應用材料 (AMAT) 2008 Q1 法說會逐字稿

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  • Operator

  • Good afternoon, and thank you for standing by.

  • Welcome to the Applied Materials fiscal 2008 first quarter earnings conference call.

  • During the presentation, all participants will be in a 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, February 12, 2008.

  • I would now like to turn the conference over to Mr.

  • Randy Bane, Vice President of investor relations, Applied Materials.

  • Please go ahead, sir.

  • - VP - Investor Relations

  • Thank you, Marvin.

  • Good afternoon, and welcome to the Applied Materials fiscal 2008 first quarter earnings call.

  • 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 January 27, 2008.

  • The financial results were released this afternoon at 1:05 p.m.

  • Pacific time.

  • A copy of the news release is available on business wire and on our website, www.appliedmaterials.com.

  • Before we begin, let me remind you that a slide presentation supporting today's discussion is available on the investor relations page of our website.

  • Today's earnings call contains forward-looking statements, including: Those related to Applied's performance; display and solar ramps; restructuring costs and savings; cash generation and deployment; growth opportunities; products; strategic position and financial targets; customers’capital spending; and the outlook for the semiconductor, display and solar industries.

  • 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 February 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 to GAAP measures are contained in our earnings press release issued today and in our earnings call slides, both of which are available on the investor page of our website.

  • George Davis will lead the call, with a discussion of our financial performance for our first quarter.

  • Mike will then follow with comments about Company progress to date and our outlook on the industry environment.

  • George will close our commentary with our targets for the second fiscal quarter of 2008.

  • After these remarks, we will open the call for questions.

  • With that, I would like to turn the call over to George.

  • George?

  • - CFO

  • Thank you, Randy.

  • Good afternoon, everyone, and thank you for joining us.

  • Q1 was a dynamic quarter for the Company.

  • We met or exceeded our targets in all respects, while experiencing very different end-market conditions and our business segments.

  • We took steps to address our operating performance and cost structure in our semiconductor equipment and related services business, while at the same time investing to meet the growing ramp in our solar and display units.

  • We also increased our share repurchase activity to return value to stockholders, reflecting our optimism in the long-term potential of Applied.

  • Order momentum was particularly strong in Q1.

  • A turnaround in display resulted in new orders rising by 13% over Q4, significantly exceeding our target of down 5% to 15%.

  • High consumer demand is driving capacity additions across all major LCD customers.

  • Our order book also reflected the first orders related to our SunFab thin film solar lines.

  • These orders increased our order performance by approximately seven points.

  • As expected, we experienced lower demand for semiconductor equipment, driven primarily by DRAM customers.

  • Backlog for Q1 increased about $400 million to $4.1 billion.

  • Backlog adjustments were minimal and totaled $32 million.

  • We completed the acquisition of Baccini after the close of Q1, so those results and any adjustments related to the acquisition are not yet reflected in our numbers.

  • Revenue for Q1 decreased 12% to $2.1 billion, slightly better than our target of down 13% to 18%.

  • This decrease from Q4 reflected lower net sales to DRAM and LCD manufacturers, partially offset by higher sales in our energy and environmental solutions segment.

  • Gross margin for Q1 decreased modestly versus last quarter to 44.8% from 45.5%, primarily due to the effects of lower revenues, partially offset by lower materials costs and our cost reduction efforts.

  • Q1 operating expenses were $562 million and included restructuring charges of $38 million for severance costs related to Applied's cost reduction plan announced on January 15 and $11 million for inplant facility retirements.

  • Our estimate for severance cost has increased since the announcement, primarily due to costs associated with expected international reductions.

  • Operating income decreased to $373 million, or 18% of revenue.

  • Non-GAAP operating income was $493 million, or 24% of revenue.

  • Net income was $262 million, or $0.19 per share, at the high end of our target range of $0.16 to $0.20 per share.

  • Excluding the impact of the cost reduction plan related charges, EPS would have improved by $0.02 and exceeded our guidance for the quarter.

  • Non-GAAP net income of $345 million, or $0.25 per share reflected a 26% decrease from Q4.

  • Non-GAAP adjustments are detailed in the press release.

  • Now I would like to discuss our segment results.

  • As noted in our press release and at our recent analyst meeting in New York, we have renamed two of our segments.

  • Adjacent Technologies has been renamed Energy and Environmental Solutions, or EES, reflecting that organization's clear focus on energy.

  • Fab Solutions has been changed to Applied Global Services, or AGS, to reflect our decision to manage all service-related activities in that unit.

  • This will result in service revenue for display and solar being included in AGS going forward.

  • We will provide segment level reconciliation on our website to facilitate your segment analysis.

  • There was no material solar service in fiscal year '07, so the adjustments will only effect the Display segment.

  • For Q1 '08, Display service revenue was $24 million compared to $35 million in Q1 '07.

  • Let's now look at the Q1 results in the segments.

  • Silicon orders of $1.1 billion were down 20% over Q4, as demand for equipment from DRAM customers to client further, while foundry and logic customer demand remained low.

  • Our order composition was: DRAM at 34%; flash memory, 26%; foundries, 14%; logic and other, 26%.

  • Orders for 70-nanometer and below technology represented 85% of silicon orders.

  • Q1 silicon net sales were down 18% compared to Q4, in line with expectations, again, primarily due to decreased investment by DRAM and logic customers.

  • In the face of falling revenue, operating income performance in Silicon Systems was strong, at $445 million, or 36% of sales.

  • Ongoing effective cost controls, as well as disciplined portfolio management and material cost reductions all contributed to improving performance.

  • In Applied Global Services, Q1 orders were down 6% from Q4, primarily due to lower orders for spares in line with industry conditions and declining fab utilization.

