應用材料 (AMAT) 2003 Q1 法說會逐字稿

A ladies and gentlemen, thank you for standing by.

Welcome to the Applied Materials first quarter fiscal 2003 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.

At that time if you have a question you'll need to press star, then the number 1 on your telephone keypad.

As a reminder, this conference is being recorded today, Tuesday February 11th, 2003.

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

Please go ahead, ma'am.

Thank you.

Good afternoon everyone.

Thanks for joining our conference call today.

With me are James Morgan, Chairman and Chief Executive Officer, Joe 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 first quarter were released on business wire shortly after 1:05 p.m.

Pacific standard time.

You can attain a copy of the news release on our web site at www.appliedmaterials.com.

During our conference call today, we may make projections or other forward-looking statements regarding future events or the company's future financial target.

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 not are 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 27th, 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 Joe Bronson, who will provide an analysis of the first quarter financial results and provide fiscal second quarter 2003 financial targets.

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

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

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

Thank you, Carolyn.

Good afternoon.

As you know, this was another tough quarter for all of us.

Our customers, our investors, and our employees.

However, despite overall lower bookings, most of our product units performed well and were essentially in line with internal targets.

This was accomplished through the hard work and perseverance of our employees worldwide.

Unfortunately, holidays and lower levels of factory utilization during our first quarter resulted in cutbacks in spares and other service requests.

Additional, we had timing issues at our Mask business.

Joe will discuss this later.

Continued weakness in the economy and uncertainty surrounding global events created a challenging environment for businesses around the world.

Our industry, semiconductor industry, is now in its third year of reduced capital spending and most of our customers, while still investing selectively in advanced technology, have put plans on hold as they assess the business outlook.

Fortunately for us, Applied Materials has experienced negotiating through downturns and up turns that inevitably follow.

We've come out of every downturn stronger by utilizing our tremendous resources and focusing what we can control to both efficiently managing our business and leverage opportunities that are out there.

These opportunities will go to those companies that best position themselves for the long-term.

In the long term opportunities, they continue to be enormous.

There are more and more people joining the network economy every day.

Information media in all its forms, voice, data, video, is driving the use of more devices, more applications, more silicon content.

The technology transition under way to make this happen have taken on a more urgent nature and it's our job to ensure that our customers have the right products and integration and knowledge they need to get there.

A few years ago, the semiconductor industry began a massive product transformation to incorporate the three waves of technology.

Smaller and smaller geometries, broad range in new materials, and 300 millimeters involving enormous investment by Applied Materials.

After moving through the initial phase of this transition, Applied Materials now commands an unparalleled understanding of the key challenges and opportunities ahead and with the steep curve behind us, we can now dedicate resources, capitalizing on all that we've learned.

We are now able to invest more of our resources into extension of existing products, development of new products, new markets and other new opportunities for growth.

The semiconductor industry is clearly in a another state of change.

Or customer are experiencing pressure on their discretionary R&D dollars.

They're looking for lower cost solutions to an ever expanding menu of end applications for chips.

They have responded to this market situation by advancing the pace of new technology applications for new products and increasing manufacturing partnerships globally.

As a result, our customer is seeking ways to stimulate demand while looking for more economical solutions to those challenges.

They're looking to us to step in and fill this gap.

This is a time when Applied Materials historically strong customer relationships provide a genuine competitive edge.

Every major chip manufacturer is working more closely with us to align their technology and business needs with our capabilities.

Our knowledge base across the industry's broadest set of products and processes is increasingly paying off here.

At Applied Materials, we believe the change is played to our fundamental strengths.

We have excellent product positioning for both current and future technology generations.

With more than 700 copper and 300 millimeter systems installed today, we are the clear leader in these technologies and have new products in development.

Our widespread network of experienced customer engineers support thousands of advanced support systems around the world.

This unmatched knowledge base brings tremendous value to our customers.

To us, change is also an opportunity.

An opportunity to build our leadership position.

Let me tell you what we're doing right now to strengthen and extend our industry leadership.

We're working even more closely with our customers to help them solve technology and productivity challenges.

We're accelerating the rate of new product introductions and up grades, whether it's standard new markets or to expand current markets.

We're expanding after sales support to ensure continuity of manufacturing the customer [INAUDIBLE].

We're continuing to make investments in other areas that serve our customers, activities like information technology, quality programs, and manufacturing efficiencies, because we know that to ensure leadership, we have to invest in all areas of the company, not just R&D.

We're successfully managing our costs in the midst of an ever changing business climate and we've taken an already strong balance sheet and kept it strong throughout this downturn.

In addition, we continue to believe in the future of Asia as a growth opportunity for Applied Materials.

In the year 2000, Asia including China represented about 30% of the world's semiconductor purchases.

That percentage could double by the end of this decade.

Our proven ability to offer integration ready equipment with on site support promises an enormous opportunity for us in the years ahead.

And finally, these are times of great distraction.

World events dominate the headlines.

The near-term future appears uncertain and it's during times like this that it can be easy to miss the finer points that give us reason for optimism.

Information age continues to unfold behind these headlines.

In China, five million new people are buying cell phones there every month.

They join the legions of people who make up the next billion participants in the information age economy.

