應用材料 (AMAT) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Applied Materials second quarter fiscal 2002 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, it you have a question, you will need to press star, then the number one on your telephone keypad. As a reminder, this conference today, Tuesday, May 14 of 2002. I would now like to turn the conference over to Ms. Caroline

- Managing Director, IR, Applied Materials. Please go ahead mam.

Thank you. Good afternoon and I thank everyone for joining our second quarter conference call. 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 N. K. Wang Executive Vice President in the office of the president and Joe Sweeney, Group Vice President of Legal Affairs and Intellectual Property. Financial results for our second quarter were released on business wire shortly after 1:05 PM Pacific Standard Time. If you have not already received a copy of our fiscal second quarter earnings you can get a copy of it

from our website, www.appliendmaterials.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 to today's earnings news release and certain Applied Materials filings with the Securities and Exchange Commission including the form 10-K for the fiscal year ended October 28 of 2001 and the form 10-Q for the quarter ended January 27 of 2002. The company extended no obligation to update the information presented in this conference call.

Today's call will begin with Jim Morgan, followed by David Wang and then Joe Bronson who will provide an analysis of the second quarter financial results and provide fiscal third quarter financial targets. After these remarks, we will open up the conference call for questions. We would like to finish by 2:45 PM Pacific Time and we would like each caller to limit their questions to one per firm. With that, I would like to introduce Mr. Morgan.

Thank you

. Good afternoon. I am pleased as you might imagine to report that we exceeded our financial targets for our second fiscal quarter and I am every encouraged by the momentum in all areas of the company.

Booking dropped over 50 percent as business activity picked up strongly during the quarter. Our global team did a great job in responding to the increased customer demand and I believe Applied Materials is well positioned to continue its leadership in an improving business environment. As I have said before, great companies are built in tough times. Our success this quarter shows our ability to excel in a tough environment. Applied Materials investment throughout the downturn has increased its position information

infrastructure company. Continuing growth in the global economy will be driven by technology innovations at companies like Applied Materials. As you are all aware, recent US economic data indicates that a recovery is underway. In the semiconductor industry we have see a moderate recovery driven by strong consumer related demand and strengthening wireless markets in Europe and Asia. However, the environment for overall electronics is still mixed as some sectors such as telecommunication and corporate investments have lagged. With the macro economic recovery expected to stimulate business and other spending, I am cautiously optimistic about growth in the global economy and therefore growth in our industry. Clearly, the first pace of the recovery is underway with the number of semiconductor manufacturers announcing during the quarter that they were raising capital spending for 2002.

I have just returned from a meeting with customers in Taiwan and Japan and with market demand for new chips increasing, it is clear that many customers particularly at the boundary level are nearing full capacity on advanced technology line. As I discussed in our last conference call, these advanced lines have been running very tight as demand has picked up for new products in consumer electronics and communication markets. Products such as electronic games, visual cameras, DVDs, LCDs, and new wireless handheld products, which are all based on, advanced chip designs.

companies are responding by putting in additional capacity. Customers are beginning to invest to close the technology gap that has resulted from their under investment over the past few years. These investments are for advanced technologies so that they can provide their customers with the corporate chips of 0.13-micron line width necessary to drive the newest consumer applications. The major investments we have made over the past few years in developing and commercializing solutions for

and the many technology challenges moving down to the natal chip level are now paying off. The strength of our 2Q orders reflects the significant progress Applied Materials have made in product development; particularly in key areas of copper interconnect. Joe will talk more specifically about product highlights in his remarks and it is important to note that most of this current increase in capacity is on 200 mm production line, as 300 mm production is still quite limited. But the economics of moving to 300 mm wafers are compelling and will drive continued investments throughout 2002. By the end of 2002, we expect to see at least eleven 300 mm

R&D and

lines. Spending is expected to accelerate in 2003 as volume production begins to ramp up to close the other technology gap at 300 mm, as only about 6% of the world's

will be on 300 mm wafers by the end of 2002. In this period of rapid technology change, our customer's primary focus now is getting their advanced chips to market quickly. With the opening of the

Process Technology Center in March, we can now offer our customers integration ready tools that will enable them to speed the development and introduction of their specific devices to market. This facility contains system that expands the breadth of our industry leading product portfolio and also includes advanced photography and electronic test capability in addition to automated wafer transport capability. We believe this state-of-the art facility gives Applied Materials a unique capability to enable customers to rapidly incorporate the newest technology changes. Our continued focus will be on ensuring market and technology synergies to match our customers advanced technology requirements. In order to achieve this, we are committed to our goals of maintaining high market share, gaining share in key strategic growth areas including service, expanding our product portfolio, and commercializing process margins. Our pipeline of advanced technology

strongest technology solutions in the history of out company. We have great people around the world as I have spent time with them in the recent weeks focused totally on our customer's success. Long-term customer relationships that have been strengthened by our commitment to them during this difficult past year. For the long term, I have no doubt that the prospects for our industry remains strong, as applications for semiconductors continue to increase and electronic products become available to more people around the globe.