  • Net sales decreased 2% from Q4, due to seasonally lower sales for spares, partially offset by increased factory software sales.

  • Operating income decreased 7% compared to Q4, in line with a decrease in revenue and mix.

  • These numbers include Display Service for the first time.

  • Display orders for Q1 for equipment were up 363% from Q4 and up 1500% year over year, as LCD customers began to invest again in response to rising LCD panel demand.

  • Display sales of $133 million were down from Q4, as expected, reflecting the low order activity seen in fiscal 2007.

  • Operating income decreased to $34 million, or 26% of net sales, due to lower revenue levels and product mix, partially offset by lower costs.

  • Again, these numbers reflect only equipment-related revenue and orders.

  • Q1 orders in Energy and Environmental Solutions totaled $260 million in Q1, up 165% from Q4, and they include recognition of our first applied SunFab thin film line orders and the first full quarter of orders for our Precision Wafering System products.

  • Net sales of $122 million was up 98% from Q4 and they were driven by increased solar-related revenue, including the contribution of the PWS revenue and higher sales of our Aton tool.

  • The Q1 operating loss for Energy and Environmental Solutions of $48 million resulted from increased operating costs associated with a buildout of our global thin film and crystal and silicon solar team, M&A charges related to the HCT acquisition, and costs related to the expansion of solar marketing efforts.

  • Next I would like to discuss our balance sheet and cash flow.

  • We continued to have strong cash flow performance, generating $390 million in cash from operations, which represents 19% of revenue.

  • We are investing in working capital to support the solar and display ramps, while managing SSG inventories in line with industry conditions.

  • We maintain our long-term objective for cash from operations at greater than 20% of revenue, but we expect FY '08 -- fiscal year '08 levels will be impacted somewhat during these ramps.

  • Working capital changes in the quarter reflected this pattern, with reductions in inventory related to semiconductor equipment, offset by the increase of working capital to support the solar growth.

  • We ended the quarter with cash balances and marketable securities of $3.36 billion.

  • In Q1, Applied returned $683 million, or 175% of operating cash flow to its stockholders.

  • Of this amount, $600 million was for the repurchase of 34 million shares at an average price of $17.84, and $83 million was for cash dividends.

  • We remain committed to generating strong cash flows and funding our investment needs, while returning excess cash to our stockholders.

  • We expect to spend between $300 million and $500 million on share repurchases in Q2 '08.

  • This is in addition to the $334 million in spending related to the close of the Baccini acquisition made at the beginning of the quarter.

  • Now I will turn the call over to Mike Splinter for his perspective on the quarter and his view of the key industry and market changes effecting our business.

  • Mike?

  • - President & CEO

  • Thank you, George.

  • Q1 performance was at or above our target and the strong bookings and display and solar give further evidence of the solid foundation of our growth plans.

  • During the quarter, Applied Materials faced a weak global market for semiconductor equipment, and at the same time, experienced a significant upswing in demand for our display products.

  • 2008 is a pivotal year for Applied Materials to focus on execution and growth.

  • We have restructured our industry-leading silicon equipment business to improve operational performance and competitiveness across our product portfolio.

  • We have expanded the role of Applied Global Services to be the service provider for all of our businesses, to take advantage of our global footprint, and we are investing to meet the extraordinary customer demand for our display and solar products.

  • In a tough year for our core silicon business, we have great optimism about our long-term prospects.

  • In 2008 we expect to extend our leadership in silicon equipment, establish Applied as the key enabler to the solar industry, and significantly expand our served market and display.

  • We intend to do this while maintaining a disciplined operating model that generates strong profits and cash flow.

  • Let me touch on some of the details about the cost reduction actions we took in Q1.

  • In semiconductor equipment and related services, we announced a global cost reduction plan designed to generate about $150 million in annualized savings.

  • We believe these savings are achievable from the efficiencies of moving to a single silicon business unit and the related product portfolio rationalization.

  • This was a difficult, but necessary step that affected approximately 1,000 people in these organizations.

  • This action is part of a roadmap developed by our Silicon Systems Group to improve its operating model by four points over the next three years, and while funding the R&D necessary to further improve our product competitiveness.

  • During this down period, our semiconductor team is working hard with customers to gain acceptance of our new products.

  • New technology solutions, including single wafer oxidation steps, and E-HARP for next-generation shallow trench isolation are gaining momentum.

  • Metal and gate Etch continue to advance ahead of the competition, and we are collaborating with key memory customers on advancing the state of the art for self aligned double patterning, which now appears to be the only technology that enables flash memory to move below 30nm.

  • Applied Global Services has broadened its scope to provide services for display and solar customers.

  • We expect to offer an expanded suite of technically differentiated services in these areas by leveraging the products and technical resources of AGS.

  • This is how we can provide our solar customers with comprehensive service, including process support, parts, service, abatement and manufacturing systems.

  • During the quarter we signed our first solar contract for a SunFab line.

  • In addition we are expanding our service offerings in our core business, from 200mm productivity upgrades to chamber performance services and integrated software.

  • Display has certainly provided the biggest positive in the first quarter.

  • Strong end customer demand for large format flat panel TVs has led to the need for significant capacity additions.

  • 2008 looks to be a record year for new orders in display and could be a record year for revenue, even though we expect revenue in the first half to be soft, in line with the low order level from last year.

  • We have significantly increased our served available market in display, with the launch of the new AKT pivot for array PVD, Our leadership team in Display is managing the double challenge of meeting an unprecedented ramp in LCD-related demand, while supporting the PDCVD component of our rapidly-growing SunFab line.

  • Display has developed a highly outsourced model for manufacturing over the past several years, and the supply chain supporting this model is ramping in line with demand.