During my visit to India last month I saw firsthand villages linking themselves to the vast possibility of the information economy.

Clearly, the given impulse to create, connect and communicate is strong and enduring.

At Applied Materials, that's what motivates us every day, providing the ever more powerful portable and affordable chips that open the information age to all.

I feel Applied Materials is in an excellent strategic position to improve its competitive position and we're taking actions today that will enable us to extend our industry leadership when business conditions improve.

Let me turn the conference call over to Joe Bronson.

Joe?

Good afternoon, everyone.

We will now discuss our results for the first quarter ended January 26, 2003, and our outlook for the second quarter.

The first quarter net sales of 1.05 billion decreased 27% from the fourth quarter of 2002 and were 5% higher than the prior year first quarter.

Gross decreased to 37% in the first quarter compared to 41.7 in the fourth quarter primarily due to under absorption of factory and field service costs.

Operating expenses were lower than the fourth quarter at 38.7% of net sales.

Expenses in the first quarter were reduced across the board through savings from workforce reductions, ongoing cost reduction programs, shutdowns, and the elimination of variable compensation accruals for employee profit sharing and bonus plans.

Results for the first quarter included a pretax restructuring charge of 99 million or four cents per share after tax for severance and other costs.

Excluding the restructuring charge, the company reported a pretax profit of six million, or no cents per share.

Including the restructuring charge, the net loss for the quarter was 66 million or four cents per share compared to fourth quarter net income of 147 million or nine cents per diluted share and a 45 million loss or three cents per share reported for the first quarter of 2002.

New orders for the quarter were 1.02 billion generating a book to bill ratio of .96 to 1.

As announced on January 31, orders missed the targeted range and were 35% lower than the fourth quarter.

Agency the world largest provider of semiconductor capital equipment, Applied Materials's performance is indicative of the current weak condition of the market.

The orders shortfall experienced in the first quarter was broad-based, occurring in most product lines and regions.

The order shortfall appears to be caused by a series of timing events as customers are deferring major capital spending plans for new fabs and for equipment due to a number of factors including the following: Uncertainty caused by unstable geopolitical factors, slower revenue growth particularly in the new technologies and insufficient customer profitability caused by low end user demand, lack of sufficient product designs for .13 micron applications, which has further reduced the demand for production.

Although most of the technology investment, 4.13 micron has been made, certain customers are pushing that capacity investments due to learning curve issues with the yield ramp at the .13 micron technology note.

Five, difficulty in raising adequate financing for certain projects.

Order percentages by geographic region for the first fiscal quarter were as follows, North America, 27%, Japan, 21%, Europe, 18%, Taiwan, 14%;

Southeast Asia and China, 12%, Korea, 8%.

U.S. customers continue to be cautious and are spending capital judiciously primarily for 300 millimeter and advanced technologies.

Japan order levels reflect investments to adopt a newer .13 micron technologies for both logic and memory applications.

As consumer applications have gained momentum, Japanese customers have reorganized and restructured their companies that become more competitive in the world market for semiconductors and are expected to increase levels of capital spending throughout 2003.

Korean order trends reflect investments in 300 millimeter by a single major customer for production capacity.

Taiwan order trends were weak with investments postponed due to end market conditions.

DRAM orders represented 30% of total system orders for the first quarter compared to 48% for the fourth quarter.

In the first fiscal quarter of 2003, 11 customers placed system orders in excess of ten million versus 19 in the fourth quarter.

Of the 11 customers, two system orders were in excess of 50 million versus six in the fourth quarter and no system orders were in excess of 100 million versus two in the fourth quarter.

Back on for the quarter backlog, 3.05 billion down from 3.19 billion for the fourth quarter.

Backlog adjustments totaled 104 million consisting of cancellations, currency and other adjustments.

To properly analyze Applied Materials backlog, it's important to consider the following.

One, under SAB-101, customer shipments to Japan and shipments of product where revenue is not taken in shipment due to specifications or commercial terms remained in backlog until revenue is recognized.

Therefore, some products will remain in backlog longer due to the impact of SAB-101.

Two, flat panel display equipment is usually deferred as well.

The backlog generally ages for revenue approximately 10 to 12 months.

Three, V-Tech's mask pattern equipment typically has longer lead times than semiconductor front end processing equipment.

Four, all service contract business for the upcoming 12 months is included in the backlog.

Long-term service contracts beyond 12 months always have 12 months of backlog on a rolling basis.

And the service business has been growing.

With respect to the balance sheet, cash, equivalent, and short-term investments increased by 59 million from the prior quarter to 4.99 billion January 26, 2003.

The increase in cash for the quarter primarily reflects continued excellent working capital management.

Accounts receivable decreased by 155 million in the quarter with net collections of 1.09 billion and DSO performance at 77 days.

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

Inventory decreased by 57 million in the quarter due primarily to decreases in receipts due to the level of business activity and ongoing inventory reduction in management programs.

Capital expenditures in the first quarter totaled 112 million and depreciation and amortization was 104 million.

The company retired its only synthetic lease by purchasing the facility in Hillsboro, Oregon for 52 million.

This lease was assumed in connection with the E-Tech acquisition in the year 2000.

