應用材料 (AMAT) 2002 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Applied Materials, Inc. fourth 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, if you have a question, you will need to press star and the number one on your telephone keypad.

  • As a reminder, this conference is being recorded today, Wednesday, November 13, 2002.

  • I will now like to turn the conference over to Miss Carolyn Schwarz, Managing Director of Investor Relations, Applied Materials, Inc..

  • Please go ahead, ma'am.

  • - Managing Director of Investor Relations

  • Thank you.

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

  • On the call today are Jim Morgan, Chairman and Chief Executive Officer, calling in from Washington, D.C., Joseph Bronson, Executive Vice President in the office of the President and Chief Financial Officer, and Joe Sweeney, Group Vice President of Legal Affairs and Intellectual Property.

  • Financial results for our fiscal fourth quarter were released shortly after 1:05 pacific standard time.

  • You can obtain a copy of the news release on our website, www.appliedmaterials.com.

  • During our conference called it, we may make projections or other forward-looking statements regarding future events or the company's future financial targets.

  • I would like to advise you that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

  • Such risks and uncertainties include but are not limited to those contained in today's earnings news release and certain Applied Materials filings with the Securities and Exchange Commission including the form 10-K for the fiscal year ended October 28th, 2001, and the form 10-Q for the quarter ending July 28, 2002.

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

  • Today's call will begin with Jim Morgan followed by Joe Bronson, who will provide financial results analysis and provide fiscal 2003 financial targets.

  • After these remarks, we'll open up the conference call for questions.

  • Since we would like to finish by 2:45 pacific time, we would like each caller to limit their question to one per firm.

  • With that, I would now like to introduce Mr. Morgan.

  • - Chairman, CEO

  • Thank you, Caroline.

  • Good afternoon.

  • First, I want to congratulate our employees all over the world for working so hard to accomplish the goals we have set for our fourth quarter.

  • This incredible implementation was carried out on a global basis and their performance would make any CEO proud.

  • Bookings at 1.56 billion in revenues, 1.5 bottom were in line with the targets were in line with the target we set at the beginning of the quarter, achieved in a very, very difficult business environment.

  • That environment is not going to get easier any time soon.

  • Geopolitical and macro economic uncertainties continue to nag our industry and postpone an upturn.

  • Despite many positive indicators from rising deram pricing to reduced inventories, we continued to wait for an inflection point.

  • As I said before, business investment and productivity needs to accelerate before real growth can gain traction.

  • Certainly, we can't ignore what is going on around us in the economic and political arenas.

  • But what I have asked our entire organization to do is to focus productively on the things we can do something about and not get distracted by things beyond our control.

  • What we're doing is what we usually do in downturns, focus on profitability today and prepare for the future growth, continued to engage with customers on what they need, develop good products and above all, drive continued drive for market share gains.

  • You can usually determine who will outperform in an upturn by looking at who is gaining market share during a downturn.

  • And Applied Materials is gaining market share.

  • Receipt semi booked a data for January 2 shows Applied gaining several points of market share already this year, and we have no reason to believe we can't continue to gain share.

  • Not only do we have significant market momentum, but we also have a full technology pipeline with plans to roll out about one new product a month next year.

  • Semiconductor industry is undergoing a number of changes that present challenges to every company in the food chain.

  • Changes that will enable Mores law to stay on strike.

  • Mores law has two components, higher chip functionalist at ever-lower cost per function.

  • These seemingly competing demands has led to several industry trends and are driving the strategic initiatives within Applied Materials.

  • First, to achieve such relentless technology advancement, equipment makers like Applied Materials are providing ever increasing levels of processed technology and integration to enable chip makers to meet the demands of nanochip production, including new materials such as copper and low K for wiring and new materials for transistors.

  • It's incredibly challenging, that is why we opened up the made-in-technology center last March to enable our product groups and customers to shorten their learning curve on these new processes.

  • We are now able to demonstrate a fully-integrated modular solution for new transistor requirements and for copper interconnect.

  • Customers who take advantage of this approach can significantly reduce their cost and also release new products to market faster.

  • Another way the industry has kept pace with Mores Law has been to increase wafer size.

  • Many of us remember the days of 3 inch wafers, then four, six, eight, and now we're at 12 or 300 millimeter.

  • With each transition, chip makers gained a cost advantage, and with each wafer transition, Applied Materials gained market share.

  • Integrated solutions in our made-in-technology center are all on 300 millimeter platforms and all these 300 millimeter systems have been qualified on pilot-production lines.

  • With the industry's largest installed base of 300 millimeter systems in the field, Applied Materials is poised for significant growth when customers ramp to volume buys.

  • Second, seeking increased efficiency, the industry has repeatedly migrated to new geographic regions.

  • First to Japan, then to Korea, Taiwan, and now China.

  • Applied Materials was always first to recognize the shifts and has been able to use the first mover advantage to gain market share.

  • Already, a significant percentage of our business, over 60% is in Asia.

  • As we reap the benefit from relationships built over time, it takes a lot of work to establish a trustworthy capability near the customer with people they can rely on to get their fabs up and running and keep them running.

  • We have already accomplished much of this work and built additional capabilities throughout Asia.

  • Applied Materials significant capabilities in China, for example, made it possible for us to help a major customer start up their new fab in record time.

  • We're also the only company that has its own parts, depo in China to help maintain manufacturing up time for our growing list of customers in that region.

  • This is what we mean by total solutions.

  • Listen to what our customers need and lining our product and service plans with those needs.

  • In addition to the advanced products to implement the newest processes required for 965 or 90 and 65 nanometer manufacturing, customers tell us they will need much more after-sales support to integrate and maintain such complex processes.

  • So, in addition to our R&D development programs for the next level of technology, we have been investing additional resources in the information technology and service infrastructure to support our customers on a global basis, particularly in Asia.

  • In sum, we qualify our existing products for volume buys, we continued our investment of new products and new markets, we invested in smart infrastructure, particularly in Asia, and we have controlled those elements of our business that we can control.

  • We know great companies are built in tough times.

  • We continue to make investments in advanced technology, regional infrastructure capability, and service solutions throughout the downturn because we know that upturns favor the best-prepared companies.