  • And ramping fast is exactly what we're doing in solar.

  • Scale is an important factor in lowering the cost per watt of our solar over time.

  • At our New York analyst meeting, we talked about how we see the industry moving to take advantage of the scale that our SunFab thin film production lines provide, using our industry-leading 5.7-square meter glass.

  • Our thin film solar approach is gaining traction and enthusiastic customer acceptance.

  • We were pleased to be recognized as the green energy innovator of the year by the prestigious Platts Global Energy Awards for our pioneering work on the applied SunFab thin film line.

  • In addition to our work in thin film solar, we are investing to build our capabilities for crystal and silicon as well.

  • With the close of our acquisition of Baccini, Applied Materials is now offering products in the high value-added areas of the crystal and silicon solar process; areas where we offer differentiated products to lower manufacturing costs, while providing systems that create and process thinner wafers, all with the end goal of lowering the cost per watt, which will increase the end market.

  • Looking forward, demand for solar is robust and growing, and we are in discussions with many new customers.

  • We are also happy to report that our existing solar customers are talking about repeat orders.

  • Overall, our solar business is accelerating and at the same time, Applied Materials technology is accelerating the adoption of solar around the world.

  • Unfortunately, the economic environment in the U.S.

  • and the world is not as bright as the outlook for solar.

  • We see the uncertain U.S.

  • economic environment and the potential for slowing global growth to be a near-term challenge, but this is offset for Applied Materials by the positive momentum toward investment in clean energy, as an economic and political priority.

  • Silicon systems is facing a soft investment environment.

  • We said in our last call the wafer fab equipment spending is forecast to be down 5% to 15% in 2008, and it's still looking that way.

  • In memory, DRAM is expected to be down greater than 30%, and nan flash is up, but not enough to completely offset the difference.

  • Foundry spending is expected to be modestly down and investment for logic should be roughly flat.

  • The environment for display this year is much improved, with expectations that industry investment will be up above 40% in 2008, driven by an LCD TV market that is projected to grow at annual rates greater than 28% from 2007 to 2011.

  • The buildout of Gen 8.5 across the industry is coming fast, as every manufacturer is speeding to add capacity.

  • Looking forward, with Sharp leading the way on Gen 10, we can expect the next wave of flat panel TV factories.

  • Overall, Applied Materials is moving prudently in some areas and investing boldly in others to optimize our performance through these exciting and challenging economic times.

  • Our cost reduction plan for the silicon sector is well timed for the market conditions we face, and our strength in solar and display is outpacing our expectations.

  • Our employees are driving our success, and are putting their energy behind the projects and initiatives fueling our progress.

  • As a Company, Applied is focused on execution in 2008 to deliver on the first leg of the growth commitments we made.

  • And now I'll turn the call back over to George to provide our targets for the next quarter.

  • George?

  • - CFO

  • Thank you, Mike.

  • Our targets for Q2 are, we expect orders to be in the range of down 5% to up 5%.

  • This is coming off very strong order performance in Q1 and reflects expected strength in solar and display.

  • We expect revenue to be in the range of flat to up 5%.

  • We expect EPS to be in the range of $0.18 to $0.22 per share, in line with mix effects and higher spend in solar and display.

  • Thank you.

  • Randy, let's open the call for questions, please.

  • - VP - Investor Relations

  • That completes our prepared remarks.

  • We will now begin our question-and-answer session.

  • Operator, please begin with the first question.

  • Operator

  • Our first question comes from the line of Stephen Chin with UBS.

  • - Analyst

  • Great, thank you.

  • Congratulations on the display order execution there.

  • My question is how sustainable do you think this momentum is?

  • For example, can Applied exit the year with display bookings tracking at over $2.5 billion annual run rate, do you think that's possible?

  • - CFO

  • Stephen, no, I think what we're seeing is a substantial push by our customers to pull display orders into the first half of the year, and I think our order outlook, while we see not being able to maintain the record level of orders that we achieved in the first quarter, we think that we'll still have a strong -- all evidence is we'll have another strong quarter for display in the second quarter.

  • But is that run rate sustainable throughout the year, no.

  • We still think overall, that orders for the year for the overall Company will be up and -- as we discussed at the New York meeting.

  • - Analyst

  • And could I just ask a second question/ Cab you share any color on Moser Bears announcement yesterday that it had secured additional solar equipment?

  • Can you give us any color if Applied Materials is again the primary equipment supplier to Moser Bear?

  • - President & CEO

  • Well, Stephen, first of all, as you know, Moser Bear is -- was our first solar thin film customer and we've been in discussions for them -- with them for sometime, so as we said in New York, we're in discussions with some major customers on gigawatt scale fab lines, but we don't have a specific thing to announce today.

  • - Analyst

  • Okay, thanks.

  • And congratulations again.

  • - President & CEO

  • Thank you.

  • Operator

  • Our next question comes from the line of Harlan Sur with Morgan Stanley.

  • - Analyst

  • Hi, good afternoon.

  • Nice execution on the quarter.

  • I think it's fair to assume at this point that the team is probably in negotiations with all of your initial customers for their next round of expansion on the solar side.

  • So I guess the question is, what kind of ramp rates are we talking about here?

  • Are we going to see second phase expansion, maybe doubling the initial capacity, and then a big step-up to, let's say, a few hundred megawatts of capacity or even gigawatts of capacity?

  • - President & CEO

  • It really depends on the customer, Harlan.

  • We -- as we tried to allude to, we said in New York about we're discussing with up to four people on pretty large scale gigawatt scale factories, but almost every one of our customers to date is thinking about a follow-on factory, some significant magnitude bigger than their first one.

  • - Analyst

  • Okay, and then my second question is, you mentioned in the last call I think, Mike, that your pipeline supported a growth outlook for at least your silicon business to grow in the second quarter order wise.

