Applied Materials (AMAT)

Q2 2011 Earnings Call

May 24, 2011 4:30 pm ET

Executives

Michael Sullivan - Vice President of Investor Relations

George Davis - Chief Financial Officer and Executive Vice President

Michael Splinter - Chairman, Chief Executive Officer and President

Analysts

James Covello - Goldman Sachs Group Inc.

Atif Malik - Morgan Stanley

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Stephen Chin - UBS Investment Bank

Thomas Diffely - D.A. Davidson & Co.

Auguste Richard - Piper Jaffray Companies

Christopher Muse - Barclays Capital

Patrick Ho - Stifel, Nicolaus & Co., Inc.

Krish Sankar - BofA Merrill Lynch

Edwin Mok - Needham & Company, LLC

Timothy Arcuri - Citigroup Inc

Satya Kumar - Crédit Suisse AG

Mahesh Sanganeria - RBC Capital Markets, LLC

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Presentation

Operator

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Welcome to the Applied Materials Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 24, 2011.

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, planned acquisition, industry outlooks, customer spending, market position, and Q3 and fiscal year 2011 business outlooks. All forward-looking statements are subject to known and unknown risk 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 May 24, 2011, 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 the 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. Please go ahead, sir.

Michael Sullivan

Thank you, Carrie, and good afternoon. 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 second quarter, which ended on May 1. Our earnings release was issued at 1:05 Pacific Time, and you could find a copy on our website, appliedmaterials.com. Also on the website is our quarterly financial highlights presentation, which provides additional details. Mike Splinter will lead off today's call with comments on the business environment along with our results and strategies. Next, George will discuss our financial performance in Q2 and our expectations for Q3 and the rest of the year. We'll then open the call for your questions.

Before we begin, I have a quick calendar announcement. Applied will hold an investor and media briefing at the SEMICON West trade show in San Francisco on Tuesday morning, July 12, Pacific Time. We hope to see many of you at the event, and we'll have a live webcast and replay for anyone who won't be able to join us in person. We'll be sure to provide you with further details about the event over the next few weeks.

And with that, I would like to hand the call over to Mike Splinter.

Michael Splinter

Thanks, Mike, and good afternoon to everyone on the call today. I'm pleased to report that for the first half of our fiscal year, Applied delivered record revenue and earnings. Our second fiscal quarter was one of the strongest financial performances in our history.

We posted revenue of $2.9 billion and operating margin of 24%. Our earnings were at the high end of our target range, and we generated $704 million in operating cash flow. Our Solar business had an exceptionally strong quarter. With net sales of $637 million, EES [Energy and Environmental Solutions] set new records for revenue and profitability. Overall, I'm very pleased with our execution, results and progress towards our strategic goals.

Shortly after the close of the quarter, we announced our intention to acquire Varian Semiconductor for a net price of $4.3 billion. We believe this represents our best and largest acquisition opportunity in the semiconductor equipment space. Varian adds a critical component, enabling us to provide customers with a full product portfolio for transistor fabrication and material modification.

Keeping Moore's law in track has become a multifaceted challenge requiring new materials, new chip architectures and new approaches to transistor formation. By combining the strengths of Applied and Varian, our teams will work hand-in-hand with customers to accelerate the industry's technology road map. We are excited about the opportunities this will deliver for our customers, shareholders and employees.

Let me spend a few moments on the state of the economy and outlook for our markets. In recent months, we have seen a combination of events that are affecting the short-term economic outlook. Rising inflation in emerging markets and reduced consumer confidence have created an environment that necessitates caution. Unrest in the Middle East has resulted in uncertainty about energy prices and fuel cost. In addition, the economic impact of the tragic events in Japan is still not fully understood.

These cumulative headwinds have recently led some of our Semiconductor and Display customers to push out near-term orders. Although we are mindful of these economic factors, we believe that the fundamental drivers within the electronics sector remains strong. Our customers have a firm foundation for a multiyear investment cycle based on the growing role of emerging market consumers, a global appetite for high-performance mobile products and the infrastructure build-out to support these trends.

Let me now provide an update for each of our segments. In Semiconductors, PC unit shipments in the first quarter were weaker than seasonal expectations, down 10% sequentially. Although we believe DRAM prices bottomed out in the fourth calendar quarter, prices remain soft. DRAM capital investment remains low and limited to technology conversions.

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