應用材料 (AMAT) 2001 Q2 法說會逐字稿

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  • Editor

  • APPLIED MATERIALS SECOND QUARTER FISCAL 2001, EARNINGS RELEASE CONFERENCE CALL

  • Operator

  • Ladies and gentlemen, thank-you standing by and welcome to the Applied Materials second quarter fiscal 2001, earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, you will need to press the '1' followed by the '4' on your telephone. As a reminder, this conference is being recorded, Tuesday, May 15th, 2001. I would now like to turn the conference over to Carolyn Schwartz, Managing Director of Investor Relations Applied Materials. Please go ahead Ma'am.

  • CAROLYN SCHWARTZ

  • Good afternoon and welcome to our second quarter call. This is Carolyn Schwartz. With me today are Jim Morgan, Chairman and Chief Executive Officer, Joe Bronson, Executive Vice-President in the office of the President and Chief Financial Officer, David Wang, Executive Vice-President in the office of the President, and Joseph Sweeney, Group Vice-President of Legal Affairs and Intellectual Property. Our second quarter financial results were released on Business Wire today shortly after 01:05 p.m. Pacific Standard Time. You can obtain a copy of the press release or listen to our webcast of this conference call on our website at www.appliedmaterials.com. During our conference call today, we may make projections or other forward-looking statements regarding future events or the company's future financial targets. I would like to advise you that these 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. Such risks and uncertainties include, but are not limited to those contained in today's earnings new release and certain Applied Materials filings with the Securities and Exchange Commission, including our Form 10-Q for the quarter-ended January 28, 2001, and the Form 10-K for the fiscal year-ended October 29, 2000. The company has since no obligation to update the information presented in this conference call. Today's call will begin with Jim Morgan for a summary of our business results followed by David Wang, who will give us an update on the market environment. Joe Bronson will then provide an analysis of our second quarter financial results and give the financial targets for the fiscal third quarter. After these remarks, we will open the conference call up for questions. We would like to finish by 02:45 p.m. Pacific Time. We would like each caller to limit their questions to one per firm. With that I would now like to introduce Jim Morgan.

  • JAMES MORGAN

  • Good afternoon. Thank-you gentlemen. I would like to begin by thanking our customers and each of our employees for their tremendous efforts during this challenging time and for the hard work that allowed us to meet our targets this quarter. While our company performed well, macroeconomic issues continued to affect our industry. In the second quarter, the slowdown in the US economy impacted other regions of the world and corporate spending, for IT investments virtually came to a standstill, which resulted in a significant slowdown in semiconductor revenue. In the United States, consumer electronic spending continued to decline. Despite ongoing weakness in orders and revenue in Q2, Applied Materials delivered profits of little over 14% after tax. In our last conference call, we were cautious since it was still unclear, how the slowing US economy and uncertain demand in our industry would impact us and we maintain this cautious stand. This downturn is in my recollection, the steepest and the sharpest cutback in equipment spending we have seen. I believe we are now in the bottom of this cycle and are waiting for the tipping point to recover. Actions like the FED took today by lowering interest rates and our customers imminent need to transition to smaller geometries, new materials, and 300 millimeter will contribute to our industry making the turn during the next two quarters. As many of you have heard me say in the past, great companies are built in tough times. Even though this was one of the toughest downturns in terms of steepness and breadth. Applied Materials is in a better position today because of actions taken in previous downturns and proactive actions taken earlier this year. Having made tough decisions about the structure of our business and our cost, our focus now is very much on capitalizing on the significant opportunities ahead.

  • We finished the last downturn with a new corporate strategy that enabled us to control employee headcount growth beyond our customer productivity support headcount increases, inline with our business opportunities. Our most important resource is our highly trained employees and through this downturn, we are balancing our need for prudent cost savings with our anticipated future personnel requirements. The account and regional management structure and new product groups established last year are providing important leadership necessary to position our broad product and technology offerings. Further, we are committed to investing in those global infrastructure capabilities that will provide confidence to our customers that they will be supported in the upcoming difficult transition simultaneously to tighter geometries, new materials, and 300 millimeter. From conversations, it is clear that our customers are carefully evaluating, how they should best invest for the next round of growth. They are making select technologies buys now, while postponing capacity buys for the near term. Just this past week, I attended Approaching Global Forum in Hong Kong, where I met with President Jiang Zemin, and spoke with leaders from industry and government and talked about the future especially in Asia. Economic growth and information infrastructures were the key priorities of the government and business leaders in attendance. While cautious about the near term, these leaders expressed their shared belief that the future for the electronics industry is bright particularly in Asia. Everywhere in the world, technology is being encouraged and embraced and it is clear that fundamental chip demand will continue to increase.

  • Billions of potential new consumers in Asia could create an unprecedented demand for electronic devices and the chips that drive them. Applied Materials has been recognized publicly for its flexibility and ability to manage through rapid cycles. Our global management team continues to take steps to reduce costs, set priorities that are appropriate, and our focus remains on meeting our long-term goals, while managing through the current downturn. We are carefully balancing our technology roadmap projects with responsible fiscal action and are unwavering in our commitment to research and development spending during this time. As in the past, we believe we will emerge in a stronger position when the upturn arrives. We are of course a strong company today, a broad line of leading products, outstanding regional capabilities, and with 4.5 billion in the bank, this cash supports us in tough times and gives us an opportunity to quickly ramp the sudden increases in business. We are strengthening our global infrastructure to support our customers anytime and anywhere in the world. This is also an unique time for us to capitalize on our e-business potential. In previous years, we made worldwide enterprise investments in information technology. We are seeing the payoff now. This technology base coupled with new software applications should enable us to lead the industry in e-business solutions. The heart of computing and connectivity is the semiconductor chip, and Applied Material Systems help make virtually every new chip in the world. I believe that no company can lower the cost and improve the power and productivity of chips like Applied Materials can. With the world producing nearly a million chips a minute, the results are an amazing acceleration of capability and potential. In a time just since our last conference call, millions of more people got connected around the globe.