Our results this quarter speak to the experience and abilities of our team to manage through good times and bad, the work done throughout this test, and Applied Material's long-term strategy executed one quarter at a time means that our company now is even better prepared to meet the opportunities ahead.

So, if we summarize, I think we can fairly see that we are in first phase of a recovery. The recovery is being driven by consumer demands. Our customers are investing to close the technology gap between current capacity and the need for advanced technology and this uplift is being felt for a while.

Now, David Wang will talk to you and give you a little perspective from his view of the customer base and the market.

Thank you Jim and good afternoon everyone. As we now just has heard from Jim, our business has significantly improved this quarter. These improvements are coming from several areas including accelerated investments by integrated devise manufacturer IBM as well as

. First business is being driven by a continuing aggressive ramp of advanced technologies as

increased capacity

the process line. To increase manufacturing volumes of higher volumes margin differentiating the devising. We are seeing these aggressive shifts to advance the technologies in both memory and to a greater extend in

manufacturing line. In Latech

for example, by the end of this colander quarter, forecasters expect close to 50 percent of the microprocessor shipment will be produced using 130 nanometer copper technology, which drives significant improvement in devise performance which reduce the power consumption and the

of lower manufacturing cost. This 130 nanometer technology ramp began just two quarters ago and will continue ramping in this rapid pace well into next year. We also saw increases in

reaching 24 percent of total

, driven by 200 mm FAB upgrade as well as 300 mm highlight line

. The highlight DUM

level reflects our customer's optimism of their business outlook and the capacity needs, 6 to 12 months from now, and to follow several quarters of under investment. To

the driving force for all the business during the quarter with foundry capacity extension and upgrades finally on 8 micron and below for both 200 mm and the 300 mm manufacturing. Recovery utilization improved the earnings and increased the expectations for future business drove pure foundries to increase their

rates. Foundries represented 45 percent of our system bookings during quarter. Utilization of living edge capacities to date in foundry

is near a maximum loading limit and as resulted in significant increased revenues and the possibility. Further expected demand growth at

to increase their capital spending by 65 percent from the previous projections. With this increase of 1.9 billion dollars of additional spending the total foundry spending will reach almost 5 billion dollars this year 2002. Well, so then

product portfolio allowing us to capture a growing share of the business globally particularly in Asia-Pacific. All the copper inter-connect capability is now regarded as the technology of choice by most semiconductor manufacturers. We also believe that our leadership position in 300 mm technology will continue to expand as we emerge from their downturn. Customers have identified the process integration capability as one of their the most significant challenges. We therefore expect that our

technology center will be a key strategic result allowing us to work side-by-side with our customers to deliver highly integrated 300 mm capability on an unmatched global scale. This center will give our customers the advantage they are seeking including process evaluation, optimization, and the more rapid products time-to-market.

I also have just returned from extensive travel through Asia and I would like to highlight several points from my

. First, we have significantly increased our capabilities in Asia and are beginning to see the befits of these increased efforts. We believe that we are gaining market share and that we are in great position to continue to expand our leadership. In terms of the overall business environment, particularly Taiwan, I feel there is increased optimism and excitement from

have had the opportunity to spend time with. This increased enthusiastic is based on an improved global economic, environment, improving profitability, and increasing semiconductor content driven by a

being designed today. Given this increased level of customer confidence, we expect to see wafer FAB

to further accelerate in the second half of the year.

Now, I will turn it over to Joe Bronsen for additional comments. Thank you.

Good afternoon everyone. We will now discuss our results for the second quarter ended April 28 as well as an outlook for the third fiscal quarter of 2002.

Historical share-related amounts

stock split in the form of a 100 percent stock dividend at April 16 of 2002. Second quarter had sales of 1.16 billion, increased 16 percent from the first quarter of 2002 and was 46 percent lower than the prior year quarter. Gross margin for the quarter was 40 percent compared to 38.5 percent of the first quarter of 2002. Margins were higher than the first quarter of 2002 due to higher revenue and higher levels of factory absorption. Ongoing operating expenses were 423 million in the second quarter compared to 410 million in the first quarter. Ongoing operating expenses were at similar levels for the first quarter as further spending cuts were made across the board offsetting the prior quarter's favorable impacts of shutdowns and mandatory vacation. Ongoing net income excluding one-time items for the quarter was 52 million or 3 cents per diluted share, which more than tripled from the 15 million or 1 cent per diluted share for the first fiscal quarter of 2002 and was significantly lower than the 360 million or 21 cents per diluted share for the second fiscal quarter of 2001. Reported net income which was the same as ongoing net income for the second fiscal quarter of 2002, if there were no one-times was 52 million or 3 cents per diluted share compared to a net loss of 45 million or 3 cents per share for first fiscal quarter of 2002 and net income of 318 million of 19 cents per diluted share for the second fiscal quarter of 2001. Company's performance exceeded our expectations for the quarter due to the achievement of higher revenue combined with the favorable impact of cost reductions derived from the prior quarter's restructuring and continuing expense control. New orders for the quarter were 1.69 billion generating a book-to-bill ratio of 1.5:1. Orders exceeded target and were 51 percent higher than the first quarter order rate of 1.12 billion. This is the second consecutive quarter of sequential growth in orders. Business activity improved considerably during the quarter with order strength and advanced capacity

particularly in Taiwan and the United states. Capacity utilization at or below 0.15 micron continued to ramp with the prior quarter. End-market demand has resulted in our customers commencing

for advanced capacity at the 0.15 microns below

. Since many customers did not have production capability in place for 300 mm, capacity orders received during the quarter were for 200 mm at the advanced line widths. Orders for de-ramped customers also picked up in the quarter as de-ramp prices were higher on average during the quarter.