Part of the company's ongoing stock repurchase program, we repurchased three million shares of common stock during the quarter for $50 million at an average price of $16.25 per share.

Some comments on the company's performance in the first quarter are agency follows: One, mass patterning equipment experienced a significant revenue in profit shortfall.

Two, service and spares also experienced revenue and profit shortfalls.

As customers took certain capacity temporarily out of service due to extremely low utilization rates and/or deferred the plan of equipment already delivered.

These factors cause significant unplanned absorption of service overhead.

Three, most of the company's semiconductor processing equipment units achieved or exceeded performance targets in the first quarter for revenue and profit with market momentum in most areas.

Four, AKT, the company's plat panel equipment products division, continues to perform well, achieving all expectations.

Five, factory under absorption continues to impact the company's margin position at these low levels of semiconductor system revenue.

In addition, customer postponement of shipments within the quarter adversary impacted margins as equipment had to be reconfigured for other customers' requirements.

Six, appliance engineering costs on 300 millimeter products were significantly reduced from the fourth quarter.

The learning curve on the introduction of these products for customer capacity demand has been completed and is not anticipated to be a significant factor in the future.

R&D spending continues to focus on new product developments in mask inspection, [INAUDIBLE] inspection and the next generation of electroplating system.

Additional efforts continue in all other business units in areas such as copper applications, barrier C, low K, [INAUDIBLE], as well as process modules and front end applications such as transistor formation.

Since the beginning of the year many of our customers have announced reductions in their 2003 semiconductor capital budgets as a result of a slower than expected economic recovery and the height of geopolitical risks around the world.

We expect capital spending to be slightly higher in 2003 than 2002, although poor visibility throughout the food chain makes forecasting extremely difficult.

Although we are aware of the downside risk of a further weakening of economic growth or further deferals in IT investment, we remain cautiously optimistic that the business environment will improve upon stabilization of the geopolitical situation.

We should then see the beginnings of a global economic expansion that drives the semiconductor industry recovery.

For the next quarter, we expect order activity in the near term to continue to be volatile and generally weak unless some of the uncertainties discussed earlier are mitigated.

We expect orders in the second quarter to be above first quarter levels.

Revenue will also be slightly higher than first quarter levels.

And the company expects the second quarter to be profitable in the range of one to two cents per share.

I'll turn it back to Carolyn.

Thank you, Joe.

That concludes our formal remarks and we are now ready to begin our question and answer session.

I'd like to remind you to try and limit your questions to one per firm.

Operator, would you please begin the question and answer period and give the instructions, thank you.

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, pick up your handset before answering your request.

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

You'll hear a beep to acknowledge your request.

If your question has been answered and wish to withdraw your question, you may do so by pressing the pound key.

As a reminder, please limit yourself to one question.

Once you have asked your question you will have the opportunity to requeue to register another question.

Your first question is from Sarench Balarma from Sync Equity.

Yes, I'm wondering, it seems that the copper [INAUDIBLE] started almost three- four years back and given the fact that companies like [INAUDIBLE ]pretty much the whole package.

Why is it that some companies have so many problems ramping when others are being with somewhat more successful?

As we said in previous discussions, this is the toughest transition I've seen.

We've moved from .18, just kind of bypassed .15, moving into .13, without a lot of experience in between, so that's an impact from experience on the line restraints.

You have more new materials than I've ever seen introduced at one time, and added to that, you have 300 millimeter.

So those of us on the developmental side for equipment processes have had to deal with [INAUDIBLE] on 200 millimeter and 300 millimeter.

So it's just not an easy process and takes experience.

That's why you're seeing the customers working more closely with this to be sure together that we can make that transition effectively and we're making real progress.

Thanks.

Your next question is from Mr. Jim Cavelow with Goldman Sachs.

Good afternoon.

My big question is on China.

You had referred to some customers having funding issues.

I would imagine that's China.

If you could comment on that a little bit if that's maybe a more permanent issue or temporal and maybe you could also just quickly comment on head count reductions and if you think you're done there, if you think you'll need to take additional actions.

Thanks very much.

The financing situation in my view does not pertain to China.

We look at the situation on a project by project basis, and move accordingly, and so every project that gets funded we've been doing business on a letter of credit basis, so the issue sometimes is the timing of how the funding gets put together.

So I think there's always an issue with respect to companies that are not in the business, but I don't see that as a major stumbling block for China's growth.

And on the head count issue?

We just continue to assess that as we see the outlook involved.

And if you could give us your best thoughts now on it. [OVERLAPPING SPEAKERS]

It's an evolving thing.

We work the outlook as we do our forecast each period.

Thanks very much.

Your next question is from Shicar Kramenic with Prudential Securities.

Hi, good afternoon.

Just two questions if I can.

Joe, on the second quarter is gross margins as an operating expense pretty similar or are gross margins slightly better?

Gross margin should be better than the first quarter.

Great, and also you gave little comments on the backlog, what's in there.

Should we look at two-thirds of the backlog rather than one-third is service?

It changes around quite a bit.

Right now with the general business being what it is, service has a higher level of business than it has traditionally, so I don't think -- I don't think there's one way to look at it.

It really is going to depend where you are in the cycle.

We're also trying to grow the service business at the same time.

So I think it's something you have to look at on a continuous basis.