  • These strategic investments have not only increased our leadership position in the industry today, but give us a great launching point to capitalize on a stronger market for chips in the future.

  • I can't imagine a future with fewer chips and as Gordon Moore said last week at the semiconductor industry's association dinner, we live in the age of semiconductors and we'll spend the rest of our lives there.

  • The industry's greatest inventions probably still lie ahead.

  • The semiconductor industry generated 1.5 trillion in revenues in its first 40 years and may generate another 2.5 trillion in the next decade.

  • What is exciting about all this is that we're ready.

  • When the economy improves, we're ready with products, already qualified for ramping a 130 nanometer technology and 300 millimeter processing, and we're ready for the next technology note.

  • Most of our products are available now for 90 and 65 millimeter nano development work.

  • So we're ready to grow while some of our competitors' balance sheets are deteriorating, ours is the strongest in the business allowing us to focus on the future, to focus on the opportunities to increase our business leadership when conditions improve.

  • And we're ready to compete.

  • The future will belong to those companies with the courage and the will to compete in a new way and a new day, and I believe Applied Materials is demonstrating today why we will remain one of the great global competitors of the still young information age.

  • Thank you.

  • - Managing Director of Investor Relations

  • I will now turn the call over to Joe Bronson.

  • - Chief Financial Officer

  • Good afternoon.

  • We will now discuss our results for the fourth quarter and fiscal year ended October 27, 2002.

  • The results for fiscal 2002 year end are audited.

  • Fourth quarter net sales of 1.45 billion decreased 1% from the third quarter of 2002 and were 14% higher than the prior year quarter.

  • Gross margin edged up slightly to 41.7 in the fourth quarter compared to 41.5 in the third quarter due to improved system margins, which resulted from lower factory costs and continued focusing on lowering product costs.

  • Offset partially by higher customer service costs.

  • Costs in the service business was effected by startup costs in the new distribution system as well as cost resulting from under-absorption of field service overhead.

  • As customers reduced wafer starts in the quarter.

  • Performance in etch, CVD, PVD, and diagnostics and controlled units was particularly outstanding.

  • Continued the turnaround and AKTs flat-panel display business continues to perform well.

  • The lower-line expenses were essentially flat in the quarter compared to the third quarter at 32% of revenue.

  • Expenses in the fourth quarter were reduced across the board offset by variable compensation accrueals for employee profit sharing and bonus plans as profit objectives were partially met.

  • Pretax income of 167.8 million in the fourth quarter was slightly higher than 163.4 million recorded in the third quarter, and represented 11.6% of net sales for the fourth quarter compared to 11.2% for the third quarter.

  • During the fourth quarter, the company reduced its effective tax rate to 21% for fiscal 2002 from 29.5% for the third quarter of 2002.

  • Changing the year-to-date tax rate during the fourth quarter, resulted in an effective tax rate for the fourth quarter of 12.3%.

  • If the tax rate had remained at 29.5, earnings per diluted share would have been lower by 2 cents for the fourth quarter and for the year.

  • This one-time tax rate reduction is due primarily to additional foreign sales corporation income tax benefits.

  • We expect the tax rate to return to 29.5% for fiscal 2003.

  • The net income for the quarter was 147 million or 9 cents per diluted share, which increased from the third quarter net income of 115 million or 7 cents per diluted share and significantly, increased from the 82 million loss or 5 cents per diluted share reported for the fourth fiscal quarter of 2001.

  • Results for the fourth fiscal quarter of 2001 included a one-time pretax charge of 149 million or 6 cents per diluted share after-tax.

  • For all of fiscal 2002, net sales of 5.06 billion were down 31% from fiscal 2001, net sales of 7.34 billion.

  • Net income for fiscal 2002 was 269 million or 16 cents per diluted share down from 508 million or 30 cents per diluted share for fiscal 2001.

  • New orders of 6.14 billion were received for fiscal 2002 up 1% from 6.1 billion for fiscal 2001.

  • New orders for the quarter were 1.56 billion, generating the book-to bill ratio of 1.08-1, they were 12% lower than the third quarter.

  • Order activity continued in 300 millimeter pilot lines and some larger production orders were received.

  • Order percentages by geographic region for the fourth fiscal quarter were as follows: Taiwan 21%, North America, 20%;

  • Japan, 19%;

  • Europe, 14%; southeast Asia and China, 14%;

  • Korea, 12%.

  • Order activity continued to decline throughout the semiconductor capital equipment industry as customers assessed their capital spending budgets in an uncertain economic environment.

  • Those customers but not all are postponing their production ramp of 300 millimeter until business conditions improve marketably from the current levels.

  • Orders from Japanese customers were strong in the quarter reflecting 300 millimeter demand as well as advanced technology buys for nanometer development in copper.

  • Korean business including large 300 millimeter order for production as well as orders for 200 millimeter fill capacity.

  • Taiwan demand was reduced from prior quarters due to weak demand for larger products, however orders for Dram improved in the region.

  • D-ram orders represented 48% of total system orders for the fourth quarter compared to 20% for the third quarter.

  • Represented 26% of the total system orders for fiscal 2002.

  • The fourth fiscal quarter of 2002, 19 customers placed system orders in excess of 10 million versus 26 in the third quarter.

  • Of the 19 customers, six system orders were in excess of 50 million versus 6 in the third quarter, and two system orders were in excess of 100 million versus 3 in the third quarter.

  • Backlog for the quarter was 3.19 billion, down from 3.3 billion in the third quarter.

  • Backlog adjustments totaled 227 million consisting of cancellations and currency and other adjustments.

  • Cash equivalents and short-term investments increased by 77 million in the prior quarter to approximately 4.93 billion on October 27.

  • Increase in cash for the quarter reflects improved profitability and excellent receivables collection performance.

  • Accounts receivable decreased by 39 million in the quarter but net collections of 1.35 billion and improved DSO performance of 66 days.

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

  • Inventory increased by 23 million in the quarter due primarily to increases in customer spares, the support new product penetrations, partially offset by a decrease of system inventory.

  • Capital expenditures in the fourth quarter amounted to $71 million in depreciation and amortization was 99 million.

  • Capital spending in fiscal 2002 was 485 million, coasting primarily of completion of the made-in-technology center, the CMP manufacturing facility in Austin, Texas, retirement of a synthetic lease and e-business projects for supplier collaboration in global spares management.

