應用材料 (AMAT) 2008 Q4 法說會逐字稿

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  • Operator

  • Welcome to the Applied Materials fiscal 2008 fourth quarter and year end earnings conference call.

  • (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, November 12, 2008.

  • Please note that today's call will contain forward-looking statements which are all statements other than those of historical fact, including statements regarding the economic and industry outlook, customer spending and utilization rates, and applied performance, strategic plans, cost reduction actions, and anticipated savings, products, competitive position, R&D, solar strategy, cash generation, and deployment, operational efficiencies and financial targets.

  • All forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

  • Information concerning these risk factors is contained in today's earnings press release and in the Company's filings with the SEC.

  • Forward-looking statements are based on information as of November 12, 2008, and the Company assumes no obligation to update such statements.

  • Today's call also contains non-GAAP financial measures.

  • Reconciliations of the non-GAAP measures to GAAP measures are contained in today's earnings release and in our financial highlight slides, which are on the investor page of our website at www.appliedmaterials.com.

  • I would now like to turn the conference over to [John Nunziati], Director of Investor Relations, Applied Materials.

  • Please go ahead, sir.

  • - Director IR

  • Thank you, Kara.

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

  • I'm stepping in as Robert Friess is sick today with a case of laryngitis.

  • I would like to highlight that we will be hosting our 2009 analyst day on Wednesday, February 18, in New York City.

  • More details on this event will be provided soon, but please note it on your calendar.

  • Joining me on the call today are Mike Splinter, President and CEOs; George Davis, Chief Financial Officer; and Joe Sweeney, Senior Vice President, General Counsel and Corporate Secretary.

  • Today we will discuss our results for the period ending October 26, 2008.

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

  • pacific time.

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

  • Mike Splinter will lead off the call with commentary on the market environment and our strategies for 2009.

  • George will follow with a discussion on our financial performance for the full year and the fourth quarter of fiscal 2008 and then provide our targets for the first fiscal quarter of 2009.

  • After Mike and George's remarks, we will open the call for questions.

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

  • Mike.

  • - President, CEO

  • Thank you, John.

  • Let me begin by thanking our employees for their excellent work in meeting the challenges of a volatile quarter.

  • Their accomplishments throughout the year position the Company well in both our core business and new markets.

  • The last six weeks of turmoil in the financial markets is unprecedented.

  • In the weakening global economy will have significant impact on all of Applied's businesses.

  • The markets for semi conductors and flat panel displays depend largely on consumer demand for growth.

  • The current negative trend in consumer spending and economic uncertainty have led our customers to reassess their spending plans and we are seeing a pattern of multiple downward revisions as a severity of the situation sets in.

  • Applied Materials is taking action based on our view that this will be an extended downturn, lasting a year or longer and that there will be significant changes in our semiconductor customer base as the industry emerges.

  • First, we intend to focus on executing our core strategies while improving efficiency and reducing spending.

  • Second, we will invest aggressively in the technology, products and customer relationships that are essential for us to emerge in a stronger market position.

  • Third, we will be disciplined, selective and patient in pursuing strategic acquisition opportunities.

  • And fourth, we have a strong balance sheet and we will remain focused on operational cash flow and asset management to preserve its strength and maintain our flexibility to support strategic business priorities.

  • In silicon systems, although visibility is extremely limited, the trends we are seeing today suggest that wafer fab equipment spending will be down more than 25% in 2009.

  • In display, we expect CapEx to be down more than 40% year-over-year.

  • Almost daily, we are hearing customer reports of factory slowdowns, closures, and capacity reductions as they would deal with the dramatic fall-off in demand for their products.

  • To date, the macroeconomic liquidity issues have had less immediate effect on our solar business.

  • However, we expect a period of pullback and reassessment in early '09.

  • Our crystalline silicon customers have a large exposure to consumer demand and even with strong government support, we expect a reduction in consumer discretionary spending to impact demand and pricing for solar modules.

  • Our Thin Film Solar customers have received equipment and are expected to continue their projects as planned.

  • For our Thin Film Solar customers and the process of securing financing, we are seeing some delays as those financing issues are sorted out.

  • Overall, we do expect 2009 to be a significant growth year for our solar business group.

  • As a result of the macroenvironment and the initial reductions, we are seeing in capital spending, we are taking significant action on our cost structure.

  • Applied will begin implementing a restructuring program in the first quarter of fiscal 2009 designed to streamline the organization, reduce operating costs, and drive annualized cost savings of approximately $400 million.

  • As part of this program, the Company plans to reduce its global work force by approximately 12%.

  • We believe these actions, while significant in size and impact, will not impair our investment in strategic priorities.

  • I'll now make a few comments on each of our businesses.

  • In 2008, silicon systems made gains in inspection and positioned us for wins at the next technology node.

  • At the same time, our efficiency in both R&D and operations dramatically improved, enabling solid financial performance throughout the year.

  • In the semiconductor market, ongoing memory oversupply is resulting in weak pricing and numerous closures of 200mm lines.

  • For logic and foundry factories, we are seeing utilization decline rapidly to less than 70% in many factories as demand for cell phones, TVs and automobiles drops off.

