應用材料 (AMAT) 2003 Q2 法說會逐字稿

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  • Ladies and gentlemen, thank you for standing by. Welcome to the Applied Materials 2nd quarter fiscal 2003 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 then the number 1 on your telephone keypad. As a reminder, this conference is being recorded today, Tuesday, May 13th, 2003. I would now like to turn the conference over to Ms. Carolyn Schwartz, Managing Director of Investor Relations, Applied Materials. Please go ahead, ma'am.

  • - Managing Director of Investor Relations

  • Thank you. Good afternoon, everyone, and thank you for joining our conference call. With me today are Jim Morgan, Chairman, and Mike Splinter, President and CEO, Joe Bronson, Executive