  • Our role is to open the information age to more people around the world, and bring the next billion participants into the global network economy. Each new participant in the global economy drives a need for more chips. Each new design and every new chip drives the need for our advanced equipment, and as the function of chips become more complex, our customers need to invest more in advanced equipment and processes. Because of the challenges, we are becoming a closer partner with our customers and play a more pivotal role in their business. For these reasons, it is an exciting time to be an equipment manufacturer and a solutions provider, and our prospects for long-term growth are excellent. Applied Materials remain strong, and I believe we will emerge stronger than ever when the upturn arrives. We have clearly emerged as a core information infrastructure company, focused on enabling information for everyone by helping our customers deliver more powerful and more portable and more affordable chips to the worlds consumers. Applied Material is not a near-term phenomenon. It is a company that has been built overtime with a 30-year record of a compounded growth of over 25% through several downturns. We have achieved this success by avoiding distractions and wavering during the downturn and by focusing our efforts together on the upturns. Our future holds a billion additional connected people, people who are more technical literate, and are utilizing more devices and applications with higher silicon content. Today, our industry is producing nearly a million chips a minute; requiring the suppliers to provide greater value. There is a tremendous opportunity ahead for our industry and for Applied Materials, its leading equipment supplier. Thank-you and I would like to turn it over to David Wang.

  • DAVID N. K. WANG

  • Good afternoon. As you have heard from Jim, it is clear that the environment today is one of the most challenging, we have ever experienced in our industry. As the slowdown in our customers business continued during the quarter, actual spending cuts were announced by several semiconductor manufacturers as their factory utilization rates were reduced. For example, foundry utilization rates on an average are running at approximately 50%, down from 70% after the end of March. However, we believe that the industry is in early stages of a very powerful technology transition. For example, utilization rates for foundries as a whole are running at 50%, around the most advanced lines at 0.15 micron and below with copper processing capability, utilization rates are running much higher at about 80%. These lines have actually ramped Wafer stocks dramatically over the past few quarters as the push for leading-edge process technology has accelerated. This very big technology transition has been evidenced in our Q2 bookings, where purchases of 0.1-micron technology and below made up nearly 40% of all equipment bookings. This percentage has doubled in just a few quarters. A strong growth is driven by increased demand for the most advanced process capabilities and is testament to the stronger position we enjoy today.

  • We also experienced record levels of foundry business as a share of our total bookings. Foundry share of the total systems new orders grew to 39% in the quarter from 26% in Q1 fiscal year 2001. China, contributed to this foundry growth, representing a real bright spot for us as bookings grew to nearly $150 million. As the foundry begins to ramp it's semiconductor manufacturing capacity. In terms of 300-millimeter growth, we expect our customers to continue their focus on 300 millimeter as a strategic investment. This year, we expect the 300-millimeter to exceed 25% of our total bookings, and to grow to over forecast 40% next year. Our early penetrating has been excellent, as we are experiencing overall higher market share on 300-millimeter business than our already strong 200-millimeter business. The share beginnings are across all the products, even in the very competitive Etch markets was our new eMAX, for dielectric Etch and the DPS II for advanced Poly and Metal Etch processing, where we are gaining tremendous momentum. Looking forward, we feel an accommodative Federal Research Policy along with US Income Tax cuts, should put the US economy in the right direction with a positive impact on corporate IT and consumer spending.

  • We think that the PC market maybe near a bottom with inventories approaching normal levels and is therefore expected the PC markets to lead the industry recovery in the second half of this year. Indeed, the DRAM manufacturers now have inventory levels back down to a more normal and healthy level of 4 to 6 weeks and OEMs are expected to burn out their inventory, which carried over from last year over the next 1 to 2 quarters. We, therefore, believe that the devices associated with the PC, such as advanced Logic for microprocessors, chipsets, and high-speed high-data rate DRAM's will be the first movers in the next up cycle. Across all markets, downgoing inventories adjustments in the supply chain are continuing, and we are certainly encouraged that several of our customers are now saying that the industry may be approaching a cyclical trial. As these trends take shape, we will see increasing FAB utilization and subsequently, a sustainable Wafer Fab equipment industry recovery initiated before the end of this year. Thank-you, for your attention, and I would like to introduce Joe Bronson, the CFO of Applied Materials.

  • JOSEPH BRONSON

  • Thanks David. Discussion of our second quarter results - net sales were 1.91 billion and we are in the lower range of the target of 1.9 to 2 billion previously discussed during the last earnings conference call on February 13th. Second quarter net sales declined 30% from the first quarter of 2001, and we are 13% lower than the prior year quarter. Ongoing net income for the quarter was 269 million or ¢32 per diluted share, 52% lower than the 558 million over ¢66 per diluted share for the first fiscal quarter of 2001, and 41% lower than the 459 million or ¢53 per diluted share for the same period of fiscal 2000. Ongoing net income as a percentage of revenue in the second fiscal quarter was 14.1%, a decrease from the 20.4% for the first fiscal quarter of 2001, and a decrease from 21% for the same period of fiscal 2000. Non-recurring items amounted to 58 million consisting primarily of severance cost for approximately 1000 employees from the previously announced voluntary separation plan as well as the shutdown of Etch's printed circuit board inspection facility located in Tucson, Arizona. In addition, the company changed its effective tax rates for fiscal 2001 from 30% to 29.5%. Recording this change in the second fiscal quarter of 2001 had no effect on earnings per share.

  • The company experienced a second full quarter in this downturn environment, which has been severe and steep. Weakening global economies as well as significant slow-to-negative growth in the technology sector of the economy had severely affected capital spending plans in the semiconductor industry. New orders for the quarter were 1.35 billion generating a book-to-bill ration of 0.7 to 1. Orders declined 44% in the first quarter of 2001. Most customers have reacted quickly to the downturn environment and have virtually seized ordering for 200-millimeter capacity and are now focused on technology purchases for slower line-width geometries 0.13 or 0.1 and the transition to copper. Activity for 300 millimeter continued at expected levels with those companies committed to 300 millimeter, still investing and taking delivery as scheduled. Backlogs for the quarter was 3.05 billion, backlog adjustments were 303 million consisting primarily of cancellations and other adjustments. Since our last earnings conference call on February 13th, business continued to weaken throughout the quarter. Cancellations and push outs continued to plague our operations causing significant reconfiguration activity to continue. Finished goods inventory from the first order was reconfigured during this quarter and along with stranded inventory was significantly reduced in the second quarter despite the revenue decline.

