應用材料 (AMAT) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Applied Materials third quarter fiscal 2002 earnings release conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards, you'll be invited to participate in a Question and Answer session. If you have a question, you will need to press star, then the number 1 on the telephone key pad.

As a reminder this conference is being recorded today Tuesday August 13th, 2002.

I would now like to turn the conference over to Miss Carolyn Schwartz, Managing Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon and thank you for joining our conference call today.

With me are Jim Morgan, Chairman and Chief Executive Officer, Joe Bronson, Executive Vice President in the Office of the President and Chief Financial Officer, Pat Somekh Executive Vice President in the office of the President and Joe Sweeney, Group Vice President of Legal Affairs and Intellectual Property.

Financial results for the fiscal third were released after 1: 05 P.M.

A copy of the news release is available on our website www.Applied Materials.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'd 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 10K for the fiscal year ending October 28th, 2001 and form 10K for the quarter ended April 28th 2002.

The company assumes no obligation to update the information presented in this conference call.

Today's call will begin with Jim Morgan followed by Pat Somekh and Joe Bronson who will provide an analysis of the third quarter financial results and provide fiscal fourth quarter financial targets.

After these remarks, we will open up the conference call for questions.

Since we'd like to finish by 2:45 Pacific time, we would like each caller to limit their questions to one per firm.

With that I will introduce Mr. Morgan.

Thank you, Carolyn.

Good afternoon.

First, I know how hard this period has been for our investors.

Business conditions and the uncertain economic outlook have had an adverse effect on the financial markets.

Despite this difficult environment, our employees have worked hard to get products in place, take care of customers and gain market share.

An incredible effort that enabled us to exceed our revenue and profit goals for the quarter.

Thanks for all our employees is well deserved.

However, despite signs of growing demand in some sectors and dwindling semiconductor inventories particularly in leading edge devices, uncertainty in the global economy is damping the ramp in our industry and caused our orders to be below what we originally estimated.

Over the last few weeks we've seen a conservative stance by companies and investors throughout the world because of decreased confidence in the growth of the global economy and a series of negative earnings announcements and corporate investigations.

As a result, while customers have been investing to meet the demands of challenging technical transitions, they are taking a cautious stance as they evaluate when the economy and investment by their customers will pick up and when to expand their production.

During times like this, companies have a choice: They can wait or use the opportunity to gain an advantage.

Companies with an eye on the future focus on emerging opportunities and lay the ground work for future growth.

And that's what we at Applied Materials have always done and will continue to do.

The mark of what a leader like Applied Materials can and must do for its customers is to continue to invest in the global and technology leadership that their customers can depend on both in the short-term and the long-term.

Our focus is on providing what customers want and certainly need to meet the increasingly complex manufacturing requirements to produce their sophisticated, powerful, portable chips at an affordable price.

Those of you who have visited our new process integration center or semi-con west three weeks ago saw first hand the validation of applied material strategy to invest in good times and bad to ensure we not only have the leading equipment but the best total technical and service capabilities for our customers.

During this time we clearly extended technological leadership.

Our market position across the line is improving and we've ensured our ability to execute quickly when business picks up.

The bottom line is that we've worked hard to control what we can control and still on track to meet all of our long-term business goals technologically, operationally and financially.

We've been focusing on blocking and tackling, strong balance sheet with an emphasis on cash.

Smart R&D programs, optimizing the global support infrastructure for future growth and keeping the core of the organization in tact and motivated.

As a result, Applied Materials as a company is well positioned to build on what I believe are the significant opportunities ahead for the semiconductor industry.

There is a multiwave technology transition going on that favors Applied product sets and technology integration gap which results in the significant challenges of making these transitions is still increasing.

Our customers, the world semiconductor makers are under tremendous pressure to invest in the transition to 130 nanometer line widths and 300 millimeter wafers.

Throughout the quarter we continue to work hard with customers to help ease their challenging technical transition and make these moves as smoothly as possible.

As you know the industry and macro economic signals are very mixed, yet I see three distinct trends taking place.

First, less than 6% of the world's capacity exists for leading devices at 130 nanometer and below.

Many consumer and business applications require chips at these line widths.

Many of them copper.

When business IT spending resumes there is the very real possibility of a shortage in strategic areas.

Certain industry leaders are starting to focus on a first mover advantage for the next generation.

Today's announcement by Intel of a its commitment to 90 nanometer line width and processing of 300 millimeter wafers is one example.

The second major trend is the coming technology refresh in corporate America.

We are approaching the closing months of 2002.

Five years ago the world began investing heavily to prevent system interruptions from the so-called Y2K bug.

Some 250 million PCs were refreshed between 98 and 99.

Today nearly all those systems are becoming obsolete.

Soon the big power and big bandwidth needs of productivity computing will demand a massive technology refresh throughout corporate America and the world.