And if I may, on the financing issue, is this related to smaller DRAM players?

I'm not going to comment on customer specific situations.

I think we all know that capital is difficult to come by these days if you're trying to start something up from scratch and then if you have existing issues of profitability, it's not easy.

The point is that we have to look at the credit worthiness of each customer and their ability to get financing and that's how we have to look at the situation.

Let's put it this way, more difficult than it would be otherwise to get money into new fab construction.

Thank you.

Your next question is from Jay Donna with J.P. Morgan.

[INAUDIBLE] bookings outlook for the second quarter, above the first quarter.

What does that mean, does that mean less than 10% up or potentially more than that, and secondly on your forecast for capital spending growth in 2003, up slightly, that is the same as 90 days ago when you said modestly, and are you more confident that that can happen now or more concerned about downside risk?

What we said about the second quarter is we expect the orders to be higher and we're not giving a range because as I said in the comments that things are so volatile, the list of opportunities that we have are enormous, and so the question is as to what percentage of those are you going to get?

And I think it's very hard to make book on on handicapping each one of those situations into a numerical range, so we believe the business will be higher and we just don't know by how much.

And the capital spending outlook?

The capital spending outlook I don't think that has changed very much.

We've been in kind of the plus 10% range for about the last, you know, four to six months and we continue to believe that.

That's doable with accumulative order book over the first two or three quarters of the year upward to 700 million less than what most folks --

Well, again, we're saying that the second quarter is higher, then obviously we'd have to have more in the second half to achieve that, and so we're seeing a few things, we've seen very little spending at all out of Taiwan and Japan is just getting started, so we believe Japan will be higher also.

You've seen the numbers from the other players, so that is kind of a broadbrush look at the situation.

I think the concern is as you see different markets roll in, Korea, Samsung, Japan, maybe Taiwan later in the year, you're not getting an equal surge from all different regions so it's kind of hard to see where the hockey stick comes from in the second half of the year to drive that if it's kind of rolling through different end market and regions.

The issue is just a lot of identified business, but you can't predict when their going to find their patents.

They have deep pockets and short arms.

It's a challenge out there.

Thanks.

Your next question is from Glen Young with Salomon Smith Barney.

Joe, I was wondering if you could look a little bit more closely at the next quarter in terms of the order outlook geographically, I think you suggest above or higher than the last quarter.

Can you give us granularity as to where there may be a strength and within that context, are you expecting to see some of the order slippages in the January quarter come back to you in the April quarter?

We do expect to see some of that.

I don't know if we'll get it all.

We'll see some of that.

Also, Japan's fiscal year starts in our second quarter, so we're hopeful that that spending starts to free up, as has been projected. 10% is not a big swing up off a down year, so it's not the kind of hockey stick that people might think.

So we do expect some pocket to strength.

Some of the other North American customers will start spending their capital budgets more [INAUDIBLE] than they did in the first quarter.

The first quarter is always a very tough quarter for us particularly in this area of holidays, where we're crossing over, and in this particular year, a lot of customers were on holidays, so we're looking for an up tick in this following quarter.

Thanks.

Your next question is from Brett Hodess with Merrill Lynch.

Good afternoon.

As we look at the coming quarter and the up tick on the revenues, given where the orders were this quarter, is the up tick coming more from some of the pushouts that occurred in 1-Q and 2-Q or does it have to do with just the timing overall?

I think it has more to do with timing than a surge in business.

It's not a big increase in revenue that we're talking about.

Given the fact that we were off a little bit in the first quarter, we're hoping -- we expect that to come in in the second quarter.

And on E-Tech, when you mention the disappointing revenues and profits, is that because of a cancellation or lack of placement of orders or is that because the timing there might be held off?

It's timing.

I understand only three orders went down in the entire world and there were no laser tools shipped at all.

It's not exactly a robust marketplace at the moment.

We're hopeful that some of the orders that were suppose to be placed will come in the second quarter.

So it's a market condition rather than E-Tech --

We think we're pretty well positioned with the products now.

Thank you.

Your next question is Ali Arani with CIBC World Markets.

Good afternoon, gentlemen.

I was hoping you could give us an idea of how low your operating expenses could go and where you could restructure the business?

Are we close to the bottom on the cost cuts?

Also to follow up on the geographies.

Can you talk about your flat panel display business in Asia?

You mentioned Joe that it was performing to expectations.

Where do you see it going in the next couple of quarters?

I will comment on the flat panel business first.

It's going very well for us, the business is expanding a bit.

With a lot of these fifth generation tools getting accepted, and also the beginning of sixth generation, and we have a very strong market position as you're probably aware of but we're only in the DVD segment so at the moment it's going well for us.

We're pleased with the performance of that group.

With respect to the cost cutting, I think I have to go back to Jim's earlier comment that we have to continue to reevaluate the situation we have to do that every day and we're still looking at the cost areas that we can control and things of that type.

So, we'll have to continue to look at that.

Let me rephrase that question a little bit.

Many of the companies that reported have talked about the completion of some of the R&D programs and therefore the R&D budget being able to be tuned lower over the next 12 months.

You brought that spending level down to $240 million.

Could we see that go down further?