  • We expect utilization to continue to fall through the first half of '09.

  • Our strategy going forward is to build on our strengths, lead an innovation through focused R&D investment, and win the key technology decisions as semiconductor devices scale to 32 and 22 nanometers.

  • For Applied global services, we build solid gains throughout 2008, especially in Asia and with our solar customers.

  • This momentum for service will continue as customers move to outsource in difficult times and look for ways to maximize their factory efficiency.

  • In display, while softening consumer demand has delayed capacity expansions, and has many factories idling capacity, strategic investments for [Gen-10] are still moving forward.

  • While maintaining our leadership in PECVD and color filter PVD, display also recognized its first revenue from the pivot PVD array system at a leading customer, opening up a large new served available market for us.

  • Our moves in solar this year culminated in the first customer sign-off of the SunFab production line in October, an important milestone.

  • We currently have five SunFab customers producing panels.

  • We signed another major SunFab contract in Q4.

  • Our conversion efficiency and factory productivity are improving and are uniform across the SunFab network and we are on track with our tandem junction technology development.

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

  • I would also like to acknowledge the US Congress for approving a renewed and improved investment tax credit.

  • The US incentive paves the way for utility scale investment over the next eight years in the world's largest electricity market.

  • While development of this market will take time, we expect investments to grow in the US during the next year, and we look forward to the Obama administration's focus on renewable energy.

  • None of us can predict how the global economy will eventually play out.

  • But we're taking steps to ensure that Applied Materials is appropriately structured, operating efficiently, and executing on our strategic priorities.

  • I'll now turn the call over to George to add operational and financial details to our results.

  • George.

  • - CFO

  • Thank you, Mike, and good afternoon, everyone.

  • As this is our year end call, I will cover results for both the fourth quarter and the full year.

  • In Q4, Applied performed at the high end of our target range for orders and exceeded our revenue and EPS guidance.

  • Orders of $2.2 billion were driven by growth in silicon systems and energy and environmental solutions offset by an expected significant order decline in display and an 8% decline in applied global services.

  • Backlog increased to $4.85 billion.

  • Backlog adjustments were negative at $65 million and comprised $20 million of debookings primarily related to cancellations and adjustments from non-solar EES customers and $45 million of unfavorable currency adjustments.

  • Revenue growth of 11% quarter over quarter was led by EES with strong sales in crystalline silicon solar.

  • Earnings per share of $0.17 was up over 40% and reflected strong operating performance in our core businesses and cost management.

  • Approximately $0.03 resulted from the gain on sale of our administrative office building in Singapore and certain other nonrecurring items.

  • In our segment results, silicon systems orders in Q4 increased 47% over Q3, in line with our call for orders to be up more than 30%.

  • Expected strength in logic was augmented by a few large orders from DRAM customers.

  • This was a highly concentrated order quarter coming off a low base in Q3.

  • Our order composition was DRAM 48%, logic and other 40%, foundries 9%, and flash at 3%.

  • While SSG net sales were essentially flat with Q3, operating income improved to just under 24% of net sales.

  • In AGS, orders and revenue were impacted by lower factory utilization in semiconductor and display factories and dropped 8% and 13% respectively versus Q3.

  • Sales of spares and refurbished systems were most heavily impacted in this environment.

  • In display, orders fell significantly as forecasted, dropping over 80% from Q3 as display customers pushed out capital investments.

  • Display achieved record net sales of $334 million during the fourth quarter, a 7% increase from Q3.

  • Operating profits were up, in line with revenue.

  • Energy and environmental solutions had a strong fourth quarter with orders up 52% and revenue up 151% driven by strength in crystalline silicon and Thin Film Solar.

  • As Mike indicated, Applied recognized the first revenue on a SunFab integrated production line in the quarter.

  • Revenue in crystalline silicon benefited by approximately $100 million from a combination of deferred revenue capture and the inclusion of an extra month of PWS results to align with applied's fiscal period.

  • The absence of these benefits will be a factor in Q1.

  • Operating cash flow for the quarter was 6% of revenue.

  • Cash flow from operations was impacted by the required build in inventory for EES and display.

  • And during the quarter, we spent $300 million on share repurchase and $80 million on dividends.

  • We are planning to temporarily put our stock repurchase program on hold until the economic situation moderates.

  • We see this as a prudent step to assure that we maintain our strong balance sheet and financial flexibility in this environment.

  • Cash flow performance for fiscal 2008 was strong and we generated $1.7 billion in cash from operations, or 21% of revenue.

  • This performance is notable given the reduced level of earnings and increases in inventory of almost $700 million to meet the ramps in our solar and display businesses.

  • For fiscal 2008, orders were down 5% at $9.2 billion and revenue was off 16.5% at $8.1 billion.

  • Our results reflected strong performance in EES and display that partially offset the impacts of a memory-led cyclical downturn in silicon systems.

  • The Company's fiscal 2008 operating profits were $1.33 billion, or 16.4% of revenue, with non-GAAP basis operating profits of $1.69 billion, or 20.8% of revenue.