display equipment order intake was very strong in the quarter and approached record levels. Order percentages by geographic region for the second fiscal quarter were as follows, Taiwan 39 percent, North America 18 percent, Korea 13 percent, Europe 11 percent, Japan 10 percent, and Southeast Asia and China 9 percent. 0.15 micron and below applications represented 70 percent of system order for the second fiscal quarter of 2002 compared to 56 percent for the first quarter.

represented 24 percent of system orders for the second quarter compared to 10 percent for the first quarter. In the second fiscal quarter of 2002, 21 customers placed orders in excess of 10 million versus 11 in the first quarter. Of the 21 customers, 6 orders were in excess of 50 million versus two in the first quarter, and one other was on excess of a 100 million versus two in the first quarter. Backlog for the quarter was 3.11 billion. Backlog adjustments consisted of 44 million of cancellations and 62 million of currency in other adjustments. Cash equivalents and short-term investments decreased by 98 million from the prior quarter from approximately 4.8 billion. The decline in cash for the quarter primarily resulted from increases in receivables as revenue increased. Accounts receivable increased by 190 million in the quarter with DSO at 76 days. Inventory was reduced by 74 million in the quarter and stock inventory was utilized to meet the increase in billed units, and the level of finished goods at

inventory decreased. Capital expenditures amounted to 124 million and depreciation and amortization was 97 million. Repurchases of accounted stock during the quarter were 20 million for 776,000 shares at an average price of

. For several years, we have talked about the three

, the move to smaller line widths, the move to copper and other materials, and the transition to 300 mm wafers. The orders this quarter reflect a momentum of those technology changes. Customers who had put in limited production lines for these new technologies are now expanding capacity to meet demands resulting in an increased order activity across the board. The systems being purchased are to add capacity for the new technologies. So, this is really a technology driven capacity cycle. Orders were up this quarter for all products except

. As customers started putting these advanced products into production lines, they were increasingly choosing the applied production proven systems to help increase their time-to-market

devises.

To highlight a few specific product successes this quarter

, we are seeing increased product momentum in several key strategic areas including dilature catch and dilature

. In dilature

orders almost doubled from the prior quarter. Much of the success is due to a new product the

application. We have had several competitive wins for the

, which is particularly good for

, demonstrating an exceptional ability or preserve the k-value of the films while reducing cycle time over competing process rows. Dilature

is growing more important as customers strive to increase speed and power of their devises. FSG and silicon nitride films continue to be the dominant interconnect dilature films at 0.13 micron and Applied leads the market in these areas. CVD locate zones are clearly the technology of choice for 170 nanometer technology nodes. Our patented flat

locate zone continues to gain market share. Our producer SE Systems

films has been making significant inroads in both 200 and 300 mm and customers around the world are selecting the producer platform as their development tool of records for their most advanced 100 nanometer topper devises. In PVD, Applied Materials is gaining market share in all applications. In addition to excellent momentum in copper barrier seats, our aluminum interconnect business comprising of both aluminum and

products is showing continued strong growth.

Another highlight of the quarter is the strength in AKTs business, club

display equipment for CVD plasma display equipment. Orders were very strong

products as manufacturing capacity is increasing in Taiwan and Korea to meet strong demand for monitors in the merging large size LCD TV market. Semiconductor environment improved in the second quarter since the date of our last call. We believe that business conditions have improved for the following reasons. One, global economy

opinion has begun to improve and consumer confidence has risen. Two, the semiconductor industry is beginning to make capacity investments in its three waves of technology, and three, China is becoming a major entrant into the semiconductor business driving a wave capacity by 200 mm. Recent improvements in demand for semiconductors reflect the need for advanced capacity of technology nodes at 0.15 micron and below for a number of advanced products including Xbox servers, high-performance PCs, PDAs, as well as security applications. This improvement in advanced capacity is primarily US and Taiwan based and is primarily 200-mm related for equipment, as customers did not yet have enough production capability at 300 mm.

Capacity for 300 millimeter is being

by the early adopters and we expect in the near term to see four new entrants invested in 300 millimeter pilot activities. Estimated spending for 300 millimeter equipment for calendar 2002 remains unchanged from our prior estimates at 9 billion. China continues to invest in capacity to begin

production in 2003. Initial production will be targeted primarily for internal consumption of semiconductors. While the semiconductor industry is in recovery mode, visibility remains limited to the continued low levels in investment in corporate IT and telecom infrastructure. Initial improvement in

equipment spending is being driven by rising, foundry, and

investments as a result of strong consumer related IT demand. As business spending begins to improve in overall or

demand recovers, we expect to see further investment. We are increasing our capital spending forecast for calendar 2002, to 30.6 billion, a decline of 20 percent in 2001 versus our earlier forecast of down 25 percent. Labor equipment spending is expected to be slightly above 18 billion for 2002, a 15 percent decline versus our earlier forecast of down 20 percent.