Finally the third trend is we are still on track to see the inclusion of another billion consumers into the network global economy by 2007.

This demographic trend will sizably reshape and expand the opportunities for the coming years.

I can't imagine a world with fewer semiconductors.

As the next billion people join the ranks of the global economy connecting themselves to PC, internet, cell phone and satellite.

You cannot hold back the globalization of information and economic growth.

The world's economies are continuing their efforts to open up trade and greater commercial cooperation at the global level than ever before.

Overall I believe it remains a matter of when and not if the economy will ratchet up.

The information age is still clearly in its infancy and the true potential is just beginning to be realized.

It's clear our industry is a bedrock of modern life.

We remain a company in the right business at the right time and with the right capabilities to grow and excel.

Finally, especially in such times as these, I want to reinforce how proud I am of what the management team and the community of employees have been able to accomplish at Applied Materials during my 26 years as CEO.

Ours is a practical conservative culture.

We work hard to maintain the highest level of financial integrity, disclosure and transparency.

We consistently maintain a system of sound corporate governance in all aspects of our business from the integrity of our financials to the experienced and independent board to our standards of business conduct.

Many of the reform proposals you are seeing in the news today are in keeping with the practices that Applied Materials has had in place for many years.

I've been at this for a long time and I have confidence in the ability of corporate America and the global economy to weather this period as we have others over the years and come back strong.

Great companies are built and tested in tough times.

Everyone at Applied Materials works hard every day to maintain our position as a great global technology company enabling information for everyone.

And the leader in our industry that our customers, employees, our suppliers and investors can be proud of for the long-term.

Thank you and I'll turn the next session over to Sasson Somekh.

Good afternoon.

****CALL IS INTERRUPTED BY ANOTHER UNRELATED CALL FOR TWO MINUTES****

Operator.

Yes, ma'am.

Can you let us know when the call got interrupted.

Operator: I am not sure when it got interrupted.

Three minutes ago where we were trying to find out what was happening.

You may proceed with your conference.

We apologize for any interruption, ladies and gentlemen.

Jim Morgan will resume where he was speaking.

We don't know when it cut off.

Just shows you need more bandwidth.

Let me go back to kind of the trends.

Key trends we've seen.

First there's less than 6% of the world's capacity exists for leading edge devices at 130 nanometers and below.

Some consumer and business applications require chips at these line widths, many of them copper.

When business IT spending resumes, there's a real responsibility of a shortage in strategic areas.

Certain industry leaders are starting to focus on a first mover advantage for the next generation.

Today's announcement by Intel of its commitment to 90 nanometer line width and copper processing of 300 millimeter wafers is one example.

The second trend is the coming technology refresh in corporate America.

We are now approaching the closing months of 2002.

Five years ago the world began investing heavily to prevent systems interruptions from so-called Y2K bug.

Some 250 million PC's were refreshed between 1997 and 1999.

Today, nearly all of those systems have become obsolete.

Soon the big power and big bandwidth needs will demand a massive refresh throughout corporate America and the world.

Of course, at Applied we see this very directly because we are facing those same issues that we've continued to invest in our application software.

Finally the third trend is that we are still on track to see the inclusion of another billion consumers into the network global economy by 2007.

This demographic trend will sizably reshape and expand the opportunity for the coming years.

I cannot imagine a world with fewer semiconductors as the next billion people join the ranks of the global economy connecting themselves by PC, internet, cell phone and satellite.

You cannot hold back globalization of information and economic growth.

The world's economies are continuing their efforts to open up trade and there's greater commercial cooperation at the global level than ever before.

Overall I believe it remains a matter of when, not if, the economy will ratchet up.

The information age is still clearly in its infancy and its true potential is only just beginning to be realized.

It's clear our industry has become a bedrock of modern life.

We remain a company in the right business at the right time and with the right capabilities to grow and excel.

Finally, especially in such times as these, I want to reinforce how proud I am of what the management team and our community of employees have been able to accomplish at Applied Materials during my 26 years as CEO.

Ours is a practical conservative culture.

We work hard to maintain the highest level of financial integrity, disclosure and transparency.

We have consistently maintained a system of sound corporate governance in all aspects of our business from the integrity of our financials and our experienced independent board to our standards of business conduct.

Many of the reform proposals you are seeing in the news today are in keeping with the practices that Applied Materials has had for many years.

I've been at this for a long time and I have confidence in the ability of corporate America and the global economy to weather this period as they have many in the past and come back strong.

Great companies are built and tested in tough times.

Everyone at Applied Materials works hard every day to maintain our position as a great global technology company enabling information for everyone.

And the leader in our industry that our customers, employees, our suppliers and investors can be proud of for the long-term.

Thank you for your support and I'll turn the next section over to Sasson Somekh.

Thanks, Jim.

There's been a great deal of talk recently about yields in copper technology and concern expressed about the possible impact on the whole electronics chain.