That will be dependent mostly on execution, so we have a number of product developments that I would like to think are in the latter stages, so that's one aspect of it, and then there's also some fixed costs aspects of it that we're working on trying to move some tools around, things of that type.

So to the extends that we can work on those things, there's an opportunity, but we really have a full plate in R&D also that could provide some issues going the other way particularly in the front end area and also in low K and a number of -- even [INAUDIBLE] programs with customers, so once again, it's something that we're evaluating.

I think you have to keep in mind, the R&D budget shifts some up and down due to the material content because we write off our material until we get the product in an acceptance mode, so that will move the absolute dollars around, but what you should know is that we are focused like a laser on every opportunity for technology advancement that we think could bring us -- enhance our position in the industry and there are a lot of those, fortunately, so you should not expect to see us trying to cut back on programs.

But the dollars may change around depending on if we can get more efficient, if we can get better asset utilization, there are a lot of things that we can do that we're working very hard on because one of the things we do know that in today's world, you have to be a very efficient cost producer as well as a technology leader, and we have that message very well understood throughout the company and people are working very hard to figure out ways to pretty significantly improve our capability and improve our asset turns and things like that.

Jim, if you had to pick one component of that in the near term for market share gains, which one would it be?

It's a whole series.

We've got good products coming in a series of areas, we'll have to see how strong the traction is, but they look good so far.

Thanks.

Your next question is from Mike O'Brien with Sound View Technology.

Good afternoon.

I'm hoping maybe-- I know it's tough in this environment from an order perspective.

Joe, any chance you can give us some kind of a low bar, is it 1.1 that you think is pretty easy to achieve given the timing issues?

Is it 1.1 to 1.4?

Could you give us something?

You realize that one order could make 15% change in the numbers.

We can't get in that approach.

If there was a hold -- in normal times you could works out a net of the ones that will come and won't couple, a couple fall out and couple will fall in, then the networks out okay.

In this environment, we get everybody with their hand at the edge of the pocket and they can't find their pants.

Until we do that, we can't forecast.

It's been a long time since we missed an order's guidance number.

I have to go back many many years.

And the list of orders that I've got missed is mind boggling.

It's just and economic phenomenon that these customers are living in an uncertain environment and they're not going to let loose until something changes.

And so the ones, you have low probability of half of them closing?

I'm just trying to get an understanding.

I wish.

If I could handicap it for you, I could give you some definitive guidance.

We don't he see it going to competitors.

You just don't know whether they'll come in or not.

How about on pricing pressure?

There's certainly been worry that the pricing environment is getting significantly tougher and whether the whole margin parameters for the industry is changing.

I was kind of prepared for this, I have a little speech, so I'll give you a few points on pricing.

One, and you can't broadbrush this as 100% across the board, there are certain customers that are demanding price concessions on large orders where there's large order potential for new business.

This is new business [INAUDIBLE] so that's one type of situation.

There's another type of situation that I think is probably much more typical, where the customers spend a lot of time up front qualifying the capability of the tools and they make a competitive selection based on their application, the productive capability of the tool, et cetera, and whether this is for 300 millimeter copper or advanced [INAUDIBLE].

Once this tool is qualified for whatever application, I believe there's little price structure because the customer understands the value proposition on the fact they did the qualification, so that's another type.

Then there is a third type which I would say is more of the outrageous type, certain customers want vendor financing to equip their new projects.

They want us to participate or want the competitors to participate.

We've said that time and time again we're not going to do that, we're not in the vendor financing business.

That is why we have the cash we have and that's why we haven't had to write off any receivables.

So we're not going to go down that path.

Finally, there are customers that have capital spending limitations for whatever reason and so what they do is we will choose to fill some of their requirements with used equipment or refurbished equipment, and that plays pretty well for us because we have a whole division that refurbs tools and can get tools on the market, configure them, provide the customer with a warranty, and a service agreement that's necessary and save capital and create a win-win situation, so I think that's kind of how I would categorize the pricing environment.

Thank you.

And I think you have to understand that what we focus very hard on and what we're seeing is our breadth of capability and our experience in the business and our heavy investment in the global infrastructure over a couple decades in terms of after sales support and the refurb business, and a lot of things that people didn't think were important because it was part of the block and tackle and that you really require it to build a company long-term, we've done it and so we know how to do it.

It's like getting into some of these markets and building that.

Now trying to come in, it's an expensive entry because you may have -- even if you have the greatest product it's tough to get in because we haven't had to pay our dues, so as we're beginning to orchestrate the collective capability of this company in the downturn and the industry is getting its efforts refocused so they're expenditures have to be focused more towards their customers as opposed to towards their suppliers, that you're seeing a shift pretty significantly particularly over the last six months of the customer really wanting to be a close partner with somebody who's got that kind of experience so they don't have to spend it because it's really dumb for them to spend the same billion dollars that we're spending.

They ought to spend a billion dollars to do something better or different, but to not leverage off of our broad long multi decade investment is really, more and more of them are seeing under pressure that we're the place to go, so that's a great opportunity.

We just have to be able to pull together and perform well in doing that.

Next question?

Your next question is from John Pitsler with CSFB.

Joe, quick question.

When you look out to the April quarter, is there an opportunity to get gross margins back up to the 45% level?