  • Directionally is that still the case here in April?

  • - President & CEO

  • Yes.

  • So we think that silicon orders and revenue will be up modestly and in Q2, but I certainly wouldn't call it a momentum at this point.

  • - Analyst

  • Okay, thank you very much.

  • Operator

  • Our next question comes from the line of Timothy Arcuri with Citi.

  • - Analyst

  • Hi, couple things.

  • First of all, Mike, if I look at the thin film bookings, it looks like maybe by the end of April, you will have booked maybe $400 million to $500 million of that -- of whatever the contract value that you currently have is.

  • So can you give us an idea of how much -- based upon contracts you have signed today, how many orders do you have beyond what you have included -- what you will have booked in January and April?

  • - President & CEO

  • I'm going to let George answer the first of the -- you're question, Tim.

  • I'll catch up with you on the second part.

  • - Analyst

  • Sure.

  • - CFO

  • We booked $160 million this quarter.

  • We're not going to forecast the specifics for next quarter, but we do anticipate booking some additional orders off of last year's contracts.

  • So we expect to book the majority of all those during this year, as we've said already, there's no change in that outlook.

  • Whether we get 50% of it in the first half or not, we're not going to guide to that right now.

  • - Analyst

  • Okay, okay.

  • I guess -- and then my second question is, George, can you give us some idea then on the backlog?

  • You haven't had this much backlog in terms of months since 2003, late '03, and you posted four straight double-digit sequential revenue growth quarters after that.

  • Can you give us some idea of the age of the backlog, so how much is that shippable within six months, for example?

  • - CFO

  • I think what -- I think what you're seeing is more of a balance issue than any change in the dynamics of our backlog.

  • You have more longer lived orders both in Display and in Services, making up that mix, so that's -- I think that's a little bit of the phenomenon that you're seeing.

  • Most of the order -- the behavior for the orders in terms of when they're going to be recognized -- for instance on the semiconductor equipment side -- is basically within the normal pattern, quarter and a half out, that we normally see.

  • - VP - Investor Relations

  • Operator?

  • - Analyst

  • Our next question comes from the line of Jay Deahna with JPMorgan.

  • - Analyst

  • Hi, it's [Jenny Unim] for Jay Deahna.

  • Can you give us a status update on the initial thin fab install?

  • Are you still targeting working panels by mid year?

  • - President & CEO

  • Yes, we are, Jenny.

  • We're expecting output by -- production output by the middle of the year and things are moving along quite well, but for a real detail, I think you have to ask Moser Bear the specific question.

  • It is their factory.

  • - Analyst

  • Now, are you still expecting overall Company orders to be up 5% to 10% and revenues to be flat to modestly down in fiscal '08 as you had said on your analyst day?

  • - President & CEO

  • Yes, that's right.

  • George, did you want to -- we're not changing that projection at this point?

  • - CFO

  • That's correct.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Our next question comes from the line of Patrick Ho with Stifel Nicolaus.

  • - Analyst

  • Thanks a lot, and nice work on the quarter.

  • I know some of your cost reduction efforts have come from the exit of some of your select semi cap businesses like ion implant and ECP.

  • What other measures exactly are you taking to further reduce costs in that segment?

  • - CFO

  • Sure.

  • We obviously -- head count reductions we talked about, that was the January 15 announcement, was talking about the head count reductions, both in the Silicon Systems Group, the services group that supports the semiconductor equipment side, and then all the staff groups that are within that were impacted as well.

  • So the head count impacts, which will primarily be felt as we roll out through the year, were a big part of that cost savings, and that's really what the -- what's driving the bulk of the cost savings.

  • - Analyst

  • Okay, so it's nothing like supply chain management, things like that that's the driver.

  • It's mainly the head count reductions?

  • - CFO

  • Well, over the long run we've talked about the global supply chain strategy that Tom and his team are putting in place, and I think that'll continue to drive.

  • We've obviously had a focus on material cost reductions year in and year out, but we believe we need to really significantly expand our global supply chain to get to the next level and that's what Tom and his team are working on.

  • So we expect that over time to have a big impact.

  • But I was really talking more about what we are seeing in Q1.

  • - Analyst

  • Okay, great.

  • And just one clarification on the numbers, the items associated with acquisition, was that in cost of goods?

  • - CFO

  • The bulk of it was in cost of goods.

  • - Analyst

  • Great, thanks a lot.

  • - CFO

  • Yes.

  • Operator

  • Our next question comes from the line of Gary Hsueh with Oppenheimer & Co.

  • - Analyst

  • Hey, great.

  • Thanks for taking my question.

  • Something I just don't understand about guidance.

  • You're highlighting flattish guidance as solar and display-driven quarter, but you're also suggesting that Silicon Systems businesses would be booking flat to slightly higher.

  • So what's going to drive the -5% Q over Q scenario in your guidance for orders?

  • - President & CEO

  • The big thing that is on the cautious side of this is off the peak on displays.

  • Display was an incredible quarter for orders in Q1, as George alluded to, up 1500% year over year, so we're going to be a bit off that --that peak in Q2.

  • - Analyst

  • Okay, perfect, Mike, and that segues into my next question.

  • If I just look historically, even after you purchased Applied Films, the peak in the last peak in flat panel display CapEx spending for your order number was roughly $355 million in the October quarter of '06 and now you're booking $555 million.

  • Is that a fair comparison, or is Aton really driving the difference here between peak to peak?

  • - CFO

  • No, no, no.

  • The apples-to-apples comparison is really you have to pull -- you had service in your $355 million number, so it was $310 million for equipment.

  • - President & CEO

  • So a little bigger difference, yes.