I thought that today I should take the time to first give you our assessment of this issue and then discuss what we should do to help customers now and finish with the things we are doing to mitigate this issue in future technology generations.

Start with the assessment of the situation.

The customers who started with copper early on are having good yields and some have referred to their yields as fabulous compared to previous generations.

Some of the customers who started on copper technology at a later date are having problems as they move into production are working to resolve them.

We believe these are classical learning curve issues exasperated by new materials, copper and processing.

These issues are being resolved and don't believe they'll have a significant impact on the electronics food chain.

I would now like to describe to you what we are doing to help customers improve their copper yield at the present technology generation.

There are three factors that impact yields: defect, materials issues, and process variations.

In the area of defects, our defect review scanning electron microscope from our process diagnostics and control organization is the standard for reviewing and classifying defects.

It is not only used in every 300 millimeter but every copper line around the world.

The issue of copper related defects means that there is a need to inspect more wafers in a copper line.

However the existing price line, our unique gray field tools delivers the best of two worlds.

The benefit of enhanced inspection while not sacrificing some of the capabilities.

Because of these features, our inspection tool is a critical part of our yield enhancement and used by multiple customers as a single inspection tool for copper processes.

The second factor that impacts yield is a device for reliability failure referred to express migration.

This happens when pin holes due to issues with the films next to it.

A number of key customers have recently switched our nitrite to solve copper migration issues.

It seems that nitrate which is one solid layer as opposed to multiple layers does not delaminate easily and deliver better stress migration performance.

Nitrite has been used in semiconductor processing for decades but the method makes all the difference in integrating the process.

The third copper issue is associated with the damaging process which caused a large variation in the copper wires.

The issue is caused by CMP variations referred to as [vishing integration].

We have recently introduced a CMP integration to help [INAUDIBLE] possessed an innovation to help this without lowering processes.

We monitor the thickness of copper in real time during polishing and varying the pressure in different zones of the wafer with a special algorithm to minimize [vishing integration.

We have been the market leader for some time but these innovations are driving our market share even higher.

These are the current issues related to the learning curve.

While people try to leap frog the learning curve, the dues have to be paid somehow.

This begs the question: What can Applied Materials due to ensure smoother technology transitions in the future?

Let's envision a future copper technology for somewhere between the 90 and 65 device generation.

It will have CVD low K film with a K value of 2.2 to 2.5.

It will have a super thin layer deposition barrier layer of 10 angstroms and it will be polished on a special low force polisher to avoid physical damage.

I believe that there's only one company in the world that is capable of this type of future integration today and this company is Applied Materials.

We are indeed doing so in our technology center.

Furthermore the new CVD film is compatible with our microchip leader CVD producer platform.

The barrier platform is compatible with microchair leader durea platform and the new CMP is compatible with our microchair leader 300 millimeter reflection platform.

All these are compatible and and leverage our large production proven base.

The difficulty of achieving high yields for the 130 nanometer copper technology nodes have underscored the value of integrating processes as quickly and efficiently as possible and we strongly believe our current integration effort will help our customer climb up the yield curve faster by providing superior integration worthy tools and process modules.

Thank you.

I would now like to turn it over to our CFO Joe Bronson.

Thanks.

Third quarter net sales of 1.46 billion increased 26% from the second quarter of 2002 and were 7% lower than the prior year quarter.

Gross margin for the quarter was 41.5% compared to 40% for the second quarter of 2002.

Margins were higher than the second quarter of 2002 due to the higher revenue and higher levels of factoring absorption.

Operating expenses were $470 million in the third quarter compared to $423 million in the second quarter.

Operating expenses were higher than the second quarter as variable compensation cost accruals for profit sharing and bonus incentive programs were resumed based on the company achieving certain profitability levels.

Spending also continued on committed research and development projects.

Net income for the quarter was $115 million or 7 cents per diluted share which more than doubled the second quarter net income of 52 million or 3 cents per diluted share and was flat with the $115 million or 7 cents per diluted share reported for the third fiscal quarter of 2001.

Company's performance exceeded expectations for net sales and earnings per share while orders increased 5% over the second quarter, they were less than the initial target.

New orders for the quarter were $1.78 billion generating a book to bill ratio of 1.2.

Orders were 5% higher than the second quarter order rate of 1.69 billion.

Order strength in the third quarter was primarily in the advanced capacity nodes particularly in the United States.

Customers order 200 millimeter tools to fill short-term capacity needs as well as to continue programs in the advanced technology areas such as copper and smaller line widths for 9 and 65 nanometer.

The company also scored several market share design wins in CVD, CMP and Edge against competitive products.

Orders for geographic regions for the third fiscal quarter were as follows, North America 23%, Taiwan 18%, Southeast Asia and China 17%, Japan 15%, Korea 14%, and Europe 13%.