With respect to targets over the third quarter, the company's third quarter orders will be sequentially higher than the second quarter. Orders are expected to improve by 10 to 15 percent for the third quarter. Further identified business opportunities are impressive over the balance of the year. Revenue will range in the area of 1.2 to 1.3 billion with further gross margin improvement. Stringent cost controls continued to be in place but expenses will be higher as variable compensation programs are restored for employee profit sharing and performance bonus programs. Earnings per share will improve from the current quarter primarily due to the increase in revenues.

So, that concludes my comments. I will

it back to Caroline.

Operator, we will now begin our question and answer session. I'd like to ask them to again limit questions to one per firm and operator, you may now begin.

Thank you ladies and gentlemen. If you wish to register a question for today's question and answer session, and if you are on a speakerphone, please pick up your handset before entering your request. To place a request, you will need to press star and then the number one on your telephone keypad. If your question has been answered and you wish to withdraw your request, you may do so by pressing the pound key. As a reminder please limit yourself to one question. Once you have asked your question, you will have the opportunity to register another question. One moment please for your first question.

Your first question comes from Mr. Steven C. Pelayo of Morgan Stanley. Please proceed with your question.

Great. Thank you.

Congratulations on the enormous sequential growth and bookings there. The way I look at it, you are regionally

Japan more than double, three

triple and by customers you are almost quadrupled and

was strong too. So, congrats there. Now I have to ask what do we do for next quarter? Where do you see the growth coming from to meet your 10 to 15 percent or further sequential growth, going forward.

Well, I think we are going to see some 300 millimeter orders from new adopters that spread all over the world in terms of those new adopters and I think, we are going to see some continued strength in Taiwan, some business in China, and some better situations in the US. So, it is pretty broad based and in fact Japan is also going to be better.

I think the economy continues getting better and for the forecast, the weaker fabrication equipments for the second half of calendar 2002 today is 45 percent

than the first two quarter but we should expect the

continues to grow for our business in the next two quarters.

Did you mention what percentage of bookings were 300 millimeter related? I didn't hear that and it looks like that is for the April quarter and what do you expect that to be for July as well as what do you expect a

percentage to be for July?

We don't give that choice that stayed out right now.

We will like to see a probably 40 percent of

for the whole entire year.

Your next question comes from Mr. Theodore

from C. E. Unterberg Towbin.

Thanks. I would like to follow up on Steven's question just to understand the quarter growth rate. David said that way for

equipment spending was further accelerated in the second half and Joe said the quarters are going to be 10 to 15 percent in the upcoming quarters. Does that imply that the second half will see an uptick in the 10 to 15 percent or are you trying to imply that?

I think wafer fabrication equipment spending is really the revenue. So, its usuallly a three months delay from the booking. Now also I would like to add a little bit of comment on how could Thailand continue to grow. The reason to revise the capital spending by the two leading

make the total capital in Taiwan to 7 billion dollars. So, it is the second largest. Also the

do not expend the capital to buying the capital equipment and the back

equipment. So, the most of the money spending will be the processing equipment. So, that means we will be still good opportunities in the future.

Your next question comes from Mr. John

of Credit Suisse First Boston. Please proceed with your question.

guys. Two quick questions. Joe, first if you would just break out what

was in the quarter? Won't you expect that to go forward and then secondly, if you could talk a little bit about your manufacturing lead times and help me understand this disconnect between sort of order rate growth and shipment growth? Is this like customer design that shipments are more second half driven or are you guys having some manufacturing ramp issues and if it is manufacturing, is it being tied in capacity or are you starting to see better pricing leverage on your tools?

Okay, with respect to the first

business, less than 10 percent in the business. Well, that is what we have been seeing about

. With respect to the second question, it is getting to be with the product lines that we have in the broad offering. It is getting to be with the FAB 101, a multiple mix of situations, you have the mix, you have results from product to product differences, and you have a mix where some products are totally deferred and take a longer time to get accepted in the new technology. In terms of manufacturing billed

in terms of the

facility or other manufacturing volume activities, we are not seeing any degradation in lead times at all. We have done a better job this time in balancing the inventories and we are able to fulfill a lot of the initial demand from generally inventories either that we had or but from spares inventory liquidation and things of that type. So, we are in much better shape and I would also add that the suppliers are in generally better shape.

I was

at Austin about 50 weeks ago and they are really well prepared for supporting the customers in this upturn.

Your next question comes from Mr. Robert Myer of Bear Stearns & Company. Please proceed with your question.

Yeah congratulations again for the quarter. One question I had is, can you tell us a little about pricing that would come

discussions that there may have been some price increases and in general, what are you seeing out there in terms of pricing?