  • Under the company's ongoing stock repurchase program, repurchases of the common stock were 55 million, the 3.6 million shares in the average price of 1532.

  • Company has performed well in this tough environment, and we have met most of our internal expectations.

  • We were disappointed in having to take the head count reduction announced last week but the company had to respond to near-term business conditions that we face.

  • We have focused and executed our strategy and are extremely well-positioned to address our intermediate and longer-term prospects.

  • Despite the general negativity in the high-technology industry, we firmly believe that the growth prospects for our business are substantial and will eventually be harvested.

  • The following points represent achievements in the company's business strategy: 300 millimeter product development is substantially complete and scalable to the 90 nanometer generation and is gaining market share, 130 nano meter and 90 man nanometer product development is substantially complete.

  • The new products have been largely transitioned to Austin, Texas and are ready for volume manufacturing.

  • The company's Santa Clara pilot manufacturing organization has been consolidated into a manufacturing/engineering organization focused on the improvement of the company's product development methodology to further leverage R&D spending.

  • Product competitiveness paying off in market share wins and leadership in 300 millimeter in most of our product areas as verified by industry market sources.

  • Companies expanding service capabilities by executing a new global distribution system.

  • E-tech product development and E-beam and laser writing systems has caught up with and passed the competition.

  • The operation is now profitable despite the industry downturn.

  • Process module product development is making significant technical progress.

  • We received our first major order for a fully integrated copper interconnect solution this quarter.

  • Our development activities are focused on expanding opportunities in mass inspection, E-beam inspection, 65 nanometer development, strip and wet/clean integration, process-module development, advanced low K CDV development, electroplating and CVD plat-panel display next generation.

  • With respect to the outlook, the economic environment was weaker than expected during our fourth quarter.

  • In fact, the school demand for electronics products below seasonal expectations and business demands still at low levels, our customers reacted by cutting back on their expenditure budgets for 2002.

  • Capacity utilization and boundaries dropped to 69% for the third quarter compared to 74% in the second quarter.

  • Given the lower-than-expected outlook for PC sales this fall at new capacity coming on line in the quarter, boundary utilization could drop below 55%.

  • On the positive side, the wireless handset market was relatively stable with unit shipments tracking expectations in Q3, '02.

  • This translates into moderate revenue and profit growth for wireless semiconductor makers.

  • Due to uncertainties surrounding the global economic recovery and lower visibility and overall electronics demand for the next six to nine months, we now expect only moderate growth in 2003 for both the chip industry and the chip equipment industry.

  • We expect order activity in the near-term to be weak as capital spending plans for production have been deferred.

  • Orders in the first quarter are expected to be approximately 20% below fourth quarter levels.

  • Revenue will also be less than a fourth quarter by at least 20%.

  • Company expects to remain profitable operationally but will incur a small loss after a restructuring charge for severance costs associated with the reduction in force announced on November 4, 2002, and other costs.

  • That concludes my remarks and I'll turn it back to Carolyn.

  • - Managing Director of Investor Relations

  • Thank you, Joe.

  • We are now ready to begin the question-and-answer session.

  • I would like to remind all of you on the call to try and limit your questions to one per firm.

  • Operator, could you please begin the instructions.

  • Operator

  • 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 handset before entering your requests.

  • To place a request, you will need to press the number 1 excuse me, star and the number one on your telephone keypad.

  • You will hear a beep to acknowledge your request.

  • If your question has been answered and you wish to withdraw your request, 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 recue to register another question.

  • One moment, please, for your first question.

  • We'll take our first question from John Pitzer with CS First Boston.

  • Two quick questions here.

  • First, Joe, when you look out to the fiscal 2002 quarter, I wonder if you could give us more color.

  • Do you see any regions particularly weak or stronger there, and then secondly, on the gross margin, for the fiscal first quarter, if you give us a sense of guidance there and what you can do given the 20% decline in revenue to mitigate some of the drop on the gross margin line.

  • Thanks a lot.

  • - Chief Financial Officer

  • I would say for the first quarter regionally, um, certainly, you know, Korea will be weaker since we had a large order and there is not many customers in Korea, so that will be weaker just from the lumpiness of that business.

  • I think in general it will trend, as you can see in this quarter, virtually there was almost symmetry with respect to where the business came from, so, um, I would expect almost a similar pattern probably a little less in Korea and maybe a little more in Japan where there is in opportunities for 300 millimeter going forward.

  • Joe -- turn back down to the mid-20% range?

  • - Chief Financial Officer

  • Yes.

  • The d-ram orders are pretty lumpy and you can see the year turned out right in the range today, typically guiding everybody with respect to this business, so for the year it came in that range and, of course, it spiked higher in the fourth quarter.

  • With respect to margins, um, I'm pretty pleased with the margins at this revenue level.

  • We're not giving guidance on the -- on the margins for Q1, but I think the system margins are making good progress, and we had some, um, one-time costs in the service business in the fourth quarter, so I don't -- with the drop in revenue, you know, we'll be hard pressed to keep the margins where they are, but they're still making pretty good progress compared to the previous quarters at this revenue level.

  • Great, thanks, guys.

  • Operator

  • Your next question is from Robert Maire with Bear Stearns.

  • Yes, you can give us a little more color on the cancellations and adjustments out of the 227, um, what were cancellations by you or by the customer and how did that continue into the first couple of weeks of November?

  • - Chief Financial Officer

  • Yeah, most of the number is reflective of cancellations, um, by customers and a couple of them were simply project cancellations, um, and a couple of them in a sense changed their, um, changed their program so they ordered what they had, you know, they canceled what they had ordered in a location.

  • So, it's pretty typical of, although it's pretty typical what we have been seeing, but not large -- large, um, numbers of customers.

  • This was about a half a dozen major accounts.

  • Okay, and one thing just as a follow-up on a previous question in your 20% downward guidance, if I do the math right, it sounds like basically you're just taking d-ram back to its normal level and the rest of the business is maintaining sort of a flattish level.

  • Would that be a correct interpretation?

  • - Chief Financial Officer

  • Well, yeah.

  • You never know.