  • This is very strong performance in a year where our most profitable segment was in a deep cyclical downturn and EES experienced an operating loss of nearly $200 million to support the startup of our solar business.

  • GAAP net income of $961 million was down 44% from the prior year due to the reduction in revenue and the mix effects of revenue losses in SSG.

  • Earnings per share for the year were $0.70, down 42% in line with lower net income.

  • Now I will briefly summarize the segment performance for the full fiscal year.

  • SSG delivered strong financial performance despite a negative order in revenue trend.

  • Operating margin performance was 31%, or 6 points higher than in fiscal 2005 when SSG's annual revenue was 10% higher.

  • This stronger performance reflects continuing improvement in manufacturing productivity and material cost reductions as well as lower operating expenses.

  • Despite a decline in our core semiconductor markets over the year, AGS maintained revenue at the $2.3 billion level.

  • The fall off in refurbished equipment and spares was partially offset with higher contract service revenues resulting from improved market penetration in Asia.

  • Strong end market demand for flat panel televisions going into fiscal 2008 led to a record year for display in orders, revenue and operating profit.

  • Revenue increased by 38%, driven primarily by our leadership position in CVD.

  • Operating profits increased considerably from 23% of revenue in 2007 to 32% in 2008.

  • In fiscal 2008, EES revenue grew to more than $800 million, up from $165 million in 2007.

  • The major drivers for this increase were the crystalline silicon solar products obtained in the HCT and Baccini acquisitions.

  • Going into fiscal 2009, as Mike outlined, a deterioration of the global financial markets has led to a rapid slowdown in many of our customers' investment plans.

  • Our cost reduction program is targeted to generate overall annualized savings of $400 million with global head count reductions of 1,800 positions, or approximately 12%.

  • We believe this will lower annual operating expenses by approximately $325 million and cost of sales by $75 million.

  • We intend to move swiftly on this program and to capture the reduction in our run rate by fiscal year end.

  • These savings are incremental to the actions that we took early in 2007 that resulted in annualized spending reductions of $150 million.

  • Before I outline our Q1 targets, I would like to reiterate some of the key market issues that impact our outlook.

  • We expect that the environment for semiconductor and display equipment demand will remain uncertain for quite some time and that volatility in our customer forecast will be very high.

  • Based on today's limited visibility and given the strong order performance in our fourth fiscal quarter, we see overall Company orders down in Q1 by more than 30% as customers put spending plans on hold.

  • Going forward, we intend to discontinue our practice of providing company order guidance until the level of volatility subsides.

  • We will continue to provide actual orders in our reporting.

  • This quarter we will also be widening the ranges somewhat for revenue and EPS where we are also subject to uncertainty, but have better visibility than we do for orders.

  • Overall, we expect that the silicon segment will face further weakening in its markets and that revenue will fall 25% or more over the next quarter.

  • We also see display revenues dropping off substantially as customers push out equipment on order.

  • AGS sales will be down, although less than the equipment markets, but demand for spares and refurbished equipment will be impacted by low utilization rates.

  • We see healthy growth in -- for EES in fiscal '09, but are forecasting some revenue fall off in Q1 in our EES segment due to the absence of the $100 million of positive adjustments in Q4 that I mentioned earlier, and also from softening demand in crystalline silicon.

  • We do expect to receive at least one and possibly two SunFab sign-offs in Q1.

  • With that as a backdrop, our fiscal Q1 targets are, we expect overall revenue to be down in the range of 25% to 35%, we expect EPS to be in the range of 0 to $0.04 per share.

  • Now, John, let's open the call for questions.

  • - Director IR

  • Thank you, George.

  • Please note that during the Q&A, we ask that you limit your request to one question and one follow-up per firm.

  • Kara, let's begin with the first question.

  • Operator

  • (OPERATOR INSTRUCTIONS) And your first question comes from the line of Jim Covello with Goldman Sachs.

  • - Analyst

  • Great.

  • Good evening, guys.

  • Thanks so much for taking my question.

  • I guess my first question would be on the DRAM segment and, Mike, you referenced in the beginning that you think coming out on the other side of this, your customer base in semi conductors could look very different.

  • Do you have any thoughts about how DRAM, particularly Taiwan DRAM, comes out of the other side of this, given the severity of this downturn and what your customer base could look like, again, particularly in Taiwan DRAM on the other side of this cycle?

  • - President, CEO

  • Well, I think it's really a worldwide question, Jim.

  • In part, in Taiwan it will depend a little bit about what government does there, but I think we see two fewer, maybe three fewer companies in this space at the end of the downturn.

  • I mean I think initially -- in this last year, we expected consolidation, this kind of global recession is going to pretty much ensure it happens.

  • - Analyst

  • And obviously customer consolidation isn't usually great for suppliers, but what's your take on that?

  • - President, CEO

  • Well, it will, I think, make things more rational.

  • There's -- you know what the pricing is like in the DRAM world over the last two years.

  • I think if there's fewer suppliers, the market will be a little bit more orderly and I think that in the long run is a positive.

  • - Analyst

  • Helpful, thanks.

  • If I could get my follow-up, it would be around the solar segment, particularly with the SunFabs.