Well, I'm not guiding you there but they're certainly going to be better than what they were.

In addition to the revenue miss [INAUDIBLE] also the service business did not have a good quarter from a profit standpoint through revenue misses and also absorption difficulties because of these fab closures or fab shutdowns and install deferrals, so that caused a whole bunch of surprises.

We expect the service business to rebound to more normal performance in the second quarter and that alone should drive margins up.

And also if we can recover some of these other revenue shortfalls, we think margins should come back.

Well Joe, if you look at the April quarter of last year, on about a 1.15 billion you hit 40% gross margin, are there mixed issues that are changing this April quarter?

No, I don't think so.

And then quickly, 300 millimeter as a percent of the order book, when you look at the April quarter, what is your expectation of Taiwan on the foundaries?

They're still very weak in the second quarter.

They're spending will come in the second half. 300 millimeter is still close -- it's close to half of the semiconductor process equipment business, just about half.

Thanks.

Your next question is from Theodore O'Neill with A.G. Edwards.

I was wondering if you could give us more color on the refurbed and used equipment marked and where that's strongest and where you see it becoming strongest and secondarily, can you give us any outlook for expectations for semiconductor equipment demand from Chinese foundaries in 2003?

We expect China to spend about 2.7 billion in Cap Ex, in 2003, that's going to be up significantly from 2002, so that's part of it.

In terms of the refurb business, some of that business is -- a lot of that is Asian based.

Particularly for some -- some of the foundaries moved to China, and for some of the projects in China, have a mix of used and new systems.

In general, there's a lot of -- this has been a growth area for the company starting from a very small base about two years ago and it's growing pretty reasonably as we take advantage of the ability to reconfigure and have the expertise to service these units anywhere in the world.

Thanks, Joe.

Your next question is from Steven Palaeo with Morgan Stanley.

First on on the service bookings in the quarter, you tend to have beginning of the New Year contract renewals that type of thing, can you give us a range?

It's been 20% of orders, but at these lower levels are we talking 30, 40% service or what are we talking about here?

It was around the mid-30s.

Okay.

And then when you look at your operating expenses, we talked already about R&D, looking at your SG&A levels, with revenues going up but offset by, I think you did your last reduction kind of mid quarter last quarter, you get the full impact of the quarter, can we still expect SG&A to grind lower?

Well, once again, I have to make the same comment that Jim commented on R&D, you have to look at the whole picture of what we're doing, where we're doing it and we certainly will look at everything that's discretionary with respect to how we go forward.

That's going to be a function of just general cost-cutting.

Anyplace we can do it is discretionary, we'll do it.

Last question for Jim.

We're pretty nervous about the peak of the next cycle being low and we're also nervous that high levels of R&D spending that equipment suppliers are continuing to take on to deal with all the process technology and all the integration issues out there, I guess I'm a little nervous that it combines a double whammy effect at the peak end and higher R&D levels to support the new technologies.

What do you think about t both those issues on a peak to peak comparison from a revenue perspective.

From an R&D perspective will that hurt the profitability if we continue to have to spend more and more?

I think we always underestimate the opportunity in technology.

It happens forever ever since I've been involved with it because what you see is we can forecast the things that we know and we can see them getting sort of saturated or however we define it.

And then, if you go back, who would have thought -- even a lot of really knowledgeable people didn't think it was a very big demand for PC.

When we came out of the '86 downturn, no one even thought the Internet even had any potential impact, and when we were in the '90s, that was all going to end and now all of a sudden we got wireless, so what we do we forecast technology and forecast the few things we can see, but there's been several technology transformations that really impact the business and the reason is what we're adding to the value of making more powerful portable and affordable chips and our flat panel, which of course is increasingly influencing what you can do with information technology, and the tie-in to technology from a systems viewpoint in that the medical side and all types of things, we just underestimate what the inherent demand is.

If you look at the R&D expenditures, we're hopeful we can get approved, it's that a lot of the work begins to build on itself after getting through this huge effort that we had to hit the three waves here we talked about a little earlier, so we're hoping to get more efficient in our ability to bring value to the customer.

The positive side of this is that it's focusing all of our people on the leverage we get from our collective capability, and so the silo mentality that gets developed in a company because everybody is -- and going and they can afford all the resources and everything and they don't need to work together as much has really changed.

So by doing that, we're seeing through, for example, the Technology Center, built in '85.

There's a lot more cooperation leverage between our different units as well as between us and the customers, so that would help make things a lot more efficient for the things that need that are sort of repetitive that have technology impact, but the customer may want to do something separately, but willing to work with us more and pay us for it.

So it's a mix.

So I think that this delay puts a lot of pressure on the upside from just a demand viewpoint, and two, there's just more value than we keep bringing.

We talk about it, but it hasn't been for the past three years that internally, the implementation people believe the vision that we talked about after sales support, the outsourcing by our customers and activity.

So these are whole new markets that are evolving that didn't come around before.

So there's a lot of opportunity out there.

Think about what this company has.

It's got one of the greatest depth and breadth of diversified technologies of any company in the world.

It's got one of the best, most integrated on a working level basis sense of cultures of almost any company in the world, and in addition, it has a huge infrastructure to support sophisticated products around the world, there's great value to that.