We recently increased the price of

for all the applications for both 200 millimeter as well as 300 millimeter and the impact

.

Your next question comes from Mr. Gil

of Salomon Smith Barney. Please proceed with your question.

Thanks. Can you talk about the sensitivity of orders from

given the recent reduction in prices that we have seen and a lot of talk about what the change

and then also taking a look across your numbers, it looks like China was down sequentially in the quarter, which talk about that being a

approach. Can you give us a sense as to when and how you think that growth is going to ramp.

So, your question first is the

and the second, the China.

Right.

In the

. I think that the

is really based on the future

the demand because the

companies did not

too much in the last two years. It is only 10 percent of our business and in this quarter as we say

24 percent of our system bookings from DUN. So, recently did that is one is upgrade the device manufacturing by buying 200 millimeters and also prepare for the capacity need 6 to 12 months from now, which is the 300 millimeter

. So, I do not see today, this will be really sensitive to the price because the

become fewer and most of them are making profit to do well.

And you also have to keep in mind that you know, if we look at this recovery in two phases, what we see for us is a heavy consumer phase now with heavy utilization of advanced chips, a couple of things happened here. Let us stick with that issue for just a moment and what we see is that as the early stages of these new products come into play there is a limited demand for the advanced chips because there is a limited demand while I see the earlier adaptors whether it is the gains or it is the

or the different types of

or PDAs or whatever the product is and all of a sudden those markets become global. So, that changes dramatically and pushes the production demand up a very steep

while we are just beginning to see that occur so that will put pressure on most of the suppliers for advanced technology. Now if we look at the second

phase, which would be the expansion of the corporate market and some of the other markets that may develop more slowly, we could just take Applied Materials as an example.

we refreshed our technology in our company right before Y2K and so, we have been fortunate to have a very strong infrastructure in

and PCs for the last few years. During the last period, a while back before this downturn, we upgraded our enterprise systems. So, now those are in shape. There in this period, as you recall, we continued with our initiatives to drive our eBusiness activities. While fortunately, that puts us in a very strong position to be responsive to our customers and to our suppliers on a global basis. Now what that means for the second phase of pickup of the corporate investment is that for many of these newer applications and the opportunities we have for efficiencies, come about with advanced PCs and servers and other networking equipment and so, we will be investors as I am sure many other corporations will be over the next, say three years. So, that is when I would see a second phase kicking into the demand for advance and sophisticated

technology.

I like to answer the second question about sequential growth in China region. The China is a new region. People

open

and maybe it is a

but I believe, it is a babble but it is continuously

which means it has an up and down

but in the long term, you will see a positive slope of growth and this kind of phenomena has happened in Taiwan, first the ten years. And this kind of growth is a recession

type of growth. So, therefore we believe

will be continuously, sequentially

and we have various

and we enter into China back to 1984 and we have more than 250 people. So, I think we have a pretty good growth

and the management today.

Your next question is from Mr.

of Merrill Lynch. Please proceed with your question.

Good afternoon. I was wondering if Joe could talk a little bit more about the margin improvement in terms of the you know, at the recent analyst meeting, where you highlighted the continuing outsourcing and how that would help margins besides adjust the volume improvements in

are you starting to see some of that yet and could that be helping to move the margins up maybe up a little more quickly than normal than we would see in just from the fixed cost absorption?

Yeah. I would say there is two, in my view major factors. One is the share increases volume gives us really substantial leverage as we go up. The higher the revenue, the better the absorption because we don't have to add facilities in our volume manufacturing facility. We have transitioned all of the 300 millimeter, almost all of them to Austin, which is really a good situation because we wouldn't want to

cost without having 300 millimeter capacity and also the cost there is much much lower in building the

. So, that is a positive thing. The other thing is the materials cost reduction because the way 300 millimeter has been designed, it is much more modular in design and the outsourcing has been achieved and now its volume improving, we are starting to get the cost reductions that we talked about in these sessions. So, it is working out about as we expected and I told all of you that you could expect to see gradual improvement throughout the year and I think, we are on track with that.

Your next question is from Mr. Kevin

of Thomas Weisel Partners. Please proceed with your question.

Yeah. Hi. Thanks. Just a very quick question on cancellations. Can you talk about the level of cancellations in the quarter?

Yeah. Cancellations were 44 million and we had two very expensive systems get

and that was

and the rest of it is pretty much spread out with just a few orders. So, it is two major systems.

Okay. Great. Thanks.

Your next question comes from Mr. Timothy

of Deutsche Banc Alex Brown. Please proceed with your question.

Great. Great. Thanks a lot. Hi guys. Yeah. Joe, it looks to me like orders out of Taiwan are about 25 percent above their prior peak levels. I guess I wanted to follow on as to what the second

of growth here might be. Do you think that it is going to be more of the same customers ordering new technology such as 300 millimeter and things like that or instead do you think that it is going to be kind of a whole second

of customers coming in and ordering tools that they haven't ordered for the last 18 months.