  • Gross margins for the quarter was 44.8, down from 48.8 in the first quarter, as margins were adversely impacted by lower factory absorption, product mix to the 300-millimeter style, and learning curve cost, and the service business, which has a lower gross margin, but the same operating margin as the systems business, as well as reconfiguration cost of prior quarters inventory of finished goods. The Austin Volume manufacturing facility is currently operating at less than 50% of capacity. Operating margins excluding one-time items were approximately 17%. Ongoing operating expenses were reduced 10% from 582 million in the first quarter to 522 million in the second quarter or 27% of net sales. Product development program expenditures as well as customer specific applications development in all areas continued, despite significant reductions in discretionary and compensation expenditures. Headcount was reduced from approximately 22,000 to 20,000 during the quarter, which includes the release of factory temporary workers. Overall activity continued to be weak, although the amount of rescheduling and cancellations had decelerated from the very high first quarter level. All regions, except China were weaker than the first quarter as demand for capacity had significantly decreased, particularly for the foundries and those semiconductor companies that serve the tall communications segment of the IC business. All percentages by geographic region for the second fiscal quarter were as follows - North America 24%, Japan 21%, Taiwan 20%, South East Asia 15%, 11% in China included in the 15%, 14% for Europe, and 6% for Korea.

  • Most of the US integrated device manufacturers are significantly curtailing capital spending. Capacity utilization in foundries located in Taiwan and South East Asia have fallen to 50%. The Japanese economy continues to be uncertain, as customers are cautious in their capital spending plans. Orders for 0.18 micron and below applications continue to drive the current business and represented 76% of system orders in the second quarter of fiscal 2001; 36% of system orders were for 0.15 micron and below applications. DRAM represented 17% of system orders for the second quarter compared to 19% in the first quarter. In the second fiscal quarter, 19 customers placed orders in excess of 10 million versus 36 million in the first quarter of 2001. Of the 19 customers, 6 orders were in excess of 15 million versus 11 million in the first fiscal quarter of 2001, and no orders were in excess of 100 million versus 5 million in the first fiscal quarter of 2001. Cash equivalents and short-term investments increased by 606 million from the prior quarter to 4.5 billion. Significant cash generating activities were as follows- aggressive collections of accounts receivable as DSO was reduced to 77 days from the first quarter of 2001, performance of 82 days.

  • Over 2.4 billion of cash collections on receivables were received in the second quarter. The company paid significant attention to inventory management during the quarter to liquidate last quarters finished good inventory of cancelled systems and monitor and reduce the rate of inventory receipts. Capital expenditures were 195 million as major infrastructure projects continued, repurchases of common stock during the quarter were 41 million for 896,000 shares at an average price of 4593. The downturn in business has always afforded Applied Materials the opportunity to strengthen its market position, since we continue to fund new product development programs and support customers with joint product development activities for new processes and applications. During this downturn, the company will continue to focus on new product offerings in existing markets as well as 300-millimeter products and customer solutions for applications through the module concept. Company has achieved significant market share in 300 millimeter in its first phase of customer investment, and currently enjoys market share that is greater than its 200-millimeter business. Our focus continues on improving the performance capability of these tool sets in a volume production environment to enable the customers to realize the potential 300-millimeter offers in terms of significant cost reduction in line with expendability. During this year, customers are also moving towards copper based processing, albeit at a slower rate as technical integration issues get addressed.

  • We estimate the markets for copper-based tools to be 500 million in 2001, and Applied Materials enjoys the largest share of this business, with significant leadership in the copper barrier seed deposition business, our leading position in the CVD family of products offering Black Diamond and Barrier Low k films as well as a leading position in CMP with momentum in electroplating. The next phase of significant development is already beginning to occur as customers move to 0.1-micron base technologies where our products offer expendability. Development of modular product offerings is proceeding for Copper Interconnect, Deposition Etch, Gate Stack, and Transistor Formation. Metrology inspection tools with yield enhancement capability will also continue to leverage our process tool offerings by offering the customers improved productivity through best-known methods for yield enhancement. Some product milestones for the quarter were as follows - CMP shifted to 1000 Mirror System, the 100 Copper Barrier/Seed System with shift, the 300 producer platform for CVD dielectric films was shipped, significant market share competitive wins for Sprint our Tungsten CVD, market leadership in high current ion implementations for the first time in the company's history, and expectations for our medium and high energy in-planter Swift are being met. Market share in PDC, process diagnostics and control, continues to improve with competitive wins in Wafer inspection particularly in 300-millimeter applications. And we shipped the first next generation mass-pattern generator to US customer.

  • The product will be formally announced at Semicon West. We expect that we will continue to extend market share leadership into the next generation line-width and 300-millimeter market through continuous execution of the product and module strategy. Before discussion of the future next quarter, we believe that the current downturn in the semiconductor industry is the worse contraction in the history of the industry since the 1984-1985 timeframe. Due to the significant growth of the semiconductor industry over the past 15 years, however, we believe most equipment companies are in a better position to withstand the negative impacts of this cycle. Despite the severe contraction, we continue to believe that the industry will return to historical growth patterns and continue to provide significant value to the global economies ability to influence and increase productivity as a basis for growth. Nevertheless, we have significant short-term challenges to face. Our view that is likely that the semiconductor revenue growth will decline by 13% year-over-year to about 182 billion and that capital spending will be down at least 25% if not 30%. These numbers include the recent announcements of cuts in capital spending by Japanese and European semiconductor companies. The telecommunications segment of the market, a growing percentage of semiconductor spending continues to work at high levels of inventory. One bright spot is that the PC market may be showing signs of nearing the bottom, as inventories appear to be stabilizing. Demand, however, remains weak. As a result of weaker than expected orders in the second quarter, our outlook for revenue in the third quarter will be poor.