  • - CFO

  • So it was -- it's really a -- it's really an extraordinary quarter for display.

  • - Analyst

  • Okay, so it's fair to say that the display business is heavily front-half loaded and pretty much loaded in the January quarter?

  • - CFO

  • I would -- yes, I wouldn't discount -- they're going to have a strong second quarter and probably will exceed the previous record as well, but, but it's going to be hard to top this quarter.

  • - Analyst

  • Okay, got you, and one last question, George, you'd mentioned that you got seven percentage points of bookings growth from SunFab.

  • That would imply $175 million in bookings-- .

  • - CFO

  • the It was $160 million -- exact number was $160 million

  • - Analyst

  • $160 million, okay.

  • So just wondering why the other part -- the crystal and silicon side is just running flattish, why we haven't seen growth.

  • Is January quarter, like a seasonally slow period for crystal and silicon, or is there some other explanation why we're not seeing growth there outside of thin fab?

  • - CFO

  • Now remember, also within the EES group, we also have glass and web, so you've got a number of moving parts.

  • You can't -- and again, I'm not going to break out every detail of the order book, but you had a run rate level of PWS orders in that, and so I think we didn't see anything that would suggest that you're having a drop off.

  • - Analyst

  • Okay, great.

  • Thank you.

  • - CFO

  • Yes.

  • Operator

  • Our next question comes from the line of Satya Kumar with Credit Suisse.

  • - Analyst

  • Yes, hi.

  • Quick question on your SunFab.

  • Seems like you've pulled in the order recognition by at least a quarter.

  • Can you talk about what specific milestones you might have achieved, particularly with demonstrating performance on tandem solar cells that you now have SunFab orders being recognized?

  • - CFO

  • Sure, Satya, what we had said is that our order recognition policy was when we believe that we were both within 12 months of sign-off with a customer and we had assurance that the supply chain was available to serve that order and all prior orders, then we would go ahead and book, and so these orders fit that criteria.

  • - Analyst

  • So is it fair to assume that over the last three months you've increased your confidence of demonstrating your specs on the tandem cells in your customer space?

  • - CFO

  • Yes, our confidence across the board on solar continues to grow and that s reflective of what we're also seeing from the customer side as well.

  • - Analyst

  • Okay.

  • That's helpful.

  • And when I look at your silicon group, I'm trying to reconcile what I'm seeing with you guys with the other companies.

  • The peak -- the trough orders are down 45% for you guys in silicon over the last three quarters.

  • Most of your peers are down between 10% and 20%.

  • If I also look at your comments that CapEx would be down 5% to 15% this year, and your comments of taking share, you lead the book about $1.4 billion a quarter in silicon on average each quarter to get to just down 10%.

  • What's the disconnect?

  • Are you looking at a pretty steep (inaudible) recovery in silicon bookings in the back half of the year?

  • - CFO

  • Yes, we said that we thought that the second half would have to be significantly stronger than the first half in order for the scenario to play out that not only we were seeing, but most people were forecasting for the industry.

  • And we've already gone over some of the timing issues.

  • A couple of cust -- one customer made a big difference on timing issues in the previous quarter, and I think -- again, I don't have your data right in front of me, but our view really hasn't changed about what has to happen in '08.

  • - Analyst

  • And real quick, you're guiding to basically down EPS on up revenues.

  • What's the moving parts as to why that should be the case in April?

  • - CFO

  • What we've done is actually we've moved the order guidance up $0.02 and really -- from where we were last quarter on flat to up 5%.

  • And I think with it given -- we know we're going to continue to increase our investment in solar.

  • We know that there's some revenue mix issues that may play out, so I think it's just representative of the volatile environment that we're in and the continued investment that we've got and so we think it's the right range.

  • But we have moved it up $0.02.

  • - Analyst

  • Okay.

  • Good orders, guys.

  • Thanks.

  • Operator

  • Our next question comes from the line of Mehdi Hosseini with FBR.

  • - Analyst

  • Thanks for taking my question.

  • I want to try to understand the thin film booking.

  • Can you please help me understand of the initial capacity that are out there for qualification, what is the current output?

  • What is the megawatt of production capacity that is out there so that you could actually attract additional customers?

  • And the number two question has to do with the specific lineup that you have, are you planning to acquire -- or to have all the different pieces of equipment manufactured in-house?

  • I understand that some of the pieces are actually outsourced and what is your strategy going forward in that area?

  • - President & CEO

  • I'm not quite sure of your first question, but overall in the industry, there was a little more than a gigawatt of capacity installed in 2007, and we said six to eight by 2010.

  • So there is wide range of capacity to be added over the next few years.

  • As far as our philosophy on what products we're going to do internally and what we're going to source from other suppliers in the SunFab thin film line, we're going to do the high value-added steps internally.

  • That's pretty much always been our philosophy.

  • It's how we do well and how we make a good profit in this business.

  • So things like CVD and PVD are right in our skill capability.

  • Some of the automation is, but a thing like an autoclave, we're not going to ever make an autoclave, I don't think, so that's a lower value-add piece of equipment.

  • It's an important piece of equipment in the process, but we, I don't think, could create a differentiation there.

  • - Analyst

  • Just as a clarification in the first part of my question, I guess I was trying to figure out what is the capacity you have as a demo out there that -- is there a first line that is up and running that you can use to sell to potentially new customers, and then --?

  • - President & CEO

  • Oh, well, we have -- we have a demo line -- we have a demo line in (inaudible) that we can show our technology to and customers can see what the technology can -- how the technology performance, yes.

  • - Analyst

  • As it stands right now, you don't have a customer that is actually shipping panels --?

  • - President & CEO

  • That's ri -- out of the SunFab line, that's correct.