I see the whole

in the world such in the account

to Taiwan. We have first tier, second tier, and the third tier companies. In the first tier today, we have demand of capacity for advanced device manufacturers. So, what do they do. They buy 200 millimeter to upgrade their manufacturing because they already have

line of 300 millimeter. The second tier is investing in 300 millimeter pilot line because they do not have really advanced technology for manufacturing like 0.13 micron. The third tier

, which is the 200 millimeter because they were never investing 300 millimeter. So, for the first tier

will be a 300 millimeter capacity buy. For the second tier, it will be 300 millimeter pilot buy and the third tier will be 200 millimeter. That is kind of sequence. So, if this theory works, you should expect in the next couple of quarters, wealthy some 300 millimeter capacity buy in Taiwan. Certainly Taiwan is a mixture of first tier, second tier, and the third tier. So, we will have to see a mixture, but the majority I will give maybe driven by the 300 millimeter capacity because towards the second half, a couple of leading company believe and already demonstrated to cross over of the activity of 300 millimeter over 200 millimeter. So, it is the time

for the capacity buy.

Your next question is from Mr. Gerald S. Fleming of Fahnestock & Company. Please proceed with your question.

Thank you. Congratulations on great orders. David, could you give us a little bit of an idea as to what customers are doing in terms of moving forward with process sequence integration and something

modules like the copper interconnect module. Are you gaining any foothold in the market there or is this still a year too

?

Let me cover that. What we are seeing is, we are seeing selective customers taking the early efforts that we have in that and slowly leveraging where we are currently getting the best traction on that is our experience in integration, which we are working on the very advanced lines. So, that gets us down the curve and I think, what we will see over time is customers selectively taking more and more of those and I think, this year will be a

effort and that it would pick up by, we guess in latter part of this year or next year and the year after.

Your next question is from Mr. Mike

of SoundView Technologies. Please proceed with your question.

First, could you give a little more color on the process diagnostics business and maybe some additional momentum that you have got there especially in the 300 millimeter node, if you didn't talk about that, I didn't hear?

Yeah. We didn't talk about it. The problem is you can't talk about everything. The business is doing extremely well. It is on track and as I have stated before, it has gained quite a bit of share in 300 millimeter. I don't think the situation is going to change much for 200 millimeter because the companies are on their last wave of investment and you know, primarily the shares in those areas are what they have been and which is in the 20 to 25 percent areas. But, we have made good penetration in China with the business and we have always been strong in Europe and we have done pretty well in the US. So, the business is tracking. It has been.

Your next question is from Byron

of UBS Warburg. Please proceed with your question.

Good afternoon. You had given us guidance that you

industry would be down 15 percent a year. Do you expect to gain share or can we assume that you would believe at least internally that you will do better than that.

Yes, we definitely believe

market share and in several areas particularly like

and we have a various product

and not only penetrate in the

area but also worked very well in the

we have wiring and also we have

. In the wiring, we are very

and also

people already know

compact magic. I think almost all the logic people are

these for the next generation because for the 0.15, the FSGs still looking very effectively. We have a very huge penetration but that black diamond for the next 0.13, we have extremely good position and the two of the company already shifting the parts with the black diamond as the low

. So, that is a big one and our new plan that we are doing well and also the

which is the single wafer because the 300 millimeter, the wafer size is big and becoming

we have a very very strong position there too. So, overall at

we are gaining market share.

Good afternoon. Recently we have heard about increases in capital spending from Taiwan and

manufacturers. Now what you have seen so far over the first four or five months? What kind of rate are they spending that in terms of like if the annual spending rate, whatever they have set for the capital spending for the year, so far have they gone above that average or are they below or in-line with the average?

I think they are in-line with average, but however, the second half will be accelerated. So that means they have not spend half of them yet.

What do you think your market share is at 300 mm versus 200 mm? And also geographically the market share in Taiwan and China versus rest of the world?

I think as we said, we are gaining share as we move from 200 mm to 300 mm. So, that will continue to expand our business on the regular products. Then we have some of the new areas, which we have been expanding our capability in. So, that gives us a good increase in overall. And then, by geographic area, we lead in all of the geographic markets. In a relative basis, we started stronger in Asia than anybody else. You will see that investment over time begin to accelerate our relative position there.

Do you think your market share in Taiwan and China is above what the averages for the rest of the world?

Yes.

Great. Thank you.

Our next question comes from Mr. Ali Irani of CIBC World Markets. Please proceed with your question. Mr. Irani please proceed with your question. Mr. Irani has withdrawn his question. Your next question is from Mr. Edward White of Lehman Brothers. Please proceed with your question.

In

mm market share issue, now that you are on your second generation 300

product in many areas and in some areas on your third generation, do you think that it has given you an advantage over other products that arrived on the marketplace? And how do you see the product portfolio going forward in 300 mm? Do you see bringing out other generation to meet your market share goals?