.15 micron and below applications represented 82% of system orders for the third fiscal quarter of 2002 compared to 70% for the second quarter.

D-RAM represented 20% of system orders for the third quarter compared for 24% for the second quarter.

In the third fiscal quarter of 2002, 26 customers placed system orders in excess of 10 million versus 21 in the second quarter.

Of the 26 customers, six system orders were in excess of 50 million versus six in the second quarter and three system orders were in excess of 100 million versus one in the second quarter.

Backlog for the quarter was 3.3 billion.

Backlog adjustments totalled 126 million consisting of 77 million of cancellations and 49 million of currency and other adjustments.

Cash equivalence and short-term investments increased by 61 million from the prior quarter to approximately $4.85 billion.

The increase in cash for the quarter reflects improved profitability, excellent receivables collections performance which were offset primarily by increased capital expenditures.

Accounts receivable increased by 118 million in the quarter with net collections of 1.1 billion and improved DSL performance at 68 days.

We continue to maintain conserve credit standards and the quality of our receivables pool remains very high.

Inventory increased by 65 million in the quarter primarily due to increases in net spares, inventory and systems shipped to Japan for which revenue is not recognized until customer acceptance.

Capital expenditures amounted to 190 million and depreciation and amortization was 100 million.

Major expenditure this quarter was border purchase of a campus in Santa Clara for 65 million which was previously held in an off balance sheet lease structure.

The company has one remaining off balance sheet lease for approximately 50 million.

As discussed in our 10-Q, the company has an ongoing stock repurchase program.

Repurchases of common stock under this program during the quarter were 50 million for 2.418 billion shares in an average price of $20.79.

Business continued to be driven by advanced technology development and innovation as well as selected capacity buying for 200 millimeter.

Third quarter, we introduced several major new products with significant enabling capability.

Earlier in the quarter we entered a new market for Applied Materials, the 300 millimeter wet-clean market with a single-wafer product called Oasis Clean.

The 300 millimeter Wet Clean market is expected to reach 1 billion by the year 2004.

At Semi-con West we introduced the copper barrier seed system, the industry's first integrated PVD copper barrier seed system.

On our industry leading and dura platform enabling copper wiring structures for the 65 nanometer chip generation.

This new system gives the company the capability to extend the strong leadership in copper.

We also introduced the fixed abrasive web CNC system with the unique slurry-free process for shallow trench structures.

The industry's only 300 millimeter web-based solution that has been qualified for production by multiple customers.

During the third quarter VCVD gained momentum particularly in copper based applications.

Etch and CNP were successful in competitive runoffs.

In addition the new defect review tool was chosen by several customers for both 200 and 300 millimeter extending the leading position.

As the flat panel display market continues to grow, AKT continues to gain market share in CVD applications winning every fifth generation tool decision and gaining share in the low temperature polySilicon market as well.

From a macro perspective, it is now apparent that the economic environment which gained momentum during the first quarter has moderated.

The recent U.S. economic data indicates lower than expected economic growth of 1.1% during the second quarter with a downward revision to the first quarter revised to 5% for Q1 '02.

Electronics demand remains a mixed picture with relatively healthy consumer demand with continued weak business spending.

Market remains weak with uncertainty regarding seasonal demand increases that have been typical in the past.

Corporate IT spending in the United States is at a seven-year low.

On the positive side, corporate IT spending rose 2.9% in Q2 '02, the first increase since Q3, 2000.

And may indicate the possibility of the bottom [CROSS TALK]..

Operator, this is the Applied Materials conference call.

We have cross talk going on.

Operator: Okay.

Shall we have Joe Bronson continue?

Operator: Go ahead.

The semiconductor continued its market recovery growing 5.8% in Q2 '02 after a 5.4% rise in Q1 '02 driven by consumer and wireless IT demands.

However, the growth momentum has slowed as a result of end market weakness.

This in tern has affected our customers FAB capacity utilization, expectations for the third calendar quarter.

Several customers have recently announced expected reductions in capital expenditures.

Our forecast for the semiconductor industry for calendar 2002 is as follows: We expect semiconductor revenue to grow to 151 billion, an increase of 5.1% from 2001.

Capital spending is expected to decrease 25.2% to 29 billion and wafer equipment spending is expected to be down 20.3% to 17 billion.

Respect to our targets for the fourth quarter, it is difficult to quantify the forecast due to macro economic factors effecting the entire market, capital spending and customer profitability.

As a result of these factors, we expect our orders for the fourth quarter to be sequentially down 5-15% from this quarter's levels.

Revenue will be flat to modestly up from the current quarter's performance.

With stringent cost controls continue to be in place, earnings per share is expected to improve from the current quarter's results.

With respect to corporate governance, much has been said and written about the crisis of confidence in public companies and how it is impacting the psychological health of our capital market system.