  • What kinds of things do you think need improvement in order to get quicker customer sign-off going forward?

  • What kind of things do you guys still believe you need to work on, other than the tandem junction technology, maybe logistical support, as you install the SunFabs or whatever issues you feel you need to improve to get quicker sign off?

  • - President, CEO

  • Sign off doesn't have anything to do with tandem junction.

  • The first number of factories are single junction factories.

  • - Analyst

  • Sorry.

  • Two separate issues.

  • Yes, sorry.

  • - President, CEO

  • Just moving up the learning curb, Jim.

  • You start up factories, you learn an awful lot of detailed issues.

  • Every one of them has to be resolved, but the good things is we resolve them once, we learn, we move to the next factory and each one will be faster and faster as we move through time.

  • - Analyst

  • Thanks so much.

  • Operator

  • Your next question comes from the line of Stephen Chin with UBS.

  • - Analyst

  • Hi, great, thanks, and congratulations on the solar operating profit there.

  • Two questions on the solar profitability.

  • I guess the first is do you think it's reasonable to model improving operating margins in that solar division as we go through fiscal 2009?

  • And the second question to that is does today's restructuring program impact applied solar division and, if so, will the solar work force reductions be similar to the rest of the company?

  • Thanks.

  • - CFO

  • Stephen, hi.

  • It's George.

  • In terms of the operating profit, I think we saw this quarter that you had a fair amount of additional revenue coming in in the area where we're having the highest margins right now in the solar because in the crystalline silicon group.

  • So that was a positive that we said will reverse itself in next quarter when we get to a more normalized revenue level.

  • 2009 is still going to be a working out year for us because it's when we're going to go through the, experience essentially the full learning curve as we roll through the initial SunFab sign offs.

  • So I think we'll just have to see for the full year where the crystalline silicon side comes out.

  • We have strong backlog in that area and then depending on how well demand holds up in that regard, that will be a positive for profitability or if we see a big pullback, that will have an impact negatively.

  • And then in terms of the cost reduction programs, every one of our operating executives has a target.

  • They are working their programs right now.

  • I'm not going to comment on the waiting.

  • Obviously, certain areas have more end market demand issues to sort out than others, but we're confident that we can execute on this cost reduction program and we'll have plans out this quarter.

  • - Analyst

  • Okay, thanks, George.

  • That's helpful.

  • Operator

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

  • - Analyst

  • In terms of your cash flow going forward, you mentioned that you're going to be focused on strategic investments.

  • Just given where the stock price is at, are you still not finding any, I guess, use for it in the near term, in terms of the stock buyback?

  • - CFO

  • Yes, clearly, clearly we think there is value in our stock and we have great confidence in our long-term business plan.

  • We just think that it's prudent at this time to preserve the cash that we would spend in share repurchase to make sure that we have basically control of our own destiny.

  • We have a very strong balance sheet coming into the situation.

  • We're probably better positioned than we've ever been, and we want to make sure that as we go through this thing, until we really see how deep and how difficult it is to navigate this particular economy, that we have the flexibility to maintain that we have going in.

  • - Analyst

  • Okay, fair enough.

  • In terms of your semi cap orders, we have one larger customer that's beginning its next generation ramp on the 32-nanometer node.

  • Without giving exact details of how they are going to order, does that provide you any near-term support over the next few quarters on that business front?

  • Thank you.

  • - CFO

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

  • - Director IR

  • Next question, please.

  • Operator

  • Your next question comes from the line of Weston Twigg with Pacific Crest.

  • - Analyst

  • Hi, I just wanted to go back to solar for a minute.

  • Specifically on SunFab revenue, looking at [Best Solar] which was the first 1 gigawatt fab, I believe, news of a delay at that facility has been circulating around for a while.

  • But I don't think it's well understood some equipment has already shipped there.

  • My question is what happens to revenue on equipment if customer delays its ramp plan?

  • And specific to Best Solar, would equipment there, if there is a long delay, be revenued, returned or redeployed?

  • - President, CEO

  • Let me just clarify something.

  • There hasn't been equipment shipped to Best Solar.

  • Best Solar is building out their factories and that may be what you're thinking about.

  • Equipment that is shipped to our customers, and we've shipped basically fully shipped to seven customers and are in the process of shipping to eight, those are all secured by letters of credit.

  • The customers are moving ahead.

  • They had to have their financing in place to be at this stage, so they are moving ahead on schedule.

  • - Analyst

  • I guess just sort of following on, what if a customer's unable to complete SunFab projects?

  • You say you have letters of credit, but how -- do you get a substantial portion up front as a down payment that might offset potential-- ?

  • - CFO

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

  • - Analyst

  • Okay, and then just on a crystalline silicon solar side, last quarter you mentioned you were around 200 million a quarter shipment run rate.

  • It sounds like potentially weakening demand on the crystalline silicon side.

  • What do you think might be a low, a low point for the shipment rate through next year?

  • - CFO

  • I'm not ready to make that call.

  • We haven't had cancellations, as you saw from the debookings you didn't see anything there from the crystalline silicon side.

  • So what has really been the phenomenon recently was the catch up with the shipment rates.

  • That's really where we are now.