You are absolutely right. We are kind of second generation in terms of productivity. Production was enough, because we have to have a

state couple of years ago and the new comers and competitors have stop to get into this state. So, it looks like our system is very easy to bring up and it is

and adding some impact on the capacity. I believe it is a very important position for us in order to gain more market share in 300 mm. And also the organization is working very hard to push these initial stage to the second stage. It is not only changing the technology, because 300 mm introduced in the beginning was for people, they even are testing 64 MB

and now that will be used to 266 mm and beyond. And also for 0.18 micron logic and now stopped manufacturing .13 and below. Therefore, the whole organization, all the product business groups, the technology people,

they are working extremely hard to make it happen. So, that is really a contribution from those entire operations to make a establishment of leadership of 300 mm, and I think we have started to enjoy the harvest.

Your next question is from Mr. James Covello from Goldman Sachs. Please proceed with your question.

Good afternoon and congratulation. Just one quick question that hasn't been answered. Can you comment on the recent trend in 300 mm

and the impact of that on has on the 300 mm

by

customers in particular?

I think the

companies are not many today. And because of this, with each one of them, we have very strong partnership. Once we have a partnership, we are talking about a total solution in a way able to combine these leverage, because we can add values in every areas not only service, cost reduction in the consumer boards, cost of reduction in operations, so to make the value become differentiated from the competitors. We feel the 300 mm are not under tremendous price pressure. I think we are able to do a pretty good business with a good value for the future.

Your next question is from Mr. Ali Irani of CIBC World Markets. Please proceed with your questions.

Good afternoon gentlemen. Can you hear me now. First I want to congratulate you on having two back-to-back quarters of record historical market share for applied materials. And I was hoping on the back of that you could again help us understand how much those

and total package solutions here offering your customers are contributing to that market share and how that business is doing in terms of bookings and

?

The

doing extremely well. I believe all of the top ten semiconductor companies

these products. So, what we have done here is been able to penetrate and provide value to these customers with respect to total service and total parts management. So, it is a business that continues to growth. The service business was up quite a bit this quarter and is actually projected as

further as these penetration start to take over. So, I think we are on track with the program and we are proving to the customers that we can add value to the operating cost equation and also to their

equation. We are also getting our inventories down.

One other thing is that we have to appreciate that

not only the implementation and revenue, but with our e-business investment in the past couple of years and our technology investment previously we are getting in a position where we can really help our customers and multiple facets of activities related to their factors. So, I think we will see more and more opportunities as we move forward because when you concentrate on an area like we are and have done it so long, don't forget we have been putting this infrastructure in place for the past

years. That is an enormous capability. We have hundreds of people at almost every factory side in the world and I think both our customers see that as an extension of their resources and we are trying to make it easier and easier for them to appreciate that.

Your next question is from Ms. Christina Osmena of Needham & Company. Please proceed with your questions.

I would like to add my congratulations. Couple of question on market issues. You have commented on saying some share in those Dielectric CVD, PVD and Dielectric

but these things, you would be able to reach the peak as you had reached back in 2000. I believe 34% share in

and 82% CVD?

First of all, in Dielectric H, we have not been the leader in the business. So, this achievement recently is a major win and we believe we can sustain this activity. In PVD, we had a fairly good share in the past. So, we believe we will be able to sustain that. In CVD, we had actually lost some share may be a year-and-a-half ago and really gained that back with all the new products and also the 300 mm generation. We with the producer platform and as well as with the black

we have

our position now in 300 mm as well as the new

technology that we believe we are growing share there very nicely.

It sounds like in CVD, you got shares out there?

I think that we have share movements in many product areas. We can talk about every product area in every conference call. Don't leave the audience with that misconception.

I think we just recently acknowledge by

that we became the leader high current implantation for the first time achieved number two position in that market. It is hard to talk about all these products at the same time, but we are definitely gaining share in most of them.

Your next question is from Mr.

from Capital Group. Please proceed with your questions.

You talked about some of these new products in their intensity, which I think, emphasizes the importance of replacement. If there is strictly replacement of 2.0 with 2.5 G and

Pentium 3 with Pentium 4, but no growth in the end markets, can you still grow? And then I have a question for Joe. How come you don't use differed revenues to book these shipments that are not qualified for sales at SEB

?

We actually will do.

First of all most of the things are moving to the new technology. Now the rate at they move is everybody is debating that and I know that. What you have seen and in

Japan, Taiwan, Korea and China, they are pushing ahead with trying to move some of these broadband applications. In US, we need to get off

and began to get this more effectively implemented, and that would help. We are in a technology shift, and I think we would grow with that. But I firmly believe that the opportunities that we can get from the advanced technology applications is such that the companies will begin to improve their investments as we go forward.

Just want to color the answer in the comment. All revenues to Japan are deferred. And all revenues for new products have deferred and all revenues are deferred for products we don't believe need all requirements of shipments.

Do you think that supporting these two platforms, 200 mm and 300 mm, simultaneous for a while, is that going to hurt your economies in scale and gross margin having to support two separate platforms like that?

No, I do not think so. And also on 300 mm, the platforms have been designed in much more modular way which has reduced parts

in the tools. As pointed out by someone else in terms of the question, they are lot easier to outsource. We will be able to reduce the second

eventually on 300 mm. So, I don't think it is problem. The other thing that has really been down is all the 300 mm products were transitioned to

in about a year's time, and that is over 65 products.