So I think there's plenty of opportunity and if we do a good job, we'll get paid for it.

Thanks, Jim.

Yep.

Your next question is from Anest Galeo with Newburger.

I have two questions.

Jim, could you care to characterize how big DRAM is of your quarter backlog?

I'll ask Joe that.

I would say it's in the same range that we have been quoting for DRAM, anywhere from 15 to 30%.

A couple quarters ago, when you were running revenues of $1.4 billion or so, you achieved almost nine, ten cents in earnings.

Coming out of this head count reduction, do you think operating leverage could be higher?

I still stick by way -- time and time again, the company has tremendous operating leverage and as the revenue goes higher, we will definitely get the leverage out of it, so I don't think this quarter taints any of my view.

I think this quarter was really hurt by poor performance in the service and some system revenue misses at E-Tech for the most part.

Other units performed pretty well.

As we get off the revenue curves, we'll get substantial leverage out of it, but I really don't think anything has changed.

Thank you.

Your next question is from Fred Wolff with Adams Harkness and Hill.

Two quick questions, there's a lot of talk about a plant shutdown.

Can you comment on any plans for that in February or in the second quarter and secondly DRAM saw a fairly significant decline in orders for the Q1.

Would you expect that decline to continue or do you think it will stabilize around this level in the second quarter?

DRAM business is going to be lumpy because there's not many competitors left -- I'm sorry, many customers left, so when DRAM people order, they order a lot, and so you're going to see lumpy order patterns.

We had 48% of the business in the fourth quarter, 30%, and all through 2002, you had in the 12%, so it's been kind of all over the place.

I think you're going to continue to see that with the small number of players.

With respect to shutdowns, I think we -- I'm not sure if -- what we publicized, but we are going to shut down I forget how many days this quarter, two weeks this quarter.

Thank you.

Your next question is from Nick Pachenco with Fulcrum Global Partners.

Good afternoon.

Two short questions.

The first one related to quarters.

What type of products perform the worst in terms of amount of orders you received in January quarter?

And the second question is what was your geographical distribution, let's say in January quarter as well?

We don't give that information.

We'll public the geographic revenue by region in our 10-Q when it's published.

We don't disclose that, that would be an [INAUDIBLE] kind of issue.

That will come out in the 10-Q.

With respect to product line orders, we don't disclose that either.

Thank you.

Your next question is from Edward White with Lehman Brothers.

Thanks.

Given the fact that the ramp-up of leading edge capacity in volume is slowed for various reasons, some you talked about before, can you talk about how much of the order activity you're seeing now is at the leading edge, you know, .13 microns and below.

And then secondly in that context to the degree that your customers -- you're engaging more closely with your customers, what are you working with them on?

Are they working on the leading edge, are they doing the .19 micron stuff, the new materials, how is the progress with them going given that -- given the difficulties in ramping up and volume for .13?

Most of our orders are in technologies, the vast majority over 75%.

And essentially we continue to work with the customers on bringing these new technologies to the market.

We have not had an industry wide capacity ramp at 130 nanometer.

That is what we're all kind of waiting for.

It will happen when there's a bunch of people out there that want the end products.

So meanwhile then, are they progressing with development work beyond 130 nanometers even though --

Absolutely.

Many are working on 90 and some even on 65.

Thanks.

Your next question is from Mark Fitzgerald with Banc of America.

A couple numbers.

I was wondering on head count for the end of the quarter.

A little over 14.

And can you give us any sense on concentration on orders in the quarter here is that -- any numbers or qualitative?

We gave you the -- a lot of the orders were -- we said 30% of the orders were DRAM.

A lot of orders this quarter is IDM, not much in the foundry.

Okay, and given your in fabs all the time, do you have any sense where the industry stands on utilization rates at this point?

I think they're trending up a little bit particularly in North America and in Taiwan.

And the leading edge -- [OVERLAPPING SPEAKERS]

In some of them they're full.

90% on leading edge, 70% across the board?

Yeah, I'd say that's pretty good.

Okay, thank you.

Your next question is from Jerry Flemming with Fond Stock.

Joe, could you give us an idea on how much the weakening dollar impacted the backlog or in another way, could you break out the 104 million of adjustments in terms of currency adjustments, cancellations and pushouts and were there any big cancellations?

We can't disclose cancellations by customers.

There were a couple of -- most of what we've done here is push -- where the customers that pushed deliveries past 12 months, we take it out.

I don't know what the currency number was, but it wasn't big.

It was less than 10 of the 104.

Most of the rest is pushing things out.

The things that got pushed beyond 12 months.

Thanks.

Your next question is from Timothy Ocury with Deutsche Banc.

Hi.

Joe, can you do you think there will be a significant up turn without Taiwan or is the real up turn key so that region?

I think the key to the up turn in my view is the 300 millimeter up turn at the .13 micron, that is where the technology sweet spot is.

Granted, some of the advance guys are working on 90, but we haven't had 130 capacity ramp yet and I think we have to have that.

That's where it's going to come from.

But if you break up by geography, is there enough happening outside Taiwan -- [OVERLAPPING SPEAKERS ]

You can't have an up turn without logic participating, so I think the foundaries or foundry like products are certainly important to an up turn scenario.