  • While some indicators suggest a bottoming out for business in our third fiscal quarter, the general lack of visibility in the industry makes it difficult to see when a true recovery may begin to occur. In this environment, we will continue to manage costs aggressively in line with expected levels of revenue. We have recently instituted additional cost cutting actions including further salary cuts, additional shutdowns, and reductions in variable compensations. We will focus spending on product development, and will aggressively pursue our R&D agenda for 300-millimeter copper modules and new products in all business segments. Financial targets for the third fiscal quarter is on and are as follows - we expect our book-to-bill ratio to be 1 or slightly above 1. Revenue will be further reduced to a range of 1.2 billion to 1.3 billion. Our earnings per share will be breakeven or slightly above breakeven.

  • CAROLYN SCHWARTZ

  • Thank-you Joe. That will conclude our remarks and now we would like to open the call for questions and answers. To comply with Reg FD we will not be giving any incremental guidance after the call, therefore if you have any issues that need to be addressed please raise them during the question and answer period. Operator, would you please give the instructions to the participants?

  • Operator

  • Thank-you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the '1' followed by the '4' on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the '1' followed by the '3'. If you are on a speakerphone, please pick up your handset before entering your request. One moment please for your first question. Your first question is from Glen Young of Salomon Smith Barney. Please proceed with your question.

  • GLEN YOUNG

  • Thank-you. Jim, I think I heard you say that you felt that the industry after a traumatic decline in the first part of the year so far, was reaching a bottom and then you felt that you could see a pick up over the next two quarters. Just want to get a sense as to what's giving you that kind of indication and what kind of confidence you have in that statement?

  • JAMES MORGAN

  • We have talked to the customers, they are beginning to look at how they are going to come out of this from their manufacturing and processing capability, and when you talk about excess capacity, people always get confused about the fact that that's true for the large installed capacity, but many of the new devices are based on the emerging new production technologies, tighter geometries, new materials, and in some cases 300-millimeter. So that capacity, as I think David mentioned is actually in short supply if there is very much of a pick up in demand, and so as more of these advanced designs go into pilot and production, it puts a demand on the need for the advanced investment and equipment. So that's what drives that and that's why we would see probably our bookings being somewhat better than our billings this quarter for the first time.

  • GLEN YOUNG

  • Jim, just a follow up to that. Would you characterize the level of bookings that you are seeing, particularly as it pertains to the 200-millimeter installed base as maintenance level bookings? And, then what would you quantify your expected industry revenues for 300-millimeter to be in 2001.

  • JAMES MORGAN

  • What you are seeing on 200-millimeter is the move to newer technologies because lot of them are going to the new materials and tighter geometries on 200-millimeter, as opposed to starting on 300-millimeter, and so there is selective investment by many of them there, than there are some who want to go ahead with 300-millimeter and the new materials. So you get demand from both of those.

  • GLEN YOUNG

  • And your expected revenues, industry revenues for 300-millimeter this year?

  • JAMES MORGAN

  • 300-millimeter? about 6 billion.

  • GLEN YOUNG

  • Great, thank-you very much.

  • Operator

  • The next question is from Vadim Zlotnikov of Sanford Bernstein. Please proceed with your question.

  • VADIM ZLOTNIKOV

  • Yes, even if I give Applied Materials credit for very dramatic rebound in the October and January quarters, it looks like your revenues will still be down over 40% and to the extent that you believe you are gaining share, how's that consistent with the guidance for the capex being down 25% to 30%, and kind of related to that, it looks like this current quarter, your gross margins will be one of the lowest on record. Is it entirely absorption of overhead or are you seeing any pricing issues on the new products, which make up for disproportions, the high percentage of total that could persist or maybe just normal for this point in the cycle?

  • DAVID N. K. WANG

  • Because in the first quarter, we had a pretty good revenue and also we believe the bottom for the booking probably is in Q2, so we should see an increase in revenue beginning maybe the last quarter. So, therefore if we add all these together, this is only about 20% down in revenue compared to year 2000.

  • VADIM ZLOTNIKOV

  • I am sorry; I guess I was looking at the calendar year. Was the 25% to 30% guidance for the fiscal year?

  • JOSEPH BRONSON

  • We haven't given any guidance.

  • VADIM ZLOTNIKOV

  • 25% to 30% for the whole industry.

  • JOSEPH BRONSON

  • Yeah, that's for the whole industry for the calendar year. And that includes photolithography equipment..

  • DAVID N. K. WANG

  • That's capital spending.

  • VADIM ZLOTNIKOV

  • I guess I was looking at the same time period for Applied over the same calendar year and that looked like it was down closer to 40, given that your January quarter was 2.7 billion.

  • DAVID N. K. WANG

  • No, usually revenue is 3 to 5 months behind the booking numbers.

  • JOSEPH BRONSON

  • I mean if the business does pick up in the latter half, that quarter that influences that would be better than David talked about.

  • VADIM ZLOTNIKOV

  • Okay, but you are still comfortable that you are gaining share, and at 25% to 30% industry you should be able to do better than that.

  • DAVID N. K. WANG

  • It all depends on the mix of what is being bought and what we felt, but as we look to the positioning on 300 millimeter, we are very excited the positioning that most of the products are getting.

  • VADIM ZLOTNIKOV

  • And on the margin front?

  • JOSEPH BRONSON

  • Yeah, the margins are not anywhere near the lowest. We have bottomed out it in the prior cycles in the 40% range. So to have the business drop by almost 50% in two quarters, I think the margin performance isn't all that bad. In fact, I think it is pretty good to what we have been able to accomplish. As I said it at the call, the biggest issue is factory absorption, the second biggest issue is reconfiguration because it costs quite a bit of money to reconfigure, to alter other customers that cancel them, and thirdly, there is a learning curve, as the 300-millimeter products go through installation and start up for the first time at the customer facilities. So we should start to see that start to improve as we ship more.

  • VADIM ZLOTNIKOV

  • Terrific. Thank-you very much.

  • Operator

  • Your next question is from Jay Deahna of Morgan Stanley. Please proceed with your question.