  • There are -- there are some d-ram projects on the horizon, whether they're going to book or not in the first quarter, we're not sure, but I would say that your comment is generally right.

  • Okay, great.

  • Thanks.

  • Operator

  • Your next question is from Bret Hotis with Merrill Lynch.

  • Good afternoon.

  • Joe, the strength in the flat-panel side, AKT, do you think that's going to continue or is that going to start to be mitigated as well?

  • - Chief Financial Officer

  • I think that, um, the business is kind of at a steady state now because there is a lot of, um, capacity that has been digested and there is a lot of -- the customers are increasing production based on what they, you know, purchased in the last nine to 12 months and I -- I think that the rate of orders is going to slow a little bit, but it, you know, they're basically on kind of a steady state, um, performance down, you know, up and down a little bit, but I would say it's that significant.

  • Is that business profitable in contributing?

  • - Chief Financial Officer

  • Yes, has been all year.

  • Great.

  • Thank you.

  • Operator

  • We'll take our next question from Jay Dana with JP Morgan.

  • Hi, good afternoon.

  • Joe, um, in your opening comments you mentioned something about low-single digits growth expectations for chips and, um, wafer fab equipment.

  • Can you granularize that a little bit, what exactly are you looking like for wafer-fab equipment growth in '03, and the second part of the question is: What would you estimate was the wafer-fab equipment market in China in 2002 and you think that that's up, down, or flat in 2003.

  • Thank you.

  • - Chief Financial Officer

  • Yeah, I'll answer the second.

  • China will be up significantly in '03, somewhere around 150%.

  • I think we're estimated about 2 1/2 billion in Cap Ex in China for '03 versus '02.

  • Um, I didn't give any numbers on single-digit growth or -- or the like.

  • I said it would be moderate, um, and I think we'll kind of stick to that moderate growth '03 over '02, given the -- and most of that is reacting to a very, um, a very low first half of '02.

  • All right.

  • - Chief Financial Officer

  • So that's where we think the moderate, you know, would be a moderate growth.

  • It's a real -- it's difficult when you don't have a lot of visibility, particularly, um, down the road, so -- but it just seems with all the projects, um, for 300 millimeter, um, and the volatility with respect to the, you know, the customer profitability, that's what makes these things uncertain but, you know, we can see the 300 millimeter projects there, and we know exactly where they are by customer and they will go when the time is right for them.

  • Just to follow up on that, I guess in order to get a modest up year for wafer fab equipment, given the first half of last year, there would have to be a meaningful hockey stick the second half of the year, I guess, if you could comment on that.

  • Secondly on a China follow up, I was actually not looking at Cap Ex per say, was looking at the wafer-fab equipment.

  • I was wondering if the equipment sales in '03 are up the same amount as --

  • - Chief Financial Officer

  • Well, yeah.

  • Definitely be up in '03 for Cap Ex, and um, and equipment.

  • We don't have -- I don't have the equipment number estimate, um, but I would imagine it's, you know, would be a similar ratio.

  • Um, going forward so I, you know, I think China will still be a growing region in '03.

  • And the first part about, you know, wafer fab for the global thing going up next year, that would imply a pretty big second half?

  • - Chief Financial Officer

  • I don't think it's a pretty big second half.

  • We say moderate growth because we had kind of a "plateauish" year, had a very low, um, first quarter, if you look at our fiscal quarters, we had very low and two descent, um, well actually poor first half descent second halfs, um, and now going maybe back, you know, back to that -- those first quarter levels, maybe not all the way and then -- so that would take the second half wouldn't have to be that, you know, that hockey stickish, if you will.

  • Thank you, Joe.

  • Operator

  • Your next question is from Glen Young of Solomon Smith Barney.

  • Joe, just a follow up on the last one.

  • Is it -- do you get a sense that down 20% from this quarter order levels you're going to be getting closer to the bottom or do you think you can be down significantly further from there.

  • - Chief Financial Officer

  • If I could answer -- answer that, I would have a different job making a lot of money on Wall Street.

  • I really, you know, it's hard for me to answer that.

  • I can only say what we have visibility to, you know, and there is a lot of -- as I said in the preceding answer, we have a lot of visibility to the customer's projects.

  • I mean the customers know what they have to do in 300 millimeter, they know where they are in .13, both the 200 and 300 and, you know, they're pretty far along in their development effort, so what they need is the better business outlook for themselves and then they'll make these investments and, of course, that will benefit the entire industry and I think they're still -- there is still too much uncertainty out there, um, for those plans to, um, to loosen up at the particular time you have seen, you know, how Taiwan has reacted in the current environment.

  • So, I think it's very difficult to predict.

  • Okay, just another follow up.

  • You gave some comments on China and any thoughts on Japan for next year?

  • - Chief Financial Officer

  • I think Japan next year will be up for us.

  • We're doing very well there and Japan's starting to invest in 300 millimeter and, um, and all the advanced technologies, so I think they see it as an opportunity to catch up, um, in the business and I think they're, you know, they're putting things in place to do that.

  • How much do you think a share gain from you versus net increase from them?

  • - Chief Financial Officer

  • I'm not following your question.

  • How much, if you look at your increase in Japan next year, how much of that --

  • - Chief Financial Officer

  • I think with the overall business will be up.

  • Okay.

  • - Chief Financial Officer

  • So I don't know -- I think the share gains that we see in our 300 millimeter product portfolio, we should be able to harvest, you know, those shares, um, going forward, but I think the overall level of business will be up in Japan.

  • - Chairman, CEO

  • This is Jim.

  • The -- a couple of points there.

  • One is in we were in Japan about a week and a half ago.

  • I was there for a couple of purposes.

  • We had a couple of our-board members there and our board members there and we had a board meeting in Tainan, and a continuation of that meeting in Shanghai and other board members were in other regions, so before we met for the board meeting, so we had a pretty good view of things and just a couple of points from that, um, one the team out in Asia are just doing an incredible job.

  • They're very effective as these customers start working with each other across borders and more back into Europe and into the U.S.

  • They're, um, very effective in helping support each other where they have, um, ramps as we have demonstrated in several places, including Shanghai, um, the -- they have gained market share and really relatively improved their position in Japan and just doing the best job I have seen them do in -- in the daily there.