  • We said we'll see production panels by mid year.

  • - Analyst

  • Okay.

  • And then going back to the second part of my first question, what about in terms of improving the yield quality, is there any metrology part of the line that is critical that you would want to do in-house and then how about a TCO and some of the processes done to help improve the efficiency rate?

  • - President & CEO

  • Well, Mehdi, you have to remember this is about moving square meters of glass and it's very fast throughput times.

  • The process just has to run.

  • You might want to know whether sheets of glass are chipped, but other than that, I expect our processes to run at high yield and under good control.

  • I don't think that you need any real metrology, any kind of offline metrology, if that's what you're thinking of.

  • But something like TCO, yes, we would be consider -- that's a step we would consider.

  • It has impact on yield, it's a high value-added, highly technical stuff.

  • - Analyst

  • So that's an area that you could actually would go out and acquire technology, or develop internally?

  • - President & CEO

  • Oh, we have the technology to be able to do that.

  • - Analyst

  • All right, thank you.

  • Operator

  • Our next question comes from the line of Jim Covello with Goldman Sachs.

  • - Analyst

  • Good afternoon, guys.

  • Thanks so much for taking the question.

  • George, first just a quick one.

  • I understood your commentary earlier about why the EPS was a little bit lower on flat revenues, but what I'm trying to understand, is that above the line or below the line?

  • In other words, is that all gross margin pressure, or is some of that going to come in the OpEx side as well?

  • - CFO

  • I think it comes from both sides, Jim, and we had -- we had a lot of activities around shutting down of factories and doing things in Q1 that won't be doing so at the same level in Q2.

  • We've got increasing investment in solar, so you've got -- that's -- a lot of the OpEx will come out of that, those areas.

  • The manufacturing obviously on the costs of sales, but increased investment.

  • Also it's our biggest quarter for investment in our business transformation process.

  • We're getting to the point where we're going to turn on the first part of that and so this is the home stretch on that piece.

  • - Analyst

  • So taking your revenue guidance, I could get to your EPS guidance by modeling a 300 basis point decline in gross margin, but that's obviously -- not all the delta's going to come out of the gross margin.

  • You think it's half, or do you think it's less than half?

  • - CFO

  • No, I think that -- yes, I think that's too significant a hit.

  • I think you're really looking at a combination of -- a combination of things.

  • Obviously it also happens to be a quarter where our stock-option expensing, expense tends to be a little bit higher than the first quarter, so there's multiple items.

  • I think mix and the volatility of the outlook are -- just lead us to say, look, we're comfortable moving our guidance up $0.02.

  • We're still guiding within that range above where we achieved, even after you take out the costs of restructuring that we -- that we incurred in Q1.

  • So we think it's prudent, given the environment.

  • - Analyst

  • Okay.

  • If I could just ask one follow up.

  • - CFO

  • Sure.

  • - Analyst

  • Obviously very good things going on long term in the solar business and in the near term in the display business.

  • Relative to the silicon business, the last time we had this much excess capacity in the silicon segment with so much of the business coming from DRAM it, really took a couple years to clean it up, not a couple quarters, and I'm wondering why you think that would be different this time?

  • - President & CEO

  • Well, Jim, you can pretty much see the cutback in demand -- or in capacity additions by the DRAM makers.

  • I think you know those as well as I do.

  • The thing that encourages me about demand is prices continue to stay very low, and I think that we'll see devices -- laptops, desk tops, cell phones -- all load up on DRAM bits, which are very inexpensive.

  • So in almost every application that you can think of for DRAMs, I think you're going to see bit growth well above the estimates today.

  • But -- so we're still thinking quarters and I don't think we have a magic ball to see in, but we're still thinking that by the third quarter, the supply and demand balances out pretty much.

  • - Analyst

  • Terrific.

  • Thank you very much.

  • - President & CEO

  • You bet.

  • Operator

  • Our next question is a follow-up question from Tim Arcuri with Citi.

  • - Analyst

  • Hi.

  • George, can you give us some -- now that you have all these moving parts, can you give us some view as to what a financial model might look like as revenue ramps in July and the back half of the year?

  • For example, if you take the current mix, what would gross margin look like, say, at $2.5 billion and at $3 billion revenue?

  • - CFO

  • Tim, I understand where you're going.

  • Let me maybe characterize it in a little different way.

  • We're -- we expect to see the operating model for the Silicon Systems Group just to continue to improve over time.

  • They're taking a lot of steps that I think will have both near-term and longer-term impact, so that -- their operating model over time will just continue to improve.

  • On Display, which is what I think is what you're seeing, we'll see most of the ramp in revenue at the end of the year.

  • So again, it'll be how much of it comes in at the end of the year and so how much of that manufacturing process is absorbed and we see the benefit of that leverage.

  • Energy and Environmental Systems, as we said, we -- while we'll expect to see both Baccini and PWS revenue in there, we'll still be in the buildout phase for -- of the thin film business and also we'll be incurring the M&A costs associated with both of those acquisitions at that same time.

  • So I think you're still really going to wait until Q -- excuse me, until fiscal year '09 to see the start of the potential for Energy and Environmental.

  • Display, it really depends on the revenue piece, but it should look very good at the end of the year and it looks pretty good, quite frankly, right now.

  • And then Silicon Systems, very, very strong performance relative to their historical model.

  • - Analyst

  • Okay, so George, I guess as you look out into '09, you should be back -- in '09 you should be back on the same margin model that you were back, say, in mid '07?

  • - CFO

  • Yes, I don't see any reason why we wouldn't be.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Our next question comes from the line of Ben Pang with Caris & Company.

  • - Analyst

  • Thanks for taking my question.

  • Just a clarification on the pattern that you expect for Silicon Systems.