As one of the largest public companies in the United States, the CEO and CFO of Applied Materials are required to and will certify and attest to the completeness and accuracy of our financial report to the Securities and Exchange Commission.

Applied Materials will file its form 10-Q and the required certifications by the due date for the company of September 11th, 2002.

Despite the current uncertainties in the global economies in our industry, our management team will focus on continuing to harvest the product development pipeline and gain market share.

We will also focus on the whole job of maintaining profitability and further strengthening of our balance sheet.

With that I'm going to close and turn it back to Carolyn.

Thank you, Joe.

We're now ready to begin the question and answer session.

I would like to remind you to limit your questions to one per firm.

Operator, you may now begin the Q&A.

Thank you.

Ladies and gentlemen, if you wish to register a question for today's question and answer session and you are on a speaker phone, please pick up your hand set before entering your request.

To place a request, you will need to press star, then the number 1 on the telephone key pad.

You will hear a tone.

If your question has been answered and you wish to withdraw your request, you may do so by pressing star and the number 2.

A reminder please limit yourself to one question.

Once you have asked your question, you'll have the opportunity to re-queue to ask another question.

One moment please for your first question.

Operator.

Yes, ma'am.

May I make a comment before you start the Q&A?

Ladies and gentlemen I was aware that many of you were dropped from the conference call due to a crossed wire and may have missed the commentary.

We will continue with our question and answer period but I would like to remind you can dial into the website and get the full text of the speaker's comments or call into the replay number which I will read now and at the end of the call available this afternoon.

The number is 1-800-642-1687.

Code 4467473 and I will remind everyone again at the end of the call.

Now ready to take the questions.

Okay and your first question comes from Jim Covelo of Goldman Sachs.

My question is could you give us a little bit of a sense of what your customers are telling you or the sense you are getting from your customers.

Are they still holding out hope that businesses are going to improve and maintain the orders given to you or do you get the sense they are cutting their orders and their capX now and they're gonna ask questions and reevaluate business conditions later?

You've seen some announcements of Cap Ex deferrals.

What this is really a difficult time normally, the summer time because of people's vacation and things like that but in this period it's particularly cloudy.

We were going through our global assessment tool by tool.

We'll look at every tool in every factory in every company in every country of the world and that will be part of our plan that we start our next year with year ending in October.

So we would anticipate in the September-October time frame that the outlook will clear and so we'll have a better sense as to what customers are going to do.

This is always a difficult time of the year and particularly now because as always, we see a lot of identified business so it's not a question is business there, the question is when will they sign the purchase orders.

They are going through the same reassessment that you're going through as investors and we're going through as Applied.

I think we're going to have to have the patience to get through into the Fall and see whether we can get some momentum going.

Thanks, very much.

Your next question is from Steven Playo of Morgan Stanley.

Proceed with your question.

Thank you.

My question is relative to your bookings outlook.

The total bookings of third quarter excluding Taiwan is up 40% which surprised me.

I thought Taiwan remained strong.

When you look at your outlook for the remainder of the calendar year, what regions can post stronger growth and hold bookings up at these higher levels?

I think Japan is a little stronger than it has been in the last few quarters.

There's certainly better activity starting to come there and I would say some of the U.S. and a little bit of catch-up in Europe.

More of a catch-up.

A lot of projects on the board for the customers.

We have very good visibility on the projects.

It's a question of timing.

Right.

And just a quick follow-up to that.

The concentration was high with three customers greater than $100 million.

Do you expect the same level of high concentration?

It's going to depend on a number of projects.

At least anywhere from 5-8 projects over 100.

It's a question of which are going to happen or not.

And the last question is the last two quarters you've given boundary as a percentage of bookings, 79% of the quarter before that, it did you say what it was for this last quarter?

I don't recall giving that before other than a general trend.

We do that and we've done that in some investor presentations and the slides are on the website.

So it's been pretty much around 35-40% and that's pretty much where it is now.

Okay.

Thanks, guys.

Your next question is from Jerry Fleming of Flaun Stock.

Joe, can you give us a little bit of a rundown on the cancellations and where they came from.

A couple of big ones and were they spread out?

Also with the end strong in the quarter, it seems to me as though currency should have been a plus on backlog rather than a negative?

That's true.

There's a lot of, the number I gave you was currency and other adjustments.

Other adjustments refer to changes in configuration.

Sometimes the customer has ordered a PVD tool and decides instead they want a CVD tool and that gets adjusted out positives and negatives.

That's the number of all of those things.

With respect to cancellations, essentially the cancellations are very few.

One is a tool that is one tool for a lot of money and the other are essentially a couple of things that we did on our own with respect to the business.

We haven't seen a lot of cancellation activity in the quarter.

Do you get the sense that there could be some building?

I think none of the cancellation variety, at least we haven't seen any of that yet.

I suppose there's a potential for some deferral if that occurs, but we have not seen cancellation activity to date.