  • So, um, I think what we see is we see a lot of shells out there, we see a lot of identified business, we see a lack of courage to make the investment until they see a better outlook on the customer, but basically the team and relative positioning is -- is paying off and we'll continue to pay off, um, even more so with time, I think.

  • Okay.

  • Operator

  • Your next question is from Jerry Fleming of Fahnestock & Co..

  • A couple of things, Joe.

  • Can you give us an idea of the restructure, the magnitude of the restructuring chart in the first quarter, give us a ballpark on that.

  • Secondly, the granularity of d-ram orders looked like you had about 750 million dollars of d-ram bookings in the quarter.

  • Um, how much of that was represented by the two largest orders?

  • - Chief Financial Officer

  • Well, with respect to the restructuring charge, we haven't done the -- all the work yet and all the calculations but, you know, we -- you can almost, um in, my view, figure it out from the guidance.

  • We still will have profitability operationally.

  • I don't think the charge is going to be, you know, substantial.

  • With respect to d-ram two of the -- two of the three orders over 100 million were d-ram.

  • Did they represent more than half of that --

  • - Chief Financial Officer

  • No.

  • Close.

  • Okay.

  • Thanks.

  • Operator

  • We'll take our next question from Jim Covelo with Goldman Sachs.

  • Good afternoon, thank you very much.

  • Two quick questions.

  • The issue of Chinese foundaries versus Taiwanese foundaries.

  • Seems the Chinese foundaries are going to spend more in capital next year than the Taiwanese foundaries, and I was wondering if you think that's true, and if that's true, what kind of implications are you drawing from that.

  • Secondly, on a monthly order basis, you're down 20% order guidance based on a flat line where you exited the quarter or does that assume another drop in kind of quarterly or monthly orders.

  • Thanks a lot.

  • - Chief Financial Officer

  • Well, the guidance is simply from the total number that we reported this quarter.

  • So, um, because this business, you know, tends to be booked in different periods that we don't look at it on a monthly basis.

  • As far as the Chinese foundaries spending more money than the Taiwanese foundaries, you know, there is only one Chinese foundary that is in production right now and it's hard for me to fathom that they're going to spend more money than DSMC and UMC and the others so, you know, I -- we haven't got that factored into our situation.

  • Okay, thank you very much.

  • Operator

  • Your next question is from Ali Irami CIBC world markets.

  • Good afternoon, gentlemen.

  • I am hoping you can comment on the R&D going forward.

  • You mentioned a substantial number of your programs were completed.

  • Are we to expect the dollar to come down in absolute terms and selectedly, I was hoping you would give us an idea of IBM spending in Europe and where that's going over the next two quarters.

  • - Chief Financial Officer

  • You mean capital spending?

  • Capital spending.

  • - Chief Financial Officer

  • Yes.

  • As far as I recited a litany of our R&D in our comments.

  • We're auditing new market, so the level of R&D spending will remain at pretty high levels.

  • We -- it may drop a little bit in absolute dollar terms just on the basis of some of these things being completed, um, but we still have a pretty significant agenda and, um, pipeline and we intend to pursue that, particularly when we're talking about entering a lot of new markets and addressing, you know, some pretty significant total available markets.

  • With respect to Europe capital spending, I think it's pretty much typical; um, rest of the world, you know, there is -- with -- there is only a few major customers and, um, and those customers are making reasonable amount of investments.

  • That, you know, it's nothing great and it's not bad either.

  • Operator

  • Your next question is from Timothy Archurry with Deutsche Bank.

  • Hi, I actually have a two-part question both about foundaries.

  • The first is that one of the big foundaries actually put up or is now putting up a slide that shows that the incremental capacity edition to the fab business could be as much as 50% because of China by 2004, and I guess I'm curious do those numbers match what you see and does that kind of worry you at all?

  • - Chief Financial Officer

  • I have no idea what you're looking at, so I would have to see what they're talking about.

  • We haven't seen any analysis like that.

  • Okay, okay, thank you, Joe.

  • Lastly, you can tell us, um, what the percentage of orders were from foundaries as well.

  • - Chief Financial Officer

  • Um, I think they were about 28%.

  • Something like that.

  • Okay, Thanks a lot.

  • Operator

  • Your next question comes from Mark Fitzgerald with Banc of America.

  • Thank you, can you just give us a head count at the end of the quarter, and you made a comment you got the most 300 millimeter shipped down to Austin at this point, and I would assume that is a positive for gross margin.

  • Any comments there?

  • - Chief Financial Officer

  • Yeah, the 300 millimeter shifting to Austin is definitely a positive for gross margins.

  • Once we get a reasonable volume, we'll get good referrage out of that -- leverage because the products are in a position now where they can be volume manufactured and we have, you know, predictable, um, bowonders, materials, so that is -- bonds, materials, so that is a good thing.

  • The other part of your question, Mark?

  • Was just the head count at the end --

  • - Chief Financial Officer

  • That's really what it's going to be at the end of the first quarter.

  • All of the people that were effected are still on the payroll, so we're a little under 16, um, 16,000 and, um, with the action will be somewhere between 14 and 14.2.

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from Greg -- excuse me, Greg Kanenzi with U.S.

  • Bancorp Piper Jaffray.

  • Thank you very much.

  • I wanted to expand on some of your comments made in the opening regarding market share in different regions.

  • Could you maybe discuss what you think your market share might be in Taiwan and China, um, versus other parts of the world, if it's substantially higher and by what kind of magnitude we're talking about.

  • - Chief Financial Officer

  • Well, we usually -- we really don't disclose those kinds of things.

  • We would rather see people verify those independently.

  • Basically, we have very high share in these regions.

  • I think that is pretty well known throughout the industry, um, typically when we enter a region for the first time, we tend to have a very significant share because our infrastructure has been there for quite sometime, so we tend, um, particularly with new technology adaption, we tend to get very high share.

  • I think that's the case, um, with respect to China, and I think we have significant share in Taiwan, although the issues now in Taiwan are different because we now, um, have got to compete on a product, you know, product-by-product basis because all the competitors are now, have been operating in Taiwan for awhile.

  • Um, I think we're still doing extremely well in Taiwan and the point I would make is that our 300 millimeter share is greater than our 200 millimeter share.

  • Okay, great.