  • JAY DEAHNA

  • Thank-you very much. Good afternoon, I was listening to David's comments indicating that bookings probably bottomed in the second quarter. Bookings were reported at 1.35 and the guidance is 1.2 to 1.3 for the third quarter, so are you looking at it from an networking perspective that your next bookings were 1.05 billion in the second quarter, and with the settling down of pushups and cancellations that your net bookings can be up in the third quarter in the 1.2 to 1.3 range. Is that the correct way to look at it? And following on that, what do your forecasts look like for the October quarter?

  • JAMES MORGAN

  • First of all Jay, the guidance was 1 or slightly in excess of 1 with respect to the next quarter. So, with revenue guidance at 1.2 to 1.3, you can do the math as to what we think. So all we are saying is that the book-to-bill ratio will be at 1 or greater for the next quarter. That's what we are saying in the guidance.

  • JAY DEAHNA

  • Okay, but if you look at it from a net bookings perspective with 1.05 billion in the second quarter and something in the 1.2 or higher range in the third quarter, does that imply that net bookings are likely up sequentially in the third quarter?

  • JOSEPH BRONSON

  • It's impossible to forecast net bookings because you don't know anything about cancellation or any error type of activity or foreign exchange adjustments, etc. So that's not a forecastable item, but we are doing this. Basically, saying that the book-to-bill ratio we think may hit bottom.

  • JAY DEAHNA

  • Okay, and then the last question is - have push outs and cancellations subsided and has may have been pretty mellow from that perspective?

  • JOSEPH BRONSON

  • Well it couldn't get much worse, so I think it is definitely decelerated for sure. I think most of the major customers have doubled their plans. They certainly are not late in coming to deal with the current levels of business in the cycle.

  • JAY DEAHNA

  • Right and then I asked about the October quarter, do you have any insights under the October quarter bookings outlook at this point?

  • JOSEPH BRONSON

  • No, we're not sure about this, that's the next quarter.

  • DAVID N. K. WANG

  • Just what we can identify, I mean, we just start going, we just can't see up that point. It's like it normally is, is you have a huge amount of identified pinup demand, and you never know exactly when that's going to happen. If you think back to 2000, the beginning of the year we forecasted that we'd have 2 flat quarters in our business plans and after about 6 weeks, into that year the customers decided that they were going to invest and they went straight up and we doubled our revenues. So, we always see a large identified need, but you never know when the CEO is going to put it in the paper for the purchase orders.

  • JAY DEAHNA

  • Just to clarify Jim, when you said in the earlier comments that you see a turn in next 2 quarters, were you referring to a bookings of revenue turn?

  • JAMES MORGAN

  • Bookings turn.

  • JAY DEAHNA

  • Okay, thanks.

  • Operator

  • The next question is from John Pitzer of Credit Suisse First Boston. Please proceed with your question.

  • JOHN PITZER

  • Good afternoon guys. Joe, a quick question first, I wonder if you could just give us sense of what was systems bookings versus service bookings in the quarter?

  • JOSEPH BRONSON

  • We will need, to break that out, but it's all answered by saying that the service business was slightly below 20% in the quarter.

  • JOHN PITZER

  • And then, just a quick commentary, it seems like when you look at some of the large semiconductor companies that a lot of them are front-end loading their capital expenditures at the first half of the year. Companies like Intel spend about 36% of their capital budget in Q1. I'm just kind of curious, given the fact that so many purchases are technology oriented. What's the risk that these guys have a strong first half and then spend the second half ramping processes, do we see sort of another leg down and bookings and billings in the second half?

  • JOSEPH BRONSON

  • Well, I don't know if David.., David may have a comment, I will think not in this particular situation if we've identified if you've define technology by the way we have, which is language changes in 300-millimeter and copper-based technologies. It seems to me from what we've seen that there is a kind of a rate of investment going on, on a per quarter basis as they try to implement these technologies, since all of these are in - private line activities. We haven't seen any spiking, but David may have a...

  • JAMES MORGAN

  • Yeah.

  • JOSEPH BRONSON

  • Let me make one comment before you get in.

  • JAMES MORGAN

  • [________________] also have to understand that this is one of the most significant transitions the industry has made for years whether you are going to tighter geometries out several very broad range of new materials and approaches and 300-millimeter, and so this is, I think, more challenging than quite a few people expected of all that, so prior to the hesitation is being sure they get that worked out, that also may affect their yields and their demand for equipment later on, but where putting so much energy and resources into working closely with the customers around the world to be sure that they make that transition and they really appreciate our broad technical depth and resources that are very local for supporter. And so that this is one of the major efforts we have. It's a great opportunity for us but it's also really a tough job for everybody.

  • DAVID N. K. WANG

  • I'd also like to make a little bit comment. Actually the major companies in microprocessor or DRAM's, they are backend loaded. The first half, they spend the money for infrastructure, not equipment and the second half, they use to capital spending for the equipment. And also for Japan, they finished year 2000, the fiscal year end of March, so their new projects is from the March to another March year 2002, and that will also be backend loaded. So, I believe at least 25% to 30% of companies are backend loaded.

  • JOHN PITZER

  • And then guys one last quick question - there seems to be a consensus warning that the worst quarter for your customers might be the June quarter with a modest uptake in September for the semiconductor space. How does you view of the world change, if September is actually down sequentially on a revenue basis for your customers?

  • JAMES MORGAN

  • I think, it's hard to say, but I think what you'll see is the delay in a ramp, but I would think they are moving along well enough in their pilot lines that they're almost going to have to make some investments, now whether the executive CEO signs that's always a question, but this capability you can't put it all in on the same day, and I think they found that out in the last upturn, and so I've been talking like this as many of the key customers on my trip to Asia, and there isn't any of them that want to be caught without a capability, but they are willing to cautiously add it. So I think it's a question that they'll invest some, and when it turns they'll all want it the same time.

  • JOHN PITZER

  • Great. Thanks guys.

  • Operator

  • Your next question is from Candace Tenbrink of William Blair. Please proceed with your question.

  • CANDACE TENBRINK

  • A couple of things - first of all could you quantify your acceptance times for 300-millimeter tools versus 200, I believe Jim you said 200 was basically 5 to 6 months, are you seeing the same sort of timeframe between [________________].

  • JAMES MORGAN

  • Are you talking about back loads?