Thank you very much.

Your next question is from Theodore O'Neill of Unterberg Towbin.

Please go ahead, Mr. O'Neill.

On the last conference call you commented that orders for the flat panel display part of the business were near record levels.

Can you comment on whether that has gone up or down since then?

Actually the orders are very good in this space.

They weren't quite a record but they're pretty close.

Thank you.

Your next question is from John Pitzer of CSFD.

Good afternoon, guys.

We cannot hear you.

Were orders --

operator, we cannot hear you.

Excuse me, John.

I apologize, can you pick up your hand set?

Is it better?

Much better.

Joe, can you hear me?

A little bit better.

Sorry about that, Joe.

Can you talk about the order shortfall in the July quarter.

Were those orders pushed into October and secondly you mentioned on answer to a question there were 5-8 projects greater than 100 million in size, can you give us a sense of what's 200 versus 300.

Thank you.

With respect to outstanding projects, there's many more than 5-8.

Not in the $100 million variety but the larger projects are in the 300 millimeter variety.

With respect to the shortfall of orders, you know, as far as we are concerned, we didn't miss by much.

Just a question of some things slipping into the next quarter.

We are insisting that we get hard copy purchase orders so we can configure the tools and sometimes those things don't get completed on time.

So I think the business activity level was within our targets but we didn't close all the paperwork.

Great.

Thanks, guys.

Your next question comes from Anish Boyle of Newbarker Berman.

Despite 26% sequential growth in revenues, the operating level was not higher.

If I look at some of the models, analysts are expecting higher of 1.46 billion revenues almost 5% higher.

Is there any one-time item in your expenses this quarter or if the revenues were to remain roughly at $1.5 billion range, could you still improve your operating margins by 2-5%?

At $1.5 billion, I think we could improve the margins a little bit. We've been, I think this quarter has to do with the mix between, you know the various product lines because they all have different levels of margins and different levels of maturity.

I think the operating leverage is there but it depends on the product mix.

Thank you.

Your next question is Mark Fitzgerald of Bank of America Securities.

Go ahead, Mark.

Could you give us an update where gray stands at this point.

Still a backlog or taken it out of backlog at this point?

We haven't taken it out of backlog.

Is that shipable in the next twelve months?

How you are defining it at this point?

And any sense of the timing at this point?

It's scheduled backlog over the next couple quarters.

Okay.

Thank you.

Your next question is from Bret Hotis of Merrill Lynch.

Please go ahead, sir.

Can you give us an update on the pricing environment.

Comments about capital spending cuts really reflected across the board pricing reductions.

Has that changed now that orders have started to slip a bit?

Not to me.

I haven't seen that.

I don't know if that answers it.

We haven't seen any of that.

So pricing is, I don't know, stable or in line with what you expected?

Absolutely.

Thank you.

Your next question is from Robert Mayor of Bear Stearns.

In terms of the shift in orders from one segment of the market to the other, are there any other changes in momentum that you are seeing with the end customers.

You mentioned a pickup in Japan and weakness in Taiwan.

Would you associate that with product groups or perhaps some of the foundries have spent a fair amount of money on getting to the next level of technology and seeing a new group of semiconductor manufacturers who haven't done that spending.

I guess the question is are we seeing a wave of second tier companies coming in to spend now?

I don't see much of a shift in the business other than, you know, a lot of business was shipped to Taiwan, and that's being, you know, installed and capacitized.

And Japan has been investing in very low levels and starting to take some product and initial 300 millimeter.

I really wouldn't say there's a huge shift going on and, you know, the established customers and the rest of the world or pretty much as we talked about as Jim talked about investing in advanced technology throughout this process.

One of the things we looked at is by the end of this calendar year, all of the majors.

In fact will have 300 millimeter capability.

I think this is a continuation of the trend.

We are seeing the opportunity to do a little bit more business in Japan than prior quarters, but kind of the rest of it seems to be about the same.

You made comments in the past of technology versus capacity in terms of percentages.

Were they at the same or where would you say?

We had more capacity in terms of shipments this quarter.

I would say going forward, it's getting -- at some point we have to change the definition of 300 millimeter because now certain companies are in 300 millimeter.

Next could be for production whereas other companies are still investing in the pilot areas that some have just started.

We're going to have to, you know, peel that definition a little bit and separate the 300 millimeter into those categories.

I would say -- I don't have a -- we haven't done that yet.

We're in the middle of our planning process to do that.

I think what we are seeing is that the current quarter shipments had a lot to do with some of the 200 millimeter capacity in Taiwan and will be shipping some capacity for China in the next two quarters but there's also a lot of technology also being put in place as well.

Great.

Thanks.

Next question is from Edward White of Lehman Brothers.

Wondering if you could give us an update on the total service solutions and spare parts solutions business?

How customers are looking at that during the current environment and how do you see that unfolding as we get into the recovery?