  • Thank you.

  • Operator

  • We'll take our next question from Christina Osmena of Needham & Co..

  • Hi, um, um, could you please give us a sense of what the service business was as a percentage of your orders and of your revenues and also, um, you know, with service being such a focus now for the company, what kind of revenue levels do you think you might be able to reach peak gross margins against?

  • - Chief Financial Officer

  • Well, the service business has been trending greater than 20% of the total, um, business for quite sometime and as the, um, -- and will continue to do so as we add offerings.

  • I don't like to comment about bookings because bookings in the service business are very, um, lumpy also because you get a large service agreements.

  • Our policy, just to refresh the people out there, is we only put 12 months of service in the backlog, so if something books a three--year service agreement or what we call a total parts management or total service package, we only have 12 months in the backlog at any one time.

  • So, the service business bookings tend to be lumpy and they also tend to be seasonal because the customers renew them at the close of their fiscal year, so we see, um, usually for those that are expiring, um, some first quarter bulge in the service, our first quarter bulge in the service bookings.

  • But basically, we have an internal goal, of having to the service business be 25% of the total business, um, and being able to add enough products and services to generate the kind of margins that are equivalent to the system margins because the -- and, you know, defined as operating margins.

  • In other words the service business is going to get lower gross margin but it carries no R&D costs, so it's highly leveraged.

  • There is virtually very little support costs going with it.

  • Sufficiently the system margins and the -- essentially the service margins should be the same.

  • That's how we're running the company.

  • I think this quarter we, um, we had some extraordinary costs from the startup of our new distribution system and we're looking to improve the service margins, you know, in the next couple of quarters.

  • When do you think --

  • - Chairman, CEO

  • This is Jim.

  • Just to add 1 our or two points there, um, one of the things that we set out to do, I don't know maybe 18 months ago, was to prepare that business for a significant expansion as a customers' move more toward these total solutions approaches, which they have become increasingly satisfied with and want.

  • And, fortunately, you know, we built that infrastructure over the past couple of decades, so we're in an excellent condition with well-trained people that, you know, a lot of you -- we have several hundred steams of people right in or -- several people right in or near in the factories at each location in the world, so that's a great resource that the customer trusts.

  • The effort to provide more services to them are well-received as they outsource more of their, um, contacts-type of activities and focus on their core and focus more of their energies upstream on the applications that they have to make in order to be nimble enough with their customers.

  • So, that's coming together nicely and, Joe and a lot of the other executives in the company have focused the past, um, 18 months or so on really substantially strengthening our global capability in that area and we hope to see some -- begin to see some payoff, additional payoff from that in the next few years, so, that's an important strategic, um, for us and -- and I'm really pleased with the progress we're seeming, it seems to accelerate.

  • May I squeeze one more question in here, when do you think service and system margins will be a parody in terms of operating margins?

  • - Chief Financial Officer

  • They already have been in the past.

  • So, they're -- they're pretty close now.

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from Ed White of Lehman Brothers.

  • Thank you.

  • In the past you have mentioned that, you know, your share in pilot lines and R&D lines and 300 millimeters was in the neighborhood of 10 percentage points above your share than 200 Miller.

  • Is that still true and secondly, you can talk about some of the things that you can due to make sure that you maintain that share advantage as we start to see the ramp-up in 300 millimeter.

  • - Chief Financial Officer

  • Well, you have to get your products positioned, and we have been able to maintain, um, that share but, you know, adoption of 300 millimeter for production is still, um, early days.

  • And, um, so we have got to continue, um to have product excellence and product differentiation in those applications, um, we're doing that but, you know, you just have to continue to do it.

  • The competitors are not going to just roll over.

  • Um, a place where I think we have made good progress, um, 300 millimeter, over 200 millimeter is in the metrology and inspections space, and I think we will continue to make progress there.

  • Where, where net case, it's better than 15 to 20% higher share because we didn't have very much shear in the 200 millimeter space in those areas.

  • Um, so in order to maintain it, we're going to have to continue to stay ahead technically and, um, innovate and get positioned for production as it comes on.

  • Okay, thank you.

  • Operator

  • Our next question is from Kevin Vassily with Thomas Weisel Partners.

  • Yes, thank you.

  • One question on the d-ram business.

  • Were you surprised, um, by the strength of the business in the quarter and in terms of higher categorizing your d-ram orders, if you put your orders from China into that category considering most of the output so far from the major production foundary is for d-ram.

  • Thanks.

  • - Chief Financial Officer

  • Um, no.

  • None of the Chinese business is d-ram.

  • They're not making them.

  • Um, so that's one; um, we're definitely not surprised.

  • You know, these are large orders and you -- you work on them for a long time, um, the customer just doesn't call you up and order, you know, 100 million worth of products.

  • It's a long sales cycle, um, in many cases we had to, um, give demo equipment or do a lot of evaluations in order to win the business, so it's -- there was not a surprise.

  • Okay, thank you.

  • Operator

  • Your next question is from Sherish Balarmem of Think Equity Partner.

  • You can guys comment on how many of top ten logic customers currently use your [black diamond] successfully and have you seen any recent change in the approach of some of them as to when they would be using low K?

  • Is it going to be at 130 nanometers or 90 nanometers?

  • Thanks.

  • - Chief Financial Officer

  • Well, it will attempt to qualify it at both 130 nanometer and scale it down, but there is very little production thus far using these kind kinds of films, although things are improving and, yielding are getting better, you know, we're still -- there are still a lot of companies doing a lot of experimental work with materials.

  • So I think it's still early, maybe it's later than -- later than it was in time, but there is still a lot of work to go, um, some production of -- there is some production, but there is not a lot.

  • - Chairman, CEO

  • This is Jim.

  • Just a couple of points to follow on and add, one is that as we have said that this transition to 130 nanometers from kind of essentially 180 and safely bypassing 150 and the increase in the number of materials plus the 300 millimeter has been a real challenge for the industry and so what we're seeing particularly in the last 3 to six months is the real benefit as we get more experience with the process, the made-in-process module center because our people are getting a leg up on internally on the product integration issues.

  • Therefore, this does difficult transition and in conjunction with our customers are able to help them get a leg up and them to also help us to some degree, um, so what we're seeing is that, you know, this investment is very critical to the fight our of the industry and -- and we're really -- I'm excited about the progress that a lot of our groups are making in there.

