by James Montgomery, news editor

August 20, 2010 – Analysts break down some of the more important points of Applied Materials’ 3Q10 numbers and discussions.

The numbers at a glance:

• Revenues: $2.52B, up 10% Q/Q and 123% Y/Y. SSG sales up 3% to $1.48B, orders up 8% to $1.53B. EES sales up 133% to $387M, orders down 6.6% to $353M. By region, more sales came from in North America (12% of total vs. 10% in 2Q10), Europe (11% vs. 7%), and China (19% vs. 10%), while there was a big decline in Korea (16% vs. 28%).

• Net income: $123M (EPS $0.09, non-GAAP EPS $0.17), down -53% Q/Q and vs. -$55M in 3Q09. Includes $450M in charges (inventory-related, severance and asset impairment) related to shuttering its thin-film division.

• Gross margins: 34.2%, vs. 28.7% in 2Q.

• Backlog: $3.13B, up 4.5%. By region, more orders came in from Europe (9% of total vs. 6% in 2Q10), Japan (8% vs. 6%), and Southeast Asia (9% vs. 6%); dropoffs were in Korea (19% vs. 22%) and China (15% vs. 22%). New order composition for SSG was: 37% foundry, 32% DRAM memory, 18% logic/other, and 13% NAND flash memory.

AMAT’s outlook for fiscal 4Q10:

• Revenues: Flat to +5% Q/Q (i.e. $2.5B-$2.65B). SSG sales should rise in fiscal 1Q11. AGS sales up >10% due to refurbished tools and higher wafer starts. EES sales down -10% to -20%, but upside if a SunFab factory in China signs off.

• Non-GAAP EPS: $0.28 to $0.32, including a $0.01/share charge "related to completed acquisitions."

• Fiscal 2010: Revenue $9.2B-$9.3B (+80%), non-GAAP EPS $0.80-$0.84. That’s a bit higher than its March projections of $8.0B-$8.5B and $0.68-$0.78.

Some callouts by AMAT execs in the presentation/conference call:

— Marketshare gains. In SSG, aiming for two points of marketshare gain in WFE share for the year, including 4 points in etch and some share growth in CMP and Cu interconnect (Semitool), and brightfield inspection and mask mask inspection.

— Records set in 3Q10: (SSG) CMP sales and Semitool orders; CEO Mike Splinter projected record orders for brightfield and mask inspection in 4Q10. (EES) crystalline silicon profits, Baccini tool sales, precision wafering orders.

— Transition of manufacturing to Asia continues. By 2012, Splinter said, 50% of the company’s semiconductor equipment shipments will be out of Singapore (the rest from Austin).

— No guidance is good guidance? AMAT once again did not provide specific guidance for orders in coming quarters. Splinter acknowledged that "the macro signals have become more cautious," and summertime is always one of concern. But nevertheless, "we have not seen a pause in semiconductor capital investment and we expect a solid finish to our year."

— NAND flash is rocketing. Look for 100%+ bit growth for NAND flash in 2011, Splinter agreed with one caller, on top of 70%-80% in 2010. That largely depends on what happens with tablet PC adoption — but if that meets "even the midpoint of projection, it’s going to drive a lot of flash memory."

— It’s still a turns-business world. AMAT is still seeing a lot of turns business, as it did in the prior quarter, and Splinter sees that continuing particularly for foundry customers. (Analysts at last month’s SEMICON West expressed "shock" at how short lead-times have become.)

Analysts’ take

Analysis from some of the smarter people in the room & in the conference call:

CJ Muse, Barclays Capital:

— Those marketshare gains AMAT spoke of? Muse breaks it down as follows: PECVD at Intel (vs. Novellus), Cu CMP at TSMC (vs. Ebara), tungsten etch at Samsung (new business) and brightfield/mask inspection also at Samsung. "The Intel win and Cu CMP win at TSM are likely significant ‘needle movers," he writes, though the other share gains might be somewhat overemphasized.

— For those seeking a prime benefactor to thank for an extended upswing in chip tool demand, Muse has a likely candidate: "[we] appreciate the benevolent influence of ASML’s immersion [lithography] shipments (i.e. extended lead times) in pacing out the recovery at a nonoverheated pace."

— AMAT’s Splinter said NAND sales would be ~20% of overall for FY10 (vs. 13% in 3Q10), suggesting that two major fabs are about to spend like gangbusters in the next couple of quarters. Muse ID’s these spenders as Toshiba’s Y5 fab and IM Flash, the Intel-Micron JV.

Satya Kumar, Credit Suisse:

— Widening concern about sluggish PC demand might be baked into Splinter’s comments about "macro concerns," but apparently have not dented semiconductor tool demand, and he doesn’t see a slowdown at least after 1Q11. DRAM demand is slowing but is offset by NAND flash and foundry.

— The projected 4Q10 boost from AMAT’s AGS unit, identified as refurbished equipment and wafer starts, is essentially 200mm tools and largely not an ongoing trend, Kumar says. (The 200mm ramp — attributed to demand from analog to automotive to MEMS and foundries — also hurt the fab solutions unit’s operating margins. AMAT CFO George Davis clarified this as having to re-ramp a "much colder" 200mm supply chain vs. 300mm, which led to "under absorption of our manufacturing.")

Steve O’Rourke, Deutsche Bank:

— DRAM bookings declined 15% in 3Q10 and should pull back further in 4Q10. Foundry bookings likely have peaked, after increasing 8% Q/Q. (Logic increased 63% Q/Q but was only 18% of total bookings.)

— EES sales were guided -10% to -20% lower, but EES bookings were down -7%. That suggests EES bookings could slow in 4Q10.