  • CANDACE TENBRINK

  • No, I am talking about, well, may be, perhaps, but really when a customer places an order and you ship it, how long does it take between the shipping and revenue acceptance?

  • JAMES MORGAN

  • It's 3 to 4 months with 200 men about 5 to 6 months on 300 and 300 is coming down.

  • CANDACE TENBRINK

  • I had heard from customers that about 70% of the problems was accepting 300-millimeter tools later in the game than earlier in the game had to do with [fops] and software issues. Have you found that to be chewed off?

  • JOSEPH BRONSON

  • Just a normal part of new product startup and development. So I don't think there's anything extraordinary about it.

  • CANDACE TENBRINK

  • And then also a couple of quarters ago you'd mentioned that your market share you thought at 300-millimeter was 10% greater than 200-millimeter, are you still forecasting that?

  • JOSEPH BRONSON

  • Yes.

  • CANDACE TENBRINK

  • And then one more thing if I may, I was kind of surprised to see that you were going to spend $30 million in marketing products to worldwide consumers that really don't know anything about this industry. What was the thought behind that?

  • JOSEPH BRONSON

  • Well, what we've seen over the last several years that there is an increased desire on the part of broad audience to better understand the technologies that go behind the products that are produced, as you know, we have over 650,000 investors. We're gaining more on a regular basis with 20,000 employees scattered all over the world, and we have a large number of people who impact our business in the communities and all the regions of the world. So last year, we felt that for the first time we would do some very targeted and selective development of our corporate brand because of our scale and our capability, but we felt at that time there was an awful lot of noise in the communications basis and so therefore, it wouldn't be as effective. We felt this was a good time to take advantage of the opportunities, particularly in Asia where we are also trying to hire the best and the brightest all over the world, to continue to build our great global capability and position applied as a significant global infrastructure company. So that's kind of the reasons we have certain areas that we continue to pursue in infrastructure and R&D, and this was one additional one.

  • CANDACE TENBRINK

  • Great, thanks.

  • Operator

  • The next question is from Edward White of Lehman Brothers. Please proceed with your question.

  • EDWARD WHITE

  • Hi! I was wondering if Jim could talk a little bit more about the opportunities in China, particularly with respect to what your infrastructure is there? How well you think you are positioned relative to competitors there? And, can you talk a little bit about some of the projects you are doing, and how big that opportunity could be in the next few years?

  • JAMES MORGAN

  • Sure, I think that's a real opportunity, as you know, we started there in the mid 80s, and I think David has been directly responsible for our development, so I'll let him fill you in on some of the details.

  • DAVID N. K. WANG

  • We started the first service center in Beijing back in 1984, and after a, probably 15 years, we really did not see much movement; however, we made progress in building the infrastructure we made finally for offices. While intending to support Motorola FAS 17 and while in Beijing to support NEC in Beijing, and also Wuxi in Shanghai. Today, we have 175 people, and about 100 people in Shanghai, because most of the activity is concentrated in Shanghai area. Last year, we made the first $100 million milestone accounting for 1% of our total revenue, and we believe we've progressed in investment from overseas. We believe, probably 5 years from now, 2005, we should be able to achieve 5% of total prior revenue from China, and this year with two new companies, SMIC and [________________] semiconductor, we believe we will do probably 2 or 3 times more business than last year, and as a matter of fact, this Q2 curve in the quarter we were able to book $150 million. Now, in terms of the area of competition, I think we are far, far ahead of anybody because we are the only one in the equipment supply the industry has a well-established infrastructure, and for other people to compete will take a few years till they build their infrastructure there.

  • EDWARD WHITE

  • Okay, thank-you.

  • Operator

  • Your next question is from Nik Tishchenko of ABN Amro. Please proceed with your question.

  • NIKOLAY TISHCHENKO

  • Good afternoon, one question. If you look historically back on the correlation between semiconductor sales and the equipment bookings, then if the data on a monthly basis you will find out that the lag between semiconductor equipment bookings and semiconductor monthly sales is one month less. Do you expect that once the semiconductor sales will bottom sometime during this summer equipment would be in demand again and you will see the pick up of equipment bookings?

  • DAVID N. K. WANG

  • Yes, but if you'll assume December will be the bottom for the semiconductor sales, I believe also we are going to pickup in bookings.

  • NIKOLAY TISHCHENKO

  • You think that it would be, as usual, a very small lag time between new orders put to you, and other equipment vendors buy semiconductor manufacturers once they see the bottom in monthly sales?

  • DAVID N. K. WANG

  • Yeah, it is depending on what type of equipment, I believe for the most advanced equipment like 0.13-micron copper processing requirement will pick up very fast.

  • NIKOLAY TISHCHENKO

  • I see, and the second short question, Joe was talking about this down cycle is one of the most steepest compared to the previous ones since 1984-85, could you please give more comparison between now and then, addressing if you can, the issues like transitions to 6-inch Wafer starting 84 and transition from G-line to I-line lithography band in 1984-1985? Do you think, the issue industry was facing during downturn 84-85 is different with what we see now?

  • DAVID N. K. WANG

  • I think the difference in 84-85 downturn most stated in the DRAM's, and today it is [cross formed] and mostly in the logic area. Now because the Japanese companies over invested before the 84 period of time trying to take over the leadership of DRAM from the States that is why there was overcapacity in equipment during 85, and we started seeing a big downturn, but this time it is different, this time mostly logic and the foundries.

  • NIKOLAY TISHCHENKO

  • Do you think that because of larger role of foundries in the purchase of that equipment, you have seen such a sharp downturn and it is likely to be at a very sharp upturn as well because of the higher role of foundries in purchasing of the equipment?

  • DAVID N. K. WANG

  • Yes.

  • NIKOLAY TISHCHENKO

  • Thank-you very much.

  • Operator

  • Our next question is from Fred Wolf of Adams, Harkness & Hill. Please proceed with your question.

  • FRED WOLF

  • Two things. One, Joe, are you committed to maintaining profitability in the October quarter? And secondly, can you give us some details on swifts and exactly where you are in terms of beta size and when do you expect to introduce the product and start shipping it for revenues?