One more number.

You've given the past foundry as a percentage of orders, can you give us that number?

Sure. 15.

15.

Great, thanks a lot.

Your next question is from Steve O'Rourke with C.E.

Unterberg Towbin.

Good afternoon.

A couple of questions.

First, could you comment on the status of the copper electroplating tool, and second, on the status of [INAUDIBLE] with respect to customer acceptance and any shifts you see in competitive positioning?

We don't comment on the status of specific development programs.

Fair enough.

One other question.

Recently, if I remember correctly, you gained traction on the module strategy with copper interconnect wind.

Could you speak about how do you see this evolving?

And you see service playing into this as well?

What you see, as I mentioned in my comment, the customers are refocusing on what's important to them, and we're -- one of the things that we can help them with is we can relieve them of some of the integration efforts, not all, and we're focused not on a whole factory, but we're focused on providing an advantage position with what we call microcircuits or subsets of products, so we have a module that's a product, a few machines integrated working well together, and that saves the customer a lot of basic work.

As they're trying to refocus their energies, they're working with us on that.

We see that as being more and more important and we're learning more and more from that whole effort, so that brings us more -- we're a more valuable partner.

As I mentioned earlier, every major customer is -- has been working with us the last six months or a lot of them before that, but all of them in the last six months to be sure what we're doing and what they're doing is aligned and they're capitalizing on what we're doing, so that's a big advantage for us and we're going to take advantage of it.

It helps us on the service end because we know how to install it, bring it up and support it.

As you know, our total service programs, which were introduced a few years ago in a more generic sense where we began to get experience, have been tremendously successful in accelerating, so that experience now could be applied to helping customers with this so we think it's a big advantage for us over the next decade.

Thank you.

Your next question is from Patrick Hoe with Morris and Cabot.

Hi guys.

It looks like your quarter in January was back end loaded with regard to orders.

Can you talk about the linearity you're expecting for the April quarter?

I think that's a phenomena of the last 20 years in this business.

Orders always come at the end of the quarter, so I don't think this quarter is going to be any different.

You don't think some of the slip-ups you might have seen --

Yeah, some of those will get close, but you still have a lot of business to book.

Fair enough.

Good luck.

Thanks.

Your next question is from Byron Walker with UBS Warburg.

Good afternoon.

I was interested in your program for refurbs and wanting to expand that business.

Was that strictly related to your own equipment or does that include or will include other people's equipment?

We got a full plate with our own equipment.

So you'll stay with that?

That's the plan?

Yeah.

The other issue is your sub suppliers and supply chain, as hard as this has been for the large public companies, it's been particularly difficult on the supply chain.

Can you give us an idea how you're managing the nature of that support for those people?

Obviously many of them are private, don't have balance sheets and the like.

Actually a lot of them have been merged or consolidated with our help over the last three to four years, so we actually have a lot of the supply chain is reasonably well healed organization and capable of withstanding that kind of punishment, although it's not helpful certainly to them.

We actually have an internal process to deal with suppliers that are in some degree of problem that we might be able to help out in some way, but -- either by advance ordering or doing something like that, but as bad as this has been and it's going on as Jim said over three years, we've had a lot less difficulty with the supply chain than we've had in our downturns, where we literally were bailing out some of them, but these days these days, a lot of those companies actually went public and have actually managed to do a reasonable job in this downturn.

Our team has gone every done a pretty good job of vendor -- of working our vendors so that we have good vendors and we have fewer of them.

We're much more focused in our relationship with them, we partner more with them, we're including them in our strategy discussions and interquality programs and things like that, so it is tough, at least from a real tough basis, they're in better shape than they were in previous downturns for our particular set.

I don't know about the industry.

And if you could help us out in terms of forecasting a little bit, as you look into your backlog, what should we assume the garage of those products are?

Are they at or about 40%?

[OVERLAPPING SPEAKERS] of the amount of revenue we are going to pump out in any particular quarter.

The backlog is priced kind of in a normal way.

It's going -- its eventual gross margin is going to be impacted by the size of the business as it rolls out.

So it doesn't have any particular pricing characteristics than it ever has.

Thank you.

Operator, we have time for one last question before making our closing remarks.

Your last question, Peter Finkel Wells Fargo Securities.

Hi, it's Susan Crosby [INAUDIBLE].

You talked about backlog and some of the factors that extent of time that revenues are held in your backlog versus global trends.

You talked a little about Japan, the way you're recognizing revenues from Japan, it's going to be the same as a year ago, I would think we've already anniversaried that so that it's no longer something that's extending your backlog.

We don't really understand your question.

We don't understand your point.

Well, I'll tell you what I'm getting at and that is that your -- your backlog versus 25-year history versus or versus other large semiconductor equipment companies the past 12 months has been much higher than normal?

Even as industry conditions deteriorated --

We explained those issues in the prepared text.

We'd be glad to get back to you later, Susan, but we've run out of time on the conference call and we have to close right now.

So operator, if you would put me back to the main call, we'd like to thank everyone for listening to our first quarter earnings announcement.

As a reminder, the webcast of this conference call is available on the web site and will remain there until February 25th.

Again, thank you for your interest in Applied Materials and this will conclude our call.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines at this time.