Applied Materials Executive Insights: Second Half Outlook and Pricing

On Thursday, Applied Materials, Inc. (NASDAQ:AMAT) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Second Half Guidance

Satya Kumar – Credit Suisse Securities LLC: Mike, it sounds like you said that the year is likely to be flattish for WFE and you’re picking up at least the low end of your WFE outlook, but you also said that Q2 may be a peak for foundries and you think memory is likely to remain weak. Could you just give us sense of the moving parts between first half and second half? What sort of coming up and may get flat in the second half?

A Closer Look: Applied Materials Earnings Cheat Sheet>>

Michael R. Splinter – Chairman, President and CEO: Sure. So I think first of all to kind of understand our view on this, you have to think about what the foundries need to supply model changes and the buying season at the end of the year. So, what it does is peaks out foundry spending in this kind of second calendar quarter, end of the first quarter beginning of the second calendar quarter. Now since if you look at both our fiscal year and the very beginning of the calendar year, spending in wafer fab equipment was a little bit weak. So, as you go through the – when we add it up, we get pretty much flat first half, second half, even though we see a peak in this time period of March, April, May. Then, if we look at the other kind of segments of wafer fab equipment spending, in the DRAM area, we expect low levels of spending throughout the year modestly down in the second half of the year. NAND spending, we previously had thought it would be better, but we now think it’s not going to be better, it’s going to be a little bit lower in the second half of the year as well. Then, we do expect logic spending to perk up at the very end of the year as the next node of logic technology starts to be purchased. So the summation of that is foundry will end up being pretty flat to first half second half, logic will pick up and memory will be modestly down in the second half.

Satya Kumar – Credit Suisse Securities LLC: One quick follow-up, if I take step back from the seasonal trends in foundries and all that, if I looked at how big the 40-nanometer node is at all the foundries and if I looked at how much capacities being added at 28-nanometer then if it try to think about the capacity at the end of the year relative to how big the opportunity is, do you think that labeling the 28-nanometer additions (indiscernible) how do you sort of think about the overall opportunity for 28 additions.

Michael R. Splinter – Chairman, President and CEO: Our view on 28 is that this is going to be the largest node. We think demand on 28 nanometers is very high and there is still constrained supply. The speed of the ramp is about something in the neighborhood of 50% faster than the 40, 45 nanometer ramp and we think in the end when this 28 nanometer peaks out over the next few years, it will end up being something on the range of 40% higher than the previous generation peak, so right now we think 28 nanometer is going to be strong through the year. It’s going to be strong into 2013 assuming that our customers can find a place to put equipment, they’ll continue to add equipment as quickly as they can.

Pricing

James Covello – Goldman Sachs: Two questions, first in the EES segment, what is normalized profitability have to get to over the next couple of years post to restructuring in order for you guys to want to stay in the business that would be the first question? Second question is on the NAND side obviously it’s been a little lower than we all would have thought this year, is it just pricing that we need to look at in order to determine when that segment could pick back up or there are some technology transitions coming along that could create a need for increased spending even in the absence of a pickup in pricing?

George S. Davis – EVP and CFO: Jim, it’s George. I’ll take the question on the EES segment. I think if you look at the new EES model that we talked about at the analyst meeting, we show that operating margins went to somewhere between 16% and 19% when we get to $1 billion of revenue which is about half of the run rate that we saw last year. So, we think as EES moves up into that range it starts to show the underlying benefit of the core operating businesses. It continues to be an investment vehicle for us. We think this is an attractive long-term business, and so we’ll continue to invest in next-generation cell technologies, but we think in that range it will be a positive contributor to the Company.

Michael R. Splinter – Chairman, President and CEO: So, Jim I think you got both the question and the follow-up, but then the main follow-up question, what we are seeing right now is about a 75% bit growth but within that there’s a number of things maybe I can address first supply and then demand. On the supply side, we are seeing a number of things happening here. A lot of the legacy demand is kind of falling off for things like cameras, iPods or MP3 players and the USB drives, so that allows them room to upgrade their legacy capacity, factor one. Then additionally the 3-bit-per-cell technology is getting qualified in many more applications and is much faster probably than we thought it would. On the demand side, I think the biggest factor is that the footprint in tablets and smartphones of NAND flash is not moving up as fast as we thought. So, while they’re affected by that big growth rate of 60% in tablets and 30% plus in smartphones, they are not getting a big additional kicker on the bit growth because the number of bits per box are staying relatively flat. I think that part of that is pricing, but I think part of it is just what the consumers’ demand for storage in these devices. So, until the solid-state drives get into the PCs or the footprint dramatically changes, I think we will see this kind of growth rate, bit growth in NAND.