  • JOSEPH BRONSON

  • No you know, we don't like to lose money, so I think we can answer the first one quite safely. We will do whatever is necessary short of, anything that's legal, I should say to make sure that we remain profitable and cut the expenses and get enough revenue to be able to do that. As far as work is concerned, we are pretty pleased with the rate of acceptance of the product, we have got the systems placed in most of the geographic regions, and so we are proceeding on a plan to get those machines qualified, and I think we are pretty pleased with the rate of customer acceptance of the tool.

  • FRED WOLF

  • You expected to introduce by Semicon West or will it be later?

  • JOSEPH BRONSON

  • It has already been introduced.

  • FRED WOLF

  • Formally, okay.

  • JOSEPH BRONSON

  • Yes.

  • FRED WOLF

  • And when would you expect to stop booking for revenues, or shipping for revenues.

  • JOSEPH BRONSON

  • We already have.

  • FRED WOLF

  • Okay, thank-you.

  • JOSEPH BRONSON

  • And don't forget, we've got a little different opportunity here hopefully, in the past we have been kind of a third player in the market for in-plant, and due to the outstanding job the in-plant team has done on the high current product where they have gained very significant market share, well in excess of overhead, they is a leader in high currents, that's given them significant amount of credibility as an organization, which means the customers are willing to take a look at our new product because they have confidence that we can do a good job with, and the new products seems to be getting well-received. So that gives us the combination it is just not the new product but a combination of our credibility with so many customers now in the high current that should leverage the new product.

  • FRED WOLF

  • Great, thank-you.

  • Operator

  • You next question is from Timothy Arcuri of Deutsche Banc Alex. Brown. Please proceed with your question.

  • TIMOTHY ARCURI

  • Hi! guys thanks, actually have a three-part question - first of all, what are looking at right now for leading indicators of the upturn, are you looking at shipped unit production [________________] metrics that you're looking at? Secondly, [_______________] orders be up sequentially, and then down again in most prior up cycles we've seen orders go up, and we've seen a V-shaped bottom, but would it surprise you to see anything other than that this time around? And third of all, can you talk about inventories more, Joe, you were talking about how you've adjusted some of your spare parts inventories but yet inventories were flat, is that mostly 300-millimeter inventory, can you kind of go into some color there?

  • JAMES MORGAN

  • It's Joe, those corrections came quickly for our group, but Joe is going to talk about the inventory but when we forecast the upturn is when the bookings pick up, that's my major gauge.

  • JOSEPH BRONSON

  • We would also look at a few things like DRAM prices and certainly the health of the telecom guys lets see if any of that starts to comes back to us, it is all further out in terms of inventory liquidations.

  • JAMES MORGAN

  • But you have remember that the requirements in virtually every customer for advanced products are pretty well defined, and so the issue really is when do they go and sign the check book or the purchase order to start with, and that's an individual company decision, and that's why we stay close to them, but we don't know for sure till they actually do it.

  • TIMOTHY ARCURI

  • Okay, great. Joe, can you talk a little bit about inventories?

  • JOSEPH BRONSON

  • Yeah, I'm actually disappointed you didn't give us much credit, I mean they actually went down by 60 million in an environment with the business dropped by 40%, that's not an easy trick to do. But any way, the key thing is shutting off the incoming pipeline and being able to balance the inventory in the factories particularly for 200-millimeter because we have a phenomenon where our 200-millimeter business is way down and our 300-millimeter business is way up, so we have things going in the absolute opposite direction, and so we have a high rate of new product requirements for our 300-millimeter inventory, and then our [________________] the revenue recognitions, we still have about $80 million with the 300-millimeter, the inventory has already shipped and is operating at customer sites. So we're going to continue to try to drop the inventory as we go forward, and we are always after trying to get the spare parts inventory down because that's always an area that we want to be out there giving the parts to the customers on time. So we try to turn that as fast as we can. We are going to be spending some money on infrastructure to do this even better. So, while the inventories, we would have liked to see them come down maybe a little bit more, but we are still headed in the right direction...

  • TIMOTHY ARCURI

  • Okay, great, and then lastly I guess would it surprise you to see the profile of the order pick up to be up and then down?

  • JOSEPH BRONSON

  • Up, I wouldn't. It usually does not happen; I have never seen that in a long time.

  • TIMOTHY ARCURI

  • So, you think that when orders pick up they are going to go up for typical 2 to 3 to 4 to 5 quarters in a row?

  • JOSEPH BRONSON

  • What you can't predict is the rate, I mean its the rate that they go up, you are not going to be able to predict. I believe they are going to go in one direction.

  • TIMOTHY ARCURI

  • Okay, great, thanks a lot.

  • Operator

  • The next question is from Gerry Fleming of Tucker Anthony. Please proceed with your question.

  • GERALD S. FLEMING

  • Yeah, before the question, great job on all the new product flow in a tough environment. The question relates to 300-millimeter revenues. In the past, you've talked about differing revenues virtually all the revenues until acceptance, but on this call you mentioned that one of the reasons that margins were down was because of 300-millimeter revenues. Can you tell us a little bit about how rapidly you expect your recognition of revenues to pick up and where are the differed revenues and the cost of goods shown on the balance sheet and how much are they?

  • JAMES MORGAN

  • First of all, there is a whole bunch of factors about 300-millimeter, one is that some of the products, not all of the products, are reaching a state of maturity that they are able to be recorded on a shipment basis. In this new world, we have now a policy that basically as specifications are hit in the factory, we are going to be able to recognize revenue on a shipment basis and that is not the case for all the products because all the products are at a different state of product maturity. There is another level of revenue that is being generated on an exceptions basis. There is about somewhere in an area of $200 million in finished goods inventory for 300-millimeter, I think, that's mostly your question.

  • GERALD S. FLEMING

  • And where are the costs associated with that shown? Are they in..

  • JAMES MORGAN

  • Yeah, they are in inventory, then the differed revenue, which is in the current liability section of the balance sheet.

  • GERALD S. FLEMING

  • Thank-you.

  • Operator

  • Your next question is from Tia-Min Tang of SG Cowen. Please proceed with the question.