  • You commented that you expect to see -- or the industry, I guess, expects to see a hockey stick scenario in the second half.

  • Is that going to be led by DRAM?

  • - President & CEO

  • We think that it will first be led by foundry and then by memory, and we do expect both flash and DRAM to come back a bit in the second half of the year.

  • - Analyst

  • So the memory capacity that you expect would be added in your fourth quarter or -- are you talking about your fiscal fourth quarter?

  • - President & CEO

  • Talking really about a calendar year on capacity adds.

  • - Analyst

  • Okay, and one follow up on the flat panel business.

  • Is it possible to separate exactly how much of the order strength in the quarter that just passed was due to the higher served development market?

  • - CFO

  • Well, in terms of the -- well, really the bulk of what you're seeing in this quarter was our historical presence.

  • PECVD tools tend to get ordered earlier in the cycle and so there is an imbalance towards that.

  • - Analyst

  • And I guess the follow-on flat panel orders will be for your newer products?

  • - President & CEO

  • Yes, for array -- for color filter testing and the pivot array PVD.

  • - Analyst

  • Thank you very much.

  • Operator

  • Our next question comes from the line of C.J.

  • Muse with Lehman Brothers.

  • - Analyst

  • Yes, thank you for taking my question.

  • Hoping to sneak in two.

  • (LAUGHTER)

  • - President & CEO

  • We'll see, C.J.

  • - Analyst

  • First, on the display side, given that you're going to see strong bookings in January and April, and that lead times are nine-plus months, does that suggest that your FPD revs should be higher in fiscal '09 than fiscal '09?

  • - CFO

  • Right now it looks like if you just model it out, that we would peak in revenue in the first quarter of '09, so in the first part of '09, but we think we're going to see some of this benefit in '08 and it's really part of why we think there's a disconnect right now between the Street estimates for where we're coming out this year and where we see, which is -- I think the Street has us down 10% and we're somewhere between flat and down 5%, based on display having the biggest impact.

  • - Analyst

  • Got you, and then a follow up.

  • On the margin side, when do you expect to break even on the Energy Environmental division, and what kind of initial operating margins are you expecting as you revenue the SunFab -- initial SunFab business?

  • - CFO

  • So certainly we expect to break even in '09 for sure, and then in terms of the margins coming out of the gate, I think I'm not going to forecast that.

  • We'll have to -- because we'll have a mix of businesses in there, and it'll be -- and the range of -- and quite frankly, the margins on the initial deals will vary depending on how much of the learning curve is taking place at which contract.

  • - Analyst

  • Thank you.

  • Operator

  • Our next question comes from the line of Steve O'Rourke with Deutsche Bank.

  • - Analyst

  • Thank you.

  • In your -- I think your prepared remarks, you mentioned service contracts booked with SunFab lines.

  • How do the service contracts work with these new lines and how are they connected to a standard warranty, for example?

  • - President & CEO

  • Well, the service contracts are -- come after the warranty period.

  • Of course during the warranty period, we take care of service, spares are purchased, and then the service contract essentially is to take care of all aspects of maintenance on the line, and depending on the contract it might be multiple years of service.

  • - Analyst

  • So you've booked service contracts for the lines that you've initially installed, these couple of lines?

  • - President & CEO

  • Actually I said we booked -- in the prepared remarks, I said we booked one.

  • - Analyst

  • Okay, fair enough.

  • - President & CEO

  • We booked our first one.

  • We've got to book one before you book a [bus].

  • - Analyst

  • Fair enough.

  • And you talked about follow-on factories for SunFab.

  • Will they all be tandem junction, do you think and can you give us an update on when you think the first tandem junction line is projected for start up and when you might think a reasonable timeframe is for protect out?

  • - President & CEO

  • Yes, sure.

  • So yes, I would think that they are all going to be tandem junction from here on out.

  • We may even see some upgrades on some of the single junction lines later on.

  • But basically around the end of the fiscal year, we'll see some output from first tandem junction line.

  • - Analyst

  • So by October of this year, you'll see some output?

  • - President & CEO

  • We think so, yes.

  • - Analyst

  • Fair enough, thank you.

  • - President & CEO

  • We said that we would ship -- we will have shipped the first tandem junction line by the end of March.

  • - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Our next question comes from the line of Jay Deahna with JPMorgan.

  • - Analyst

  • Hi, it's Jenny Unim again.

  • Just a clarification, have you signed one of the gigawatt contracts?

  • - President & CEO

  • We have no announcement on a signed gigawatt contract at the moment.

  • - Analyst

  • Do you expect one to be signed in the next three to six months?

  • - President & CEO

  • Well, I sure hope so.

  • You can never tell about contract negotiations, but we are in serious discussions on the topic, so hopefully we can come to an agreement with one of the -- at least one of the customers that we're having discussions with at this time.

  • - Analyst

  • And when you're negotiating these contracts, how do you get comfortable with their financial wherewithal, like if they could fund such a large contract?

  • - CFO

  • We look at all the normal things we look at for any customer, which is do they have financing, can they secure their commitments with the appropriate instruments, so it's a balance of items that gives us comfort.

  • - Analyst

  • Do they have to have that secured by the time they sign the contract?

  • - CFO

  • It varies, depending on the customer.

  • - Analyst

  • Okay.

  • - CFO

  • And that's true of whether it was gigawatt scale or it's a smaller scale.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

  • - Analyst

  • Yes, thank you very much.

  • One more question on the revenue recognition for SunFab.

  • This revenue recognition is going to be for the whole line at a time, or you'll do it by equipment by equipment?

  • - CFO

  • It'll be -- our current plan is for the line and so it'll be upon customer sign-off.