  • We're caught up.

  • As it will be, as we work through our backlog, we've been running at about the 200 million rate a quarter and until there's cancellations, that's our assumption.

  • - President, CEO

  • And remember, if people are going to bring on silicon capacity, they have to saw and shape the wafers and have to be able to process them.

  • I don't think that says much about what the end demand is going to be like or when an adjustment would take place, but I don't think we're in a position to make a solid forecast out a couple of quarters.

  • - Analyst

  • Okay, thanks.

  • Operator

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

  • - Analyst

  • Hi, it's [Jennie Yun] in for Jay Deahna.

  • Two quick questions.

  • First, how many SunFab lines did you book this quarter and how many do you expect next quarter?

  • And then have I one follow-up.

  • - CFO

  • We don't forecast, but we booked one SunFab line this quarter.

  • - Analyst

  • And would you expect that or more next quarter?

  • - CFO

  • We're not -- we don't forecast out on the SunFab orders.

  • - Analyst

  • Okay.

  • And then just could we get more specifics on your tandem junction (inaudible) lines?

  • Do you have working panels at 8% efficiency and when do you expect sign off?

  • - President, CEO

  • Well, do we internally to Applied Materials?

  • Yes, but we can't comment on what a customer has working.

  • But we're happy with where our technology is moving and how fast it's moving ahead.

  • The schedule for that factory sign off is in our second quarter.

  • We think that's very much on schedule and going to happen.

  • - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Your next question comes from the line of Krish Sankar with Banc of America.

  • - Analyst

  • Good job, solid profitability.

  • I have two questions.

  • One is given the dislocations in the solar market, can Applied capitalize on this and move downstream like leveraging (inaudible) investment in other things, or is the plan in '09 just to focus on executing the (inaudible) part of the business?

  • - President, CEO

  • Well, our strategy first and foremost is to focus on our equipment and turn key and technology business.

  • We think this is the fastest way to scale solar energy around the world and drive the pricing down.

  • Will we do some downstream demonstrations, those kind of things?

  • They are for us at this point more marketing than business process to help create the demonstration that this is a business people can make money at and is cost effective to install and I think we're demonstrating those things around the world.

  • - Analyst

  • Okay, and in terms of your guidance for orders down over 30%, can you just give granularity on the breakout between how low silicon could be?

  • - CFO

  • No, we think it will be down significantly, but we're not, we're not going to break it out much more than that for the same reason that we're not giving order guidance, the ability to forecast at the start of a quarter when our own customers' forecasts are dropping or as volatile as we're seeing them.

  • So we wanted to give you some indication directionally of where it looks overall, but I think we're just going to leave it at that at this point.

  • - Analyst

  • Just a quick follow-on, how many hundred-plus million orders did you have in the October quarter?

  • - CFO

  • It was -- we had a very -- let me put it to you this way.

  • We had four orders, four customers, I should say, that comprised 70% of the total orders that we had in silicon.

  • That was the big piece.

  • Obviously we had a SunFab order that was also larger than $100 million.

  • So I think you can -- that should give you an idea of the concentration.

  • - Analyst

  • Thank you.

  • Operator

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

  • - Analyst

  • Hi, guys.

  • Two things.

  • First of all, it looks like pricing for crystalline modules was thought to come down about 20% next year, but really looks like it's going to be down about 20% in Q1, just in Q1.

  • So I'm wondering, the pricing rabbit and the cost rabbit that you thought you were chasing, i.e., where you thought pricing would be for crystalline modules out two or so years from today, does it -- does that rapid rate of pricing decline change how you think about solar and how you might have to get more aggressive in terms of cutting price to get CapEx per watt down?

  • - President, CEO

  • Actually, no.

  • You know that crystalline silicon pricing has been very stable for a long time.

  • Any approach, any modeling that we've done in this business, we've always thought that pricing had to come down 20% a year on average to really start getting this technology into the space where it can eventually be competitive with other forms of electricity generation.

  • So the fact that because of silicon shortage, pricing has been stable for multiple years really doesn't change how we think about strategically how we think about this business or the targets that we have set internally for ourselves.

  • We know where we have to get to the target is other forms of electricity generation.

  • It's not some internal solar target necessarily.

  • So as far as pricing, we know we have to keep driving the technology to get more efficient, more productive and that's where we're going to keep the market growing.

  • - Analyst

  • All right, Mike.

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

  • - President, CEO

  • Well, it's hard for us to think about crossing the line of competing with customers if that's what you're inferring, Tim.

  • I think there's lots of opportunity in the solar market and various spaces to help increase demand, but I think for right now we want to stay focused.

  • If we really see the business change, maybe we would reevaluate, but I think we still see enough interest in our products and turn key factories that we're going to do quite well in this market over time.

  • - CFO

  • Plus at the end of the day, Tim, you just -- it's not our balance sheet that would drive the value equation there.

  • It's ultimately what's the end market demand and do you have the utilities coming in, do you have broader government subsidies?

  • The demand -- these are very financeable arrangements if the demand is right and if the demand isn't right, there's no amount of balance sheet that's going to solve that problem.

  • - Analyst

  • Understood.