I've talked to most of the customers either on the road or at Semi-con in the last three months.

They really have or increasingly looking on that as an opportunity for them to improve their productivity and work more closely with us.

So that's, I think, a strong trend that's in place.

If we continue to do a good job, we're going to, you know, grow that market substantially.

Thank you.

Every major company is beginning to fan out their initial after the success of their initial projects.

Okay.

Over the next couple years, you know more will expand that opportunity to more companies and also I think the ones that have already been doing it looks like they'll go pretty much across the board.

That's the current trend.

Great.

Thank you.

Your next question is from Chicar Humlick from Prudential Securities.

Good afternoon.

Just a question, what reason we saw that customers can tune down or stop the investment plans very quickly as they saw their business weaken.

What are they saying to you, will they come back equally strongly if their business picks up at some point in the future?

Let me make a generic comment that kind of is a perspective and a more general sense.

You know trying to forecast in the world in today is a challenge, but if I look at a year or so ago, I was at the economic summit that the President held down in Austin, and there's about 45 or 48 companies there come from everywhere, agriculture, food, technology, auto parts, et cetera, and the thing that had surprised them came up with how quickly the economy dropped or how quickly their orders dropped.

What I said at that is I said that, you know, one of the things that happened is everybody has the same information and some of our investors see that or the investors so see that in the stock market.

One day everybody has the information and goes some place.

A period later, a month, a year, six month, days, they have another set of information and it goes.

We are in a period of instant information.

The bad news to that is swings happen quickly.

The good news to that is that if we're in a down period, the up period could happen quickly and we saw that a lot of you remember in the last upturn because the customers kind of moved and our business ramp very fast.

I think there's a reason for that.

Mine is that a lot of customers have the chip sets that are advanced in their technology and they have the early adapters buying the chip sets.

As they -- as that becomes an accepted product, the products no longer evolve from Japan or California or New York but they instantly become global products.

And so you not only have to respond to the demand for the product itself but you also have to invest in putting parts into the pipeline.

So I think that's why you see some of these hockey stick responses.

So I think that's one of the things that is clearly possible.

A quicker response on the upside if people decide that things aren't as bad as they thought they were and begin to get orders.

Great.

And, Joe, how much service is the current backlog?

It's about 20%.

A little bit more than that.

More than 20%.

Great, thank you.

Your next question comes from Glen Young of Solomon Smith Barney.

When we look at the business now, forecasting what's going to happen is so difficult.

Can you talk about what you will do to manage the costs in this environment.

You've done a lot already.

But what can we look forward to and how can that help us profitability wise.

We are working on all sides of the equation, both the mergers and the cost.

We are going to continue to do that and make money in this environment and driving towards the kinds of numbers that we did in the past.

We are only, you know, at this point we are 50% of the previous peak cycle.

We're working on getting both of those components in terms of profitability higher and we have ways to do that and we've been doing that all along even in this quarter.

9% of almost 9% after taxes aren't bad in this environment in our view.

We will continue to improve it as we move on irrespective of what happens because technology is still going to bring products to market that's going to grow the revenue.

So we continue to focus on all aspects of this.

I might add to what Joe said.

I agree with that.

A time like this for a company like Applied is an opportunity because, you know, fortunately we're not trying to clean up many old problems.

In other words, we aren't trying to redo our governance process.

We're not trying to restructure the company.

We're -- our full focus is we're getting out of compliance issues relative to our earlier introduced products in 300 millimeter and so our focus is on getting the new technology in place to continue to provide the leadership.

It's continuing to develop our people.

It's in continuing to improve our operations and our service and support capability.

We're able fortunately to not only invest but keep our key technology programs going but we've been able to keep our critically-business investments going.

We've been able to upgrade some of our logistics systems and operations systems and our service approaches and build up things with the customer, so, I mean, almost everybody in the company is focused on leveraging ourselves long-term.

We're not spending a lot of time bemoaning the problems that are caused by being in a downturn.

That's a wonderful place to be for a corporation that's a leader.

A lot of companies, you know, as you know, have a set of problems that are ugly to deal with.

Still trying to get to the future.

Today you can't -- you have to be able to move fast and continue that, otherwise you really get, you lose your relative position in things.

Your next question is from Byron Walker of UBS Warburg.

Good afternoon.

Could you tell me what the head count was for the quarter as well as any stock option exercises during the quarter?

I don't think I have the current quarter's exercises given the stock price.

I wouldn't think there would be very many exercises this quarter.

What was the other part?

The head count, Joe.

The head count is about 16,000.

So pretty much flat with the previous quarter?

Yes.

We bring in, you know college kids that we recruited and attrition has taken some toll.

We are about the same.

What's a rough quarter over quarter attrition rate?

Well, I don't know.

It depends.

It varies.

It's not very big now.

The valley is not exactly the hotbed of activity at the moment.