  • Thanks and can I add on a question to that, um, can you comment on which segments are creating pricing pressure and if it's based on products that are the function of which technology thus far.

  • Thanks.

  • - Chief Financial Officer

  • Yeah, I don't see pricing pressure in the business.

  • I said this time and time again that you -- you get the product's position qualified and win the business.

  • The companies are not going to, um, select on the basis of price, there is too much at stake on the other end and capabilities, and I think the customers know that, so it usually doesn't boil down to pricing pressure.

  • Operator

  • Your next question is from Steven Playo with Morgan Stanley.

  • Thank you.

  • Joe, just a quick question.

  • I think you were talking in the past during the fiscal first quarter during shutdown days, I think it was a week during Thanksgiving, two weeks during Christmas.

  • If you can help us quantify the cost savings, one from the head-count reductions and two from the shut down, three out of 12 weeks in a quarter, should I be thinking 25% loss?

  • Can quantify the cost savings for both of those programs?

  • - Chief Financial Officer

  • Well, we really can't.

  • All we can tell you is that we're shutting down and, um, some of the shutdowns are a variable because there is, um, some product demand and some customers -- customer deliveries that are are -- that are near end, so, um, some functions are shutting down more than others, but there will be shutdown days for sure.

  • That's about the most I can do with -- with that question at the current time.

  • Just a little vague here, including the charge, should we assume the charge is something less than a nickle per share?

  • - Chief Financial Officer

  • Well, I can't tell you.

  • I haven't done it yet.

  • I think if you did a computation of a nickel per share, you know, that would be pretty much on the high side, I think.

  • Okay, thanks, Joe.

  • Operator

  • We'll take our next question from Michael O'Brien of sound view.

  • Hi, good afternoon.

  • On the guidance, you had it at slightly higher level of down 20% of new orders versus 5 to 15% or so range of last quarter.

  • Is it a bit more visibility in the January quarter two to get you there or do you think this is a worst-case scenario, maybe give more color on the guidance for new orders.

  • - Chief Financial Officer

  • Um, worst-case scenario, I don't know.

  • We said approximately 20%.

  • We have a pretty wide range and so to give, you know, there's a lot of projects that can get done so, um, we chose not to give the range because it was too wide, so we decided to hone in on, um, a number that we're comfortable with in terms of, um, making a commitment to the street.

  • Okay.

  • And, thanks.

  • And the, um, did you say the head count level that you're at now, what revenue or what increase in revenue from your January guidance could you see without adding head count.

  • - Chief Financial Officer

  • Um, well, we could, in my view, easily accommodate a couple hundred-million easily, if not more.

  • Okay, thanks a lot.

  • Operator

  • Your next question is from Kevin Wink with Polynice capital management.

  • My questions have been answered.

  • Thank you.

  • Operator

  • Your next question is from David Wo with Webush Morgan Security.

  • Good afternoon.

  • I was looking at the pretty volatile foundary, the Taiwanese foundary offering rates and, um, it sort of looked pretty grim last fall also, and went pretty sharply to the upside.

  • I was thinking what kind of offering rate do we need to see this time around for the TSMPs and USMPs to increase capital spending let's say same time next year.

  • - Chief Financial Officer

  • I would say it's not a function of that as it is, what technology note we're talking about and very little capacity is in place for the advanced, um, technology needs at 130 nanometers and below.

  • So if the demand came from, you know, advanced wireline products like 2 1/2, 3 G and all of a sudden that became a very big thing or, you know, significant increases in these, um, in video-type chips and Playstations and various applications, there is no capacity, um, in place to do that.

  • So if the capacity came from older-type products and obviously the capacity utilization rates would increase in those older lines, say .18 micron and above.

  • So it's going to depend on what -- where the, you know, what the demand is and where it's coming from.

  • Some of the new PCs, even though they're cheap, they still have a lot more IC content in them from a cost standpoint and depending on, you know, the types of mix.

  • I think we're seeing a lot of design activity, um, which is a good sign in the 130-90 nanometers area as well as copper, there is not a lot of capacity in place to do that if that became significant.

  • So that's where it's going to come from.

  • We think, for example, that the 130 nanometer node, you know, the utilization rates are pretty high.

  • There is not a lot of capacity and there isn't that much demand, but if it increases, um, capacity would have to be added there.

  • I see.

  • Thank you very much.

  • Operator

  • We'll take our next question from Fred Wolf of Adams, Harkness & Hill.

  • Yes, Joe, you talked about a declining finished-goods inventory.

  • You can give us a feeling from where that's coming from?

  • Did that come from any significant portion of it from evaluation units, children recognized as both orders of revenues from customers in the quarter.

  • - Chief Financial Officer

  • Well, Jim Morgan was on the call, I would say it would be good management but I can't say that.

  • Um, I think we have really focused --

  • - Chairman, CEO

  • It was good management, Joe. [ Laughter ] I think the, um, -- we have really managed the system's inventories levels really hard and the company has really, you know, tried to move -- move evaluations through the systems quicker and getting our tools sewned off faster, you know, things of that type.

  • And, um, particularly in Japan where -- where revenue is based on sign-off, um, there is a lot of, um, faster turnaround time, and I think that is what's helping us quite a bit, you know, with that scenario.

  • Um, that's pretty much it.

  • Trying to keep a handle on this because a lot of -- a lot of systems moved in and out in the quarter in terms of, you know, one customer wants something and then they don't want it anymore and somebody else wants something different.

  • You're reconfiguring things.

  • I think the group did a good job with the inventory management on the systems side.

  • Okay, and a quick follow-up question.

  • You talked about basically in your order guidance having from the sequential orders outside the d-ram area.

  • How does that jive with the people cutting on the 2000 -- 2002 capital spendings, which I would assume would impact the final months of this year.

  • - Chief Financial Officer

  • Well, for one, I don't think I gave any granularity on the orders, so I don't even know the -- other than the fact that what I said the d-ram order is being lumpy, but there is still a lot of opportunity and the band width is so wide, I'm not sure, you know, where it's going to come from, either d-ram or logic.

  • It's probably, you know, going to come from both so, um, I don't see a lot of change.