  • Thanks, guys.

  • Operator

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

  • - Analyst

  • George and Mike, I'm a little surprised that you saw a significant increase in Taiwan DRAM orders.

  • I was wondering if you could give me some color on whether these orders are for technology buys or capacity, some kind of (inaudible) conversion or just stack capacity.

  • Are you looking to ship these products in the next one or two quarters or do the ship dates extend beyond the next couple of quarters?

  • - President, CEO

  • Well, okay.

  • There's a complex question but, yes, it's for both technology and capacity in Taiwan.

  • Some of the orders are for conversion, so kind of the answer to your question is all of the above.

  • - CFO

  • As I said, these are very concentrated orders and as I said, 70% came from four customers, but 30% of the total order book that we got for Q4 in silicon turned in the quarter, and another 25% of it is going to turn in the next quarter.

  • So we've got, we've got a big piece of the flow-through just in the first -- basically in the first quarter of '09.

  • And then some will stretch on out to the latter part of the year.

  • - President, CEO

  • But our aging and our backlog is not particularly moving.

  • - Analyst

  • Okay, that's helpful.

  • And, Mike, earlier on in your prepared comments, you made a comment that you're suspending the buyback and you might look to be more aggressive on the acquisition front.

  • I was wondering if you could add a little bit more color to that.

  • Are you primarily looking in the silicon part or are you looking to make more acquisitions in the EES as you look to grow the business longer term?

  • - President, CEO

  • I'll comment on the acquisition and let George comment on the buyback.

  • But actually what I said was we are going to be disciplined and patient about acquisitions.

  • I'm quite happy with the capability we've developed in the company to do acquisitions and I think we want to be very selective.

  • I think we're going to say no many more times than we'll say yes.

  • We think that there's going to be lots of opportunity for acquisition, but what we're going to try to do is be very strategic in both our semiconductor space and our solar space to see where there's technology or products that will add to our offering and really make a strategic difference to the Company.

  • As you know, doing an acquisition takes a lot of management bandwidth.

  • We want to make sure the ones that we do really are going to have impact.

  • But I wouldn't say we're going to be overly selective on one business unit or the other.

  • I think we're going weigh it on strategic impact of the company.

  • - CFO

  • And on share repurchase, I'll just reiterate the fact that as you know we've been a strong proponent of share repurchase as a way of returning excess cash to shareholders, so it's not -- no change in that philosophical bias.

  • Also no change in our view that we're a very attractive long-term investment and certainly at the kind of levels today you just feel very comfortable.

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

  • - Analyst

  • Okay.

  • Thank you much.

  • Operator

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

  • Muse with Barclays Capital.

  • - Analyst

  • Yes, good afternoon.

  • Thank you for taking my question.

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

  • - CFO

  • Today it's crystalline silicon dominates the revenue picture in EES and it should, it should even out by the end of the year be more of an even mix and, again, I think that's assuming that things play out the way we see them today.

  • Forecasting has been a very difficult process in this environment, but that's how we see it today.

  • - Analyst

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

  • - CFO

  • Yes, I think honestly we have to take a look at where, how customers react to this environment to answer that question.

  • I mean we believed last time we update on this that 2009 would be the year that we would be GAAP breakeven.

  • Just remind you, we carried in '08 $120 million of acquisition charges in the EES segment, so there's a big nut there that has to be worked through on a GAAP basis.

  • On an operating basis performance has been obviously substantially better than what you see in the reported segment.

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

  • - Analyst

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

  • - CFO

  • Well, I think what you're seeing today with the mix that they have today, that kind of revenue level, they were clearly breakeven but it's, again, I think it will depend on mix and we'll just have to see.

  • We feel very good about the long-term business model for the solar group.

  • Inherently, the products are profitable and the SunFab model we think is an excellent one, and once we get through the basic learning costs should generate the kind of operating margins that they forecasted for 2010 and beyond.

  • - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Bill Ong with American Technology.

  • - Analyst

  • Yes, based on conversations with your chip customers, do you have an industry forecast of what global chip revenue should be next year, flat, down, some way of quantifying it?

  • Then, more importantly, do you have a sense of what the baseline type of spending is needed just to keep the global fabs running?

  • - President, CEO

  • You're -- Bill, you're asking for chips -- our forecast on chip sales?

  • - Analyst

  • Yes, because if you understand the chip revenue, you get a sense of capital intensity as a way to figure out what type of spending is needed.

  • - President, CEO

  • We think in 2009, chip sales will be down some place 5% to 10%.

  • That's kind of our view at this point.

  • Obviously, I would say our visibility on that is pretty low, but that's our view at the current time, so when there is less sales in the chip world, there's little need for added capacity.

  • - Analyst

  • As a follow-up, do you think the capital intensity would probably still be at the 16% to 18% of revenue?

  • - President, CEO

  • I don't even now how to forecast that when units are down.

  • - CFO

  • Capacity utilization is down so much.

  • - Analyst

  • Okay, thank you.

  • Operator

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

  • - Analyst

  • Good afternoon.

  • Mr.