It's probably less than 1% per quarter.

Thanks.

Your next question is from Mike O'Brien of Soundview Technology Group.

Good afternoon.

Give me an update on what you have done on the electroplating side and how that is coming along and when you'll have that back out and ready to go to incorporate back in with the barrier seed for copper.

Right.

We have focused our attention on the electroplating at 300 millimeter and working with key customers to qualify as a matter of fact advanced processes on our system.

We are continuing the focus on the system.

And you have that system -- you've got tool record status for that system in00 millimeter anywhere.

Yes, we do.

The next question is from Greg Kinezny at US Bancorp Piper Jaffray.

What percentage from the July quarter were from 300 millimeter and you expect 300 millimeter to grow here or decline in the October time period.

Thanks.

My sense is they'll be about the same.

Ranges from a third to 40%.

I think they'll be the same in both quarters.

Your next question is from Avanosh Kont of SG Cowan.

This week announced the acquisition of --, how do you see that impacting your CMP business and how are you prepared for that?

You know, we are always paranoid about the competition.

This is our job to be paranoid about the competition.

We think we have a very good position in CMP, particularly copper CMP and continuing with a string of innovation to maintain and enhance that position.

One of the things I didn't mention earlier, but I came back right before this from the engineering technology conference that we're holding here in the valley of our people for technology, about 1,000 of them.

You spend a little time with that group and that's an awesome set of minds.

We are looking forward to continuing to provide technology leadership for our industry and just spending a few hours with them gives you good confidence that we'll do fine.

Thank you, very much.

Your next question is from Steven Playo of Morgan Stanley.

Steven, please proceed with your question.

Steven, your line is open.

We'll move on to the next question.

Next question is a follow-up from John Pitzer of CFSB.

Yeah, guys, I wonder if you can talk about the market share fronts and the trends there.

The reason I'm asking is relative to the July performance and your October guidance your bookings are weaker than the competition.

Is that because you have a months more of data or are you seeing trends on the market share front.

Thank you.

We don't see any particular trends one way or the other.

It depends on what comes in, but if we look at the positioning on the leading edge opportunities, we've been really pleased with the job the team has done.

But I think we're actual gaining share.

I think the data gets a little interesting between what gets reported and when.

So we've got I think significant momentum in CVD and CMP.

And have really done what these new products in the CVD space, the barrier seed position is doing extremely well.

So we can go -- it's hard to answer this question with the broad, you know, we can go product by product but I think we're actually gaining share in this environment which is what our focus always is and I think it will prove out to be when the shipments start becoming recorded.

Great.

Thanks, guys.

Steven Pelayo.

Please go ahead.

My question is your revenues related to geography.

Do you have that there, Joe?

No, we can get that.

I'll wait until the 10-Q for that.

And a follow-up.

Think about bookings outguidance, any reasons you expect to be up and out in dollar terms or in the same amount in line with overall guidance?

You can't do that because there's so many ins and out.

For us, if you look at it and the same for you, you look at it, there's so much to benefit that don't have an issue at all.

You could forecast anything.

The question is what the customer is going to place.

When is the CEO going to sign the purchase order?

So it's not opportunity, it's whether the opportunity can be -- we can make the opportunity into reality and that could happen in any region in any company because all of them have a plan to go forward and be successful and gain market share.

It's who is going to be the early leaders and take advantage of this hesitation by people.

I go back to Robert's question that we answered that said Japan is stronger, and therefore other regions are going to be down but the absolute numbers, it's hard to do.

Thanks, guys.

Operator, this is Carolyn Schwartz, we'd like to take one last question and then make closing remarks.

Your last question is from Christina Osmena of Needham and Company.

Sorry, I was on mute.

I'm not sure if you tracked this but do you have a sense of what kind of activities are going on in terms of requiring capacity and if so maybe you could share with us what flavors of technology are beginning to come off the market now.

If it's just an issue, quarter micron or .8 coming off.

Look at what the demand is.

The demand is all for .18 and below.

I mean, if you have capacity beyond that, there's not much demand so that's why I made the point in my part is that there's a technology transition going forward and there's very little production capacity of .15 and so we try to move from .18 to .13 and you know there isn't a need much for above that.

So everything out there is obsolete except for the new requirements.

The comment I would make is I think that some of the older technology like quarter micron and above, you might see some of the Taiwan companies moving that to China or getting started in China and those nodes.

That would be one idea.

I think you're going to see some 6" and below, excess capacity at the -- in the second tier, third tier companies become either abandoned or, you know, on the block, for sale from others.

Those are all over the world, you know, pretty much, but not certainly, I don't see much happening by the major customers who have moved on and have retooled.

Thank you, operator.

I'm going to make my closing remarks now.

If you would let the people on the line know.

Again, ladies and gentlemen, I would like to apologize for the interruption on our conference call today.

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