  • - Analyst

  • Okay, so it's going to be like a big size, whenever it happens, it won't be for like per tool $20 million, $30 million or --?

  • - CFO

  • Right, for the initial ones, that's correct.

  • - Analyst

  • Okay.

  • And the second question on EPS guidance, are you assuming any nonrecurring charges in that guidance?

  • - CFO

  • No.

  • - Analyst

  • Okay.

  • - CFO

  • And again, we have the normal ongoing adjustments of stock-option expensing and M&A, but it doesn't include any anticipated restructuring cost.

  • - Analyst

  • So M&A means amortization of intangibles?

  • - CFO

  • Correct.

  • And all that's -- again, you have a reconciliation of all that in the schedules with the release.

  • - Analyst

  • All right, thank you.

  • - CFO

  • You're welcome.

  • Operator

  • Our next question comes from the line of Jesse Pichel with Piper Jaffray.

  • - Analyst

  • Yes, good evening.

  • Of the four gigawatt factories, should we assume that's both crystalline and thin film?

  • - President & CEO

  • No, you should assume that these are thin film factories.

  • In the crystal and silicon area we're more selling machine by machine in our more traditional way of -- more traditional business model, I guess, I would call it, and in that regard, an example is our Aton -- we had a breakthrough in Japan selling our first Aton system.

  • As these crystalline factories scale up I think they'll use more of our large scale system.

  • - Analyst

  • You used the word utility scale often.

  • Did that mean you're in discussions with European utilities and is that a far-fetched question?

  • Is the SunFab so easy that a utility could run it and it wouldn't be outside of their core competency, assuming it came with some performance guarantees from AMAT?

  • - President & CEO

  • Well, I don't think we can disclose real customers, but a power provider -- utilities are different than power providers and you have to look at how the industry is set up, but I think you would certainly say that we're in talks with companies who are interested in being power providers.

  • - CFO

  • Right.

  • And many of our customers have looked to put electricity into the grid out of their fabs.

  • - Analyst

  • I'm under the impression that Orlacon offers guarantees with respect to throughput and efficiency.

  • Does Applied offer that at current?

  • - President & CEO

  • The Applied contract is set up on watts out, so in the end I think our customers want to produce watts and that's what's so critically important.

  • One of the -- we often talk about scale, so you mentioned utility scale, but the size of our panels allow the installation and wiring and bracketing to be done much more efficiently and this is one of the areas why we chose to move to the larger-size panel.

  • - Analyst

  • My last question is, one of the advantages of the big public (inaudible) company we know now for solar is that annually it gets throughput improvements of about 6% plus per year.

  • Do you anticipate that the AMAT lines would also have similar annual improvements, and do you think there's a way for your service business to potentially capture on some of the value of a 6% plus annual throughput improvement on a watts basis?

  • - President & CEO

  • Well, Jesse, one of the things why we are so confident about our solar business is our history of 40 years of driving costs down.

  • This has been a hallmark of Applied Materials engineering and I see that continuing.

  • It's a thing we learned in Silicon.

  • We showed in Display for the last 15 years.

  • We've driven down the costs -- helped our customers drive down the cost of displays by 20 times to improve productivity.

  • We're using the same capability and -- in solar, and so I'm very confident we're going to be able to drive our roadmap and be very aggressive on moving the costs down.

  • - Analyst

  • And can you capture some of that improvement through --?

  • - President & CEO

  • Well, we'll see how the AG -- the service contracts are structured.

  • It'll depend on the specific customer, but we like performance-based contracts.

  • We have performance-based contracts today in the silicon area.

  • That means we can apply our technology.

  • It's a win for us, it's a win for our customers and that's the way we like to schedule our contracts.

  • - Analyst

  • Great.

  • Thank you so much.

  • - President & CEO

  • You bet.

  • - VP - Investor Relations

  • Operator, we have time for one more last quick question and then we'll make our closing remarks.

  • (LAUGHTER)

  • Operator

  • Our final question comes from the line of Edwin Mok with Needham & Company.

  • - Analyst

  • Thanks for squeezing me in.

  • Just a quick question on the $160 million for thin fab.

  • You guys have said before you guys are going to have seven lines up and running by sometime this year.

  • Are we expecting you to recognize some level of revenue those other lines?

  • - CFO

  • Now what we've said -- our outlook really hasn't changed.

  • We've said that we expect to book during this year and that we anticipate some revenue at the end of this year, but the bulk of the revenue for the contracts that were signed in '07 will be in early '09.

  • - Analyst

  • Yes, maybe my -- maybe a different way to ask this -- sorry I'm misspoken maybe -- just in terms of booking, you guys said you booked $160 million for just one line, right?

  • - CFO

  • Correct.

  • - Analyst

  • So you have six more lines in this year, that means you're going to --?

  • - CFO

  • No, hose are more -- those orders represent more than one order.

  • - Analyst

  • I see.

  • Okay, thanks for clarifying.

  • - CFO

  • Okay.

  • - President & CEO

  • Thanks, Edwin, and I think just a clarification of what we've said, we will ship seven lines by end of our Q3.

  • And just a final note, I'd just say if you look at our order -- the orders we reported today and the targets, we said to really reinforce our confidence and the strength of our strategic direction Applied is focused on execution in 2008.

  • We're going to keep that focus, and even in a difficult economic environment, we're getting the results and building terrific momentum.

  • Thank you all for attending today, and look forward to talking with you in three months.

  • - VP - Investor Relations

  • We would like to thank you for joining us on our discussion today of our financial results and we would like to remind you that a replay of this call and the supporting slide package will be available on our website starting at 5:00 p.m.

  • today and will remain posted until February 27th.

  • Thank you for your interest in Applied Materials.

  • This concludes our call.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.