  • Splinter, you're starting to see some production of single junction panels from some customers and I'm wondering what type of cost per watt these customers are seeing relative to the cost road map that you've communicated to the analyst community.

  • - President, CEO

  • Yes, in the initial phases here, we're seeing roughly $1.50 a watt.

  • This is very early.

  • As these panels start getting into higher volume and the factories run more efficiently, we'll see that continue to come down.

  • So we're pretty happy with where we are.

  • We're pretty much right on track with where we thought we would be.

  • - Analyst

  • That's great.

  • And as a follow-up, another solar equipment company demonstrated that a good chunk of its solar backlog is backed up with revokable LC's and cash deposits and I think their number was about 50% of their backlog, and this is GT Solar I'm talking about.

  • I'm wondering, is there any kind of metric you could share with us of how your solar backlog is protected there with LC's or deposits?

  • - CFO

  • Yes, we have -- as we talked about for SunFab, we have a policy of being fully covered as we've shipped and all of our eight factories where we've shipped equipment so far were fully secured for all of the equipment and the sign off value for the factories.

  • So -- and then it's been a practice in, on the crystalline silicon side to take deposits and to secure credit where credit is necessary, customers commitments.

  • - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Your next question comes from the line of Atif Malik with Morgan Stanley.

  • - Analyst

  • Thanks for taking my question.

  • If I look at your orders over the two-quarter period, your orders on an absolute basis are actually in line with your peers.

  • Is it fair to assume that your quarter was back end loaded for silicon?

  • - CFO

  • I think that's fair, because I think that we would expect some of our competitors to perhaps see some of these orders in their next quarter they report.

  • - Analyst

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

  • - CFO

  • We'll -- we're going to try and obviously address the head count reductions as expeditiously as possible and other spending reductions, but we don't have a scaled out obviously, but I would think in the first half of the year we would try and get at least more than half of it out the gate and we'll see.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Your next question comes from the line of Gary Sway with Oppenheimer and Company.

  • - Analyst

  • Thank you.

  • Mike, just kind of your general comment about thin film continuing their projects as planned, despite some financing delays.

  • That's kind of tough to believe given oil, where it is right now and given the difficulty and even kind of bigger main stream companies with balance sheets getting financing.

  • Are you really referring just to the near-term and kind of your basket of five to seven customers, or are you indeed really talking about the entire industry as a whole?

  • - President, CEO

  • Gary, let me clarify there.

  • What I said was for those customers that we've already shipped equipment to, we see those projects staying on schedule and for those that are still working through their financing, I said we thought that there would be some delay as they both have financing issues and maybe they have other project issues, but I tend to focus right now on more of the financial situation, but remember also that the (inaudible) and tariffs in Europe have not subsided and they will be increasing tariffs in Japan.

  • We have obviously a new incentive tax credit in the US.

  • We have a new administration in the US.

  • China will do something on renewable energy in their infrastructure package.

  • So how all these things play out over the next year exactly, I'm not sure, but I don't expect that oil prices specifically are going to have a whole lot of effect on solar energy, very little electricity is generated by oil.

  • Most is generated by coal and natural gas, but it doesn't matter.

  • In the end, you got -- we got to keep driving the costs down and get the costs competitive with all forms of electricity.

  • That's in the end the goal.

  • - Analyst

  • Okay.

  • Thanks for setting me straight.

  • One question for George really quick.

  • George, I really don't understand the hesitancy in reiterating your profitability guidance for solar next year and basically also sort of the secrecy kind of surrounding what your breakeven is.

  • You look right now and obviously I think you're trying to guide us to not model a breakeven at roughly around $450 million, but given obviously a 50/50 mix that you really kind of talked about in '09 and kind of rolling off of sort of this benefit from, I would guess slightly higher margins off of that $100 million in deferred revenue recognition, what is kind of the ballpark number we should be looking at more of a 50/50 crystalline silicone than [thin film]?

  • Is it 500, 600, 700?

  • Just give us some help there.

  • - CFO

  • So clearly you saw a breakeven this quarter and, first off, we have been I think exceedingly transparent in our discussions on this and so it's -- my view is forecasting the profitability for 2009 when there's a key dependency on crystalline silicon when we're not prepared to forecast crystalline silicon for the full year is just premature.

  • We'll keep you posted.

  • We know it's an important issue.

  • We're very interested in reaching profitability as rapid as possible, so -- and we're taking whatever steps necessary to get there.

  • So we'll keep you posted.

  • It's really more of a hesitancy to try and forecast a full year of crystalline silicon.

  • - Analyst

  • Okay.

  • Well, just quick follow-up, I can understand the hesitancy and visibility.

  • Intel basically cut their guidance one more time here.

  • But if I strip out that $100 million in deferred revenue out of EES in the October quarter, what would have been the profitability there?

  • - CFO

  • Yes, it would, it would not have been profitable.

  • - Analyst

  • Okay, okay.

  • Okay, great.

  • Thank you.

  • - President, CEO

  • Yes.

  • Operator

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

  • - Analyst

  • Yes, thanks for taking my question.

  • Just a couple of follow-ups.

  • This morning one of these manufacturers talking about shutting down 40% of their lines.