  • Okay, great.

  • Thank you.

  • Operator

  • Your next question is from Sue with BenchMark Strategies.

  • Yes, Joe, could you give us more detail.

  • You talked about the PDC and what was going on there.

  • We have seen, um, KOA consider have lower numbers, we saw Rudolph raise their guidance.

  • What is happening?

  • - Chief Financial Officer

  • Well, um, you've done pretty well at 300 millimeter in this space with some of the newer, um, product offers that are able to detect, um, you know, defects that others may be can't find.

  • And so we're seeing the same shift being reasonably successful with the whole PDC business.

  • So, you know, we see that pretty much across the world, and we're doing pretty well there.

  • I think particularly in 300 millimeter.

  • We think that trend should continue.

  • The other point about PDC, it was, um, a unit that grew nicely year over year and, um, you know, had a book-to-bill ratio of higher than 1 all year and has the, some of the highest margins in the company, so we're, you know, we're pretty enthusiastic about its performance.

  • And if I could ask a follow-on, I'm at the trade partner's conference in Hawaii right now, and there is a lot of talk about the costs of mass sets.

  • You can give us a sense of what is going on with E-tech and the redicle inspection side, you said E-tech was back to profitability, I believe.

  • - Chief Financial Officer

  • It's been profitability for two quarters, you know, and we have caught up technically in the E-beam space.

  • Of course, we're the leader in the laser space and have not lost any position there.

  • I think the industry is grappling with the high cost of mass sets in general, very high at the advanced technologies, and we're focused on trying to get that cost reduced.

  • We think there is a lot of leverage there.

  • We have a couple of products, um, coming in both of these areas that we're hopeful of getting out very quickly.

  • And if we're able to do that, I think we will, um, you know, gain a substantial lead here and I think the other thing we have to get focused on is really the reduced the mass cost for the industry creating a lot of opportunities for us as well as it's a very difficult situation right now.

  • It certainly is.

  • Thank you.

  • - Chief Financial Officer

  • Okay.

  • Operator

  • Your next question is from Byron Walker with UBS Warburg.

  • Hi, Joe.

  • When you gave us, um, guidance last quarter, did you have the fiscal effective tax rate included in that guidance?

  • - Chief Financial Officer

  • I did not.

  • The -- I was waiting for somebody to ask that, um, you know, I think we're dealing with the laws of numbers here because the benefit itself is $20 million.

  • So ordinarily, um, it wouldn't have that big of an impact in terms of, um, of EPS, but it kind of runs about to a 1.6 cents or something.

  • I think it's really got to do with the law of numbers.

  • We do the, um, -- although we provide for this in the 29 1/2% tax rate, you do a transaction analysis in the fourth quarter and, um, when we got all done with the tax provision, filed a return as well as, you know, this is audited by the auditors, um, this was the result and, you know, we had to record it in the fourth quarter.

  • Okay, thanks.

  • - Chief Financial Officer

  • Yeah.

  • - Managing Director of Investor Relations

  • Operator, we'll take one last question and make our closing remarks.

  • Thank you.

  • Operator

  • Our final question comes from Chicar Prominick with Prudential Securities.

  • Hi, good afternoon.

  • Just, you know, you have recently done the resizing or in the process of doing so, and you have some idea of how that looks overall, what kind of target, gross margin and operating margins as you -- [ Indiscernible ] Do the businesses have in mind?

  • - Chief Financial Officer

  • Well, we're not going to give guidance about '03 with respect to that, but we continue to target you overall gross margin equivalent to the margins we, have -- we achieved at peak levels of revenue.

  • So all of our businesses, our product lines are all geared to have a 50 to 55% gross margin component in the service business, um, we target for a 35%, um, margin performance.

  • Now, obviously, we're not doing that because we have all of this underabsorbed factory overheads and, you know, we're waiting for prime time in the industry.

  • It's in the.

  • So, we'll continue to drive towards those things and as I said in our -- in my comment with respect to 300 millimeter, I'm very confident because we're over the learning, um, curve and have got a lot of products now that are effectively completed and ready for volume manufacturing, so the higher we can get the units, the more leverage we're going to get out of the business and what we believe the leverage is there.

  • And -- and based on, you know, concrete sizing, what revenue levels is that peek margin achievable?

  • - Chief Financial Officer

  • Well, it's hard to say because, you know, we're not one or two products.

  • We're 10 products and a few geographies across, you know, anything I say is dependent on what the mix is, so it's hard to say.

  • Um, you know, some -- some products are better than others so it would depend on what the mix is.

  • We pretty much targeted at an overall level of $2 billion we would like to see the 50% margin threshold.

  • We discussed this with the investment community many times.

  • So, we think $2 billion is a kind of, um, goal that we think we can get to.

  • Thank you.

  • - Chief Financial Officer

  • I wish we could get the business of 2 billion.

  • That's for sure.

  • - Managing Director of Investor Relations

  • Jim, would you like to make a closing remark before we close off the call?

  • - Chairman, CEO

  • We just appreciate the support that we have had from our investors and I know this has been a tough time for everyone of out there and it still remains uncertain, uncertainty -- unfortunately, but I think after listening to Joe and some of the specifics that we talked about and from my trips throughout the company it's clear that the company is well prepared to take advantage of an opportunity to upturn what when it comes so we appreciate you hanging in there and we'll so you next quarter.

  • - Managing Director of Investor Relations

  • Thank you, Jim.

  • We would like to thank everybody for listening to our fourth quarter year-end -- fourth quarter end year-end 2002 earnings announcement.

  • The webcast of this conference call is available on our website and will remain -- remain there until November 27.

  • Again, thank you for your interest in Applied Materials, Inc..

  • This will conclude our call.

  • Operator

  • Thank you for participating in today's fourth quarter fiscal 2002 earnings release conference call.

  • This call will be available for replay beginning at 6:00 p.m. eastern time today through 11:59 p.m. eastern time on November 27 of 2002.

  • The conference I.D. number for the replay is 5787470.

  • Again, the conference I.D. number for the replay is 5787470.

  • The number to dial for the replay is 1-800-642-1687 or internationally at 1-706-645-9291.

  • This concludes today's conference call.

  • You may now disconnect.