Your next question comes from Mr. Mark F. Fitzgerald of Banc of America Securities.

I was interested in your comments on the productivity of 300 mm

customers at this point and particularly in light of the ability of the semiconductor equipment industries abilities surpast 2000 peaks given the productivity of 300 mm?

If you would take 6 inch to 8-inch transition, it took 12 years to cross over. For 8 inch to 12 inch it took about five to six years to cross over. That we started in 1999. So, we are in the middle of about roughly 40%. We still have 6-inch capacity in the world to make wafers. So, we do not expect the 8-inch for

.

Also, we do get productivity. But that is what the business has been about forever. So, unless we get the productivity, we are not going to continue down the cost curve per function. So, without the movement to 300 mm, we would have

on our productivity per function. I think people always miss this in the transition. In the 6-inch transition, everybody said there will be a lot less demand for wafers. Big companies promote that, because they want to discourage new entrants and other players, but the real facts have always been that over time there is a huge increase in demand and if you think about the fact that 10 to 12 percent of the people have cell phones, 3 percentage has PCs in the world and the cost of all these like devices are dropping rapidly fortunately and values are moving back in the Silicon. The customers are outsourcing

. We see that there is huge opportunity for us. We see no change in our opportunities out several years

very large company just in this field.

You said that you could surpass

in this cycle?

Some day we anticipate that we could be a $20 billion company and we got to pass peak

.

Question on two areas. You talked a lot about Black Diamond and we have seen many ship makers

push off their move to lay 0.13 micron adoption. Is it your view now that black diamond will be the tool of choice of the raise over or is there

to go on

say the second half of the 0.13 generation. And second part of my question, could you talk about the

business. You talked about

machines which brings to mind that

business. Can you talk a little bit about how that is going and how the

reductions are going?

For the 0.15, you can make the raise with so called Foreign Dotted Silicated

we call it FSG and the way

providing these from the produce of

and many other ways to do. And the 0.13 micron, the second part is definite, they need a lower case materials lower than the FSG and we have introduced the Black Diamond more than two year and working with leading customers and it is truly qualified and I would say that

already ships some of the wafers with Black Diamond inside. So, we are pretty sure that it will work. Certainly, it is a difficult job to make the whole process integration. That is what our trend here. Not only Black Diamond, we have CNP, we have H, we have

, we have a module F. So, we are able to make it happen and I believe that will be the trend for the next few years for the varied applications in the logic.

Great and then about

?

The business there is a little bit challenging. The overall market is not exactly robust for demand at the moment. We introduced the new tool and got it placed

with couple of orders this quarter. And lot of development activities are in focus now in 15 and 17 nanometer, which is what the customers are

. So, there is still pretty R&D efforts going on to lead those requirements. The major tools are being shifted into production for 100 nanometers. It is a tough situation, but we are continuing to support it. The outlook is getting better for the business going forward.

Great. Thank you so much.

Your next question is a followup from Mr. John W. Pitzer from Credit Suisse First Boston, Inc. Please proceed with your question.

Just a quick followup. I want to get clarity on the SAB

issue. Is it fair to say that your reported revenues are not growing as fast as the shipments in the April quarter?

Yes.

Can you give us the magnitude of difference?

No.

Your next question is also a followup from Mr. Steven C. Pelayo of Morgan Stanley. Please proceed with your question. I am sorry. Mr. Pelayo has withdrawn his question. The next question is a followup from Avinash of SG Cowen Securities.

What was the head count for the quarter?

15,124.

Opeator, we can take two more questions.

Your next question is a followup from Christina Osmena of Needham & Company. Please proceed with your question.

My question has been asked. Thank you.

And our final question come form Mr

of US Bancorp Piper Jaffray.

Could you help us a little bit in terms of how the gross margins will progress here. Is there rough quarterly revenue range where you get back towards 50% gross margin level or something that give us a little bit color on how that will progress in the next few quarters?

There are a lot of components to doing this. Basically, we said that we will make sequential progress as revenue increase and we believe we will get above the 50 percent and certain revenue level. In order to do that we need to revenue to increase. Get the leverage. Continue on material outsourcing. We talked about achieving first 45 percent threshold and that we have to get through a number of all these learning curve issues with 300 mm which we are getting through, as well as to get the revenues up and we are doing that. So, that is kind of way to look at how the business works. We peaked at 53 percent margin when the business was 2.9 billion. We have got various models at various

points, but they are so highly mix dependent. I think that as our revenue goes up, we will get leverage from that. We get leverage from the 300 mm learning and we will get leverage from our field

absorption because these machines will take a lot lower expenses

. So, we are on our projections to get back to where we believe where we need to be as the revenue goes up.

Thank you operator. This will conclude our conference call for the second quarter of 2002. I would like to thank everyone for joining us today. I would like to remind you that the webcast of the conference call is available and will on our website until May 28. Again thank you very much for your interest in Applied Materials and in joining us today.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines at this time.