  • I expect some of the other silicon crystalline based manufacturers also start shutting down lines.

  • Has that already been factored into our comment that crystalline and thin film bookings are going to even out by some time next year?

  • - President, CEO

  • I don't know whether we have incorporated something that happened this morning, but we certainly incorporated everything we know from the customers that we have and what they have ordered from us at the current time.

  • - CFO

  • Right.

  • It's really more a reflection of current backlog and the fact that we didn't have any customer cancellations in Q4.

  • The mix of that can change as our forecast could change based on things that we learn over the next several months.

  • - Analyst

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

  • - CFO

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

  • - President, CEO

  • Chris, he's asking--

  • - CFO

  • I'm sorry, crystalline-- Excuse me.

  • - Analyst

  • crystalline.

  • - CFO

  • Oh, on the bookings side?

  • I'm not going guide to the individual areas at this point.

  • - Analyst

  • Okay, and then when I look at your guidance for the January quarter as zero to $0.04 and kind of revenue range that you guide to kind of gives a sense of what EPS breakeven is and I do understand you don't want to provide any guidance on the new breakeven point, but for the purpose of modeling, as we try to factor in the 12% work force reduction, how should we think about the drop through or incremental change in OpEx?

  • - CFO

  • Sure.

  • No, the other question was about breakeven for EES segment.

  • We would be happy to talk about breakeven for Applied Materials overall.

  • You can see from our guidance today that we look at the -- if you look at the low end of our EPS guidance range and you match that up with a low end of our revenue range, that gets you a breakeven level of around $1.3 billion a quarter.

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

  • - Analyst

  • Okay, thank you.

  • - CFO

  • You're welcome.

  • Operator

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

  • - Analyst

  • Thank you very much.

  • I have a question on silicon systems.

  • Did your revenue guidance imply that silicon system will be down close to 50%, that puts you in the 400 kind of revenue range and not an exact science, but I -- your backlog for me, silicon system backlog is coming out to somewhere between 1.8 and 1.9 billion.

  • - CFO

  • We actually -- let me just correct you on that.

  • We were specific and said that we thought it could be down more than 25%.

  • We did not use a 50% number.

  • I'm not sure where you got that number.

  • - Analyst

  • Okay, so, but still your backlog for silicon system will be still much higher than what your peers have reported.

  • Most of the companies, most have reported that backlogs are running at the level of their revenues.

  • Are you still -- a nice multiple of your revenue run rate.

  • Could you-- ?

  • - CFO

  • I think that -- yes, I think, I think number one, you have to take a look at the fact that we had a very strong order quarter this quarter that they have not yet experienced or put into their backlog and I think that's probably what accounts for virtually all the difference of what you're seeing.

  • - Analyst

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

  • - CFO

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

  • - Analyst

  • Yes, but even the -- I mean that, that's what I'm saying, that that would imply that your peers will have that booking so their backlog should increase in December quarter for them, but nobody has guided their order.

  • - CFO

  • Yes.

  • - President, CEO

  • We-- We don't want to speak for our competitors, so I don't want--

  • - CFO

  • You can talk to them, yes.

  • - Director IR

  • So, operator, we'll take one more question and then make our closing remarks.

  • Operator

  • Yes, sir.

  • Your final question will come from the line of Raj Seth with Cowen & Company.

  • - Analyst

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

  • - CFO

  • Yes, we're -- I'm not going to guide to gross margin.

  • Obviously we're taking actions to keep our operating costs as low as possible, so we would, we would see them coming down in the, and continue to come down as we roll through the cost savings.

  • - Analyst

  • Okay, and one, if I might for Mike.

  • Mike, given the magnitude of what's going on, do you see any of your customers, at least those you expect to survive, are they changing the, their pace of technology transitions in a significant way or are we still following Moore's Law here?

  • - President, CEO

  • I think that especially in a downturn, people are going to actually focus on moving to the next generation of technology faster to get products that maybe will attract more buyers.

  • They are going to work hard to get to that next generation of technology, so I think we're going to see Moore's Law continue maybe a slightly slower pace, but nothing significant here at this current time.

  • Everybody's going to use this time to move ahead and find new products to sell.

  • - Analyst

  • Right, and just a follow-up to one of the earlier ones.

  • Somebody asked about capital intensity.

  • You said last quarter in a normalized environment, clearly that's not what we're in, that you expected capital intensity to return to 20-ish percent.

  • A couple of your peers have suggested a lower number.

  • Any change to that 20% number that you gave last quarter?

  • - President, CEO

  • Well, I, I think when we come out of this on the other side, if there are fewer customers, the factory efficiency and the capital intensity will be down a few points, but I think the industry will be in better shape because of it.

  • So I think we have to see what happens during this period to -- before we solidify any prediction.

  • But in general, that's what I'm thinking.

  • - Analyst

  • All right, thank you.

  • - Director IR

  • Okay.

  • We would like to thank you for joining us in the discussion of the financial results.

  • We would like to remind you that a replay of this call and the supporting slide package will be available on the website starting at 5:00 p.m.

  • today and will remain posted until November 26.

  • Thank you for your interest in Applied Materials.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.