhaps on the crystalline silicon side in 2010?

George S. Davis

That’s for acquisitions that we’ve already made.

Operator

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

Gary Hsueh – Oppenheimer & Co.

Within the context of the EES revenue guidance for next fiscal year plus or minus 10%, I’m just wondering what your assumptions are for project sign offs, particularly what is the total [inaudible] interest of project sign offs in fiscal ’09 and on average what’s the megawatt size on those sign offs and what’s embedded in your expectations in terms of the flat plus or minus 10% guidance for EES as a whole next year in terms of project sign offs, the number and average megawatt size? I’m got a follow up as well.

George S. Davis

We certainly have at least three to four more factories to be signed off in that forecast. We also expect a certain number of bonuses to potentially be paid during that time period. I’m not going to go in to the details on the megawatts but we have again, I would say certainly the largest factory will be coming in the latter part of the year that we have.

Gary Hsueh – Oppenheimer & Co.

My follow up question is just about some of the reorganization that’s been happening. I jumped on the call late but I wanted to understand whether or not there’s any structural reorganization specific to etch and inspection that really might help you kind of reenergize the effort in terms of regrowing the market share specifically in etch and I guess to a lesser extent in inspection since you’ve made some headway there already?

Michael R. Splinter

We’re not announcing any organizational shifts today in those groups. We just, a couple of months ago, Randhir Thakur took over as a General Manager of SSG and he’s working very closely with customers and making sure they understand our technology roadmap and have renewed confidence in our direction.

Operator

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

Mehdi Hosseini – Freidman, Billings, Ramsey & Co.

The first question has to do with the EES, have you done any study to find out the kind of estimated megawatt of installations that your SunFab customers could be manufacturing for especially over the next 12 months? Then George, regarding the January quarter, given such a wide delta in the guidance range, help me understand what would it take to hit the low end versus the high end of revenue guidance range?

Michael R. Splinter

On the megawatt installations since this is output from customer factories it’s very hard for me to comment but obviously the top side is their rated capacity and other than that I can’t say a whole lot. There’s been announcements about the rated capacity of each of those factories.

George S. Davis

I think the range reflects the range that we gave on revenue and I think that if you think about the low end so if for some reason revenue grew at the low end, remember we have about $0.02 to $0.03 of cost in op ex in Q1 that we didn’t have in Q4 and the tax rate impact is about $0.01 as well. So, the low end of that range is probably not as a low performance straight up comparison wise as you might consider.

Operator

Your next question comes from Edwin Mok – Needham & Company.

Edwin Mok – Needham & Company

The first question is on the backlog, you said $116 million of cancellation, can you tell us where that cancellation comes from in terms of which group and how do we look at that going forward? Is that something that we should expect ongoing? Then just a follow up question regarding your strategy initiative, I was just wondering the guidance of $450 million of savings does that include the potential savings you can get from transitioning your manufacturing to Singapore and if not, how much will that incrementally be on top of that $450?

George S. Davis

I’ll take your second question first, the $450 does include benefits associated with that activity over the next 18 months. Then in terms of the backlog adjustments, what we’re seeing is I would say about $90 million of the cancellations were in our SSG group and really just reflect the fact that customers’ plans have been changing fairly substantially and as we talked about their order patterns are shortening up substantially. But, we’re now down to about 20% of our backlog is SSG so not a lot of volatility going forward. The rest of it is between AGS and EES, with EES mostly centered around crystalline silicon customers around the world.

Operator

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

Mahesh Sanganeria – RBC Capital Markets

Just another question on op ex, if you look at the temporary savings you had $350 million, 70% of the op came from op ex so that’s pretty much offset by the $250 million savings you’re going to get from restructuring. Just looking at the profile it looks like temporary savings come back faster and the restructuring will come slower so op ex will increase and then towards the end of the year the impact we come back to starting point. Is that the right way to think it?

George S. Davis

I think that’s a fair way to look at it and we’ll give you an update every quarter on our progress which should help you tune your model over time.

Mahesh Sanganeria – RBC Capital Markets

Just one quick one, so your SG&A went down significantly from $168 to $155 and you’re saying that was a onetime thing and it goes back to $168 or higher level?

George S. Davis

Again, part of what you’ll see with part of the restructuring is SG&A will improve over time as part of the actions that we’re taking. I think the way to think about it is as revenues increases you’ll see more and more flow through because the temporary costs will come back at a slower rate after we see further recovery.

Operator

Your next question comes from [Agadesh Ire – Argus Research].

[Agadesh Ire – Argus Research]

Two questions, one is how should we think about this Advent Solar acquisition in terms of your incremental revenue opportunities going in to say 2011 because it looks like it’s a very disruptive technology so how should we think about that? The second question as a follow up is we’ve been hearing that logic and foundry customers are pursuing a double patterning stream of litho etch litho [inaudible]. How does the dynamics change because you guys have been pushing the self aligned double patterning? Can you just help us understand the dynamics please?

Michael R. Splinter

Well, on Advent first of all it’s way too early to make a forecast. We obviously very much like the technology, we do think it’s a disruptive technology but we have to prove its manufacturability and cost effectiveness and that’s what we’re going to be doing over the coming quarters. As we get closer to introducing that as a capability to the marketplace we’ll update you on how we think it’s going to change the fabrication of solar panels.

On the litho etch litho [inaudible] self aligned double patterning I don’t think there’s a whole lot of difference for us. We still win in the thing film depositions and there’s going to be a mix of these things and it’s hard to exactly tell how it’s all going to shake out litho etch litho [inaudible] obviously better for logic and self aligned may be better for flash memory. But, I think we’re going to see how the adoption rate goes over the next year.

Operator

Your next question comes from Matthew Petkun – D. A. Davidson & Co.

Matthew Petkun – D. A. Davidson & Co.

A couple of questions, first on the consolidation of the supply chain and manufacturing, I just want to be clear, you expect to net increase or decrease your use of outside partners or could we actually see an increase in your own vertical integration over the next 12 months?

Michael R. Splinter

I don’t think you’ll be seeing an increase in our vertical integration. I think what we want to do is looking across our supply chain we want to ensure that we’re working with the suppliers that both have the right technology and can stay with us in this very volatile business. We’re going to be doing an awful lot of that in Asia as Singapore ramps up and for semiconductors and Taiwan ramps up for our large footprint equipment. But certainly we’re looking to make, in this kind of a business, we’re looking to make ourselves more variable and have more variable costs not less.

Matthew Petkun – D. A. Davidson & Co.

Then the display business has been strong, any update on your opportunity in the LED market as it relates to back lighting for displays?

Michael R. Splinter

Well, we’re in the latter stages of developing a product for that market. I had a lot of discussions with customers on what they want and what they need. We’re working very closely with a number of customers. We have some eval tools out there today. We haven’t introduced the product yet but we think we’ll participate in this market in a meaningful way.

Michael Sullivan

What I would like to do is thank everyone for joining us this afternoon on the call. Because today is a federal holiday our Form 8K covering today’s release and restructuring announcements is scheduled for tomorrow November the 12th. A replay of this call will be available on our website beginning at 5 pm Pacific time today and will remain posted until November 25th. Thank you for your continued interest in Applied Materials.

Operator

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

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Source: Applied Materials, Inc. F4Q09 (Qtr End 10/25/09) Earnings Call Transcript
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