  • TIA-MIN TANG

  • Afternoon, I've got a couple of questions. First one is for Joe. You've given guidance for breakeven or better, do you think you've got to a stage now with your infrastructure where you can achieve that without further cost cuts or are further cost cuts necessary, and what form would they take, would that be multiplying production lines, would that be further reductions in force, what nature would they take?

  • JOSEPH BRONSON

  • Well the cost cutting is not that simple. What we're trying to do is we're trying to cut discretionary cost, we're trying to cut waste, we're trying to do everything necessary that we don't need to do because there are a lot of other things that we need to do. If we are going to position ourselves to be a great company coming out of the downturn, so we continue to invest on IT infrastructure. We're spending as much money on IT infrastructure in the year 2001 as we did in the year 2000 when we implemented an entire enterprise-wide system. So the cost cutting takes various different phases and shapes. Another example is we're not cutting essential R&D programs; we must do those. So, what we need to do is cut some programs that are not necessary or that are too far out, or if you will, are play things, etc., so those are the things that we are doing to stay focused. So the cost cutting has to take a number of different shapes to it so that we can do the right job and focus on the right things as opposed to very simply doing one thing, but the whole idea about the employees is also very key because we believe that it is very important to keep a highly trained technical workforce. It is interesting, you will give us credit for lopping off employees as a nonrecurring item, but when we hire those people back, we don't get to show the cost of training as a nonrecurring items, and those are huge costs. So we are taking great pains to try to keep the workforce that we have and yet utilize it in the best way forward in order to really grow this company and position it well for going up the other side, and that's really where our whole focus is about with respect to the cost cutting.

  • TIA-MIN TANG

  • Thanks, as a separate issue, looking at the new materials market, the copper and low k dielectric market, could you size what the total market is this year, and could you give us an idea, a qualitative indicator what your customers are saying in terms of whether they are spending for copper and low k dielectrics is first half or second half weighted?

  • DAVID N. K. WANG

  • Capital spending in terms of Wafer fabrication equipment which covers the copper barrier seed, copper deposition and copper CMP, totally about $500 million market in year 2001. And, however, if we take five years from 2000 to 2005 the copper compound annual growth rate is 45%, and the overall our interconnects is 20%, so therefore the copper interconnect area grows more than 2 times faster. Now you asked about the [_______________] go backend load, I think will be uniform because the new technology, new material, and new processing is needed for any of our customer to be ready and competitive in the future. So, therefore averagely, we are seeing a pretty uniform spending in this area.

  • JAMES MORGAN

  • I think what maybe as not as clear is that the dramatic changes are taking place in the transitional formation and the thermal processing side which is an area, which in the past hasn't had too much technical transition, but the last few years, its been of the case increase in the number of aluminum layers, the metal layers and things like that. In this case you have a broad set of changes pretty much across the cross section of the device. The advantage that our team has, and has developed, is that we have been working on most of the layers anyway starting with FE in-plant thermal processing all the way up to the metal layers and the [_______________] layers for years and that collective combined knowledge gives us a real advantage if we can effectively take advantage of the capability we've built up, and so last year, we put together a set of product group managers that were structured in a way that focused on these module subsets and they were young and somewhat inexperienced in integrating and managing these large scale organizations, but what we've seen over the past since last summer, they've begun to grow and of course this downturn focuses to mind like you'll never believe, so they are really beginning to make, I think, impressive progress. That if we can get back the play over the next 6 months combined with the work they're doing with the customer, its an awesome capability that our customers have available which is an extension of their capability, and so I'm really excited about that combination of events and the job that people are doing to take advantage of the unique positioning that the technical team and the management team has put together over the past 5 years or so.

  • TIA-MIN TANG

  • Thank-you.

  • Operator

  • Your next question is from Brett Hodess of Merrill Lynch. Please proceed with your question.

  • BRETT A. HODESS

  • Good afternoon. My question has to do with basically, Intel last weak commented that they were going to upgrade some of their 200-millimeter fabs to 300-millimeter which was something we hadn't really heard before and then they said that about 30% of the equipment in their 200-millimeter fabs was reusable, and I was wondering if we can get Applied's view on, if that seems to be a reasonable strategy, and if so is that a good thing or a bad thing for Applied's product portfolio?

  • JAMES MORGAN

  • I think you'll have to ask Intel about their strategies and stuff, that's between you and them what they want to say.

  • BRETT A. HODESS

  • Fine, thank-you.

  • CAROLYN SCHWARTZ

  • Operator we are coming to the end of the time allotment, we have time for one more question.

  • Operator

  • Your last question comes from Mark Fitzgerald of Banc of American Securities. Please proceed with your question.

  • MARK FITZGERALD

  • I am curious if you've seen additional, kind of second-tier player show up in the quarter for 300-millimeter buys companies like ProMOS and [________________]

  • DAVID N. K. WANG

  • Can you repeat the question.

  • MARK FITZGERALD

  • Yeah, if in the quarter if you've seen companies other than the kind of companies that have led the charge in the 300-millimeter start showing up and purchasing or ordering equipment for 300-millimeter in the quarter.

  • DAVID N. K. WANG

  • Okay, in the current quarter?

  • MARK FITZGERALD

  • Yes.

  • DAVID N. K. WANG

  • Well, they are some [________________] DRAM's, a company in Korea is doing that, and also we are almost to conclude a business deal with another Japanese DRAM company; it's a joint venture, in this quarter.

  • JAMES MORGAN

  • There are some additional players beginning to move forward. We very much appreciate the support that we had from all of our investors in these tough times and thank you for your commitment, and we look forward to seeing you at the next conference call.

  • CAROLYN SCHWARTZ

  • Thank-you everyone, this is Carolyn Schwartz. Again we'd like to thank-you all for listening to our second quarter, and I would say as a reminder the webcast of this conference call is available on our website and will stay there until May 29th. Also for our shareholders, we would like to draw your attention to a link that's been added to our website in the investor section and enables you to register for the new electronic delivery of the annual report and proxy materials. Again, thank-you for your interest in Applied Materials, and this will conclude the conference call, thank-you.

  • Operator

  • Ladies and gentlemen, that does conclude the conference call for today. We thank-you for your participation and ask that you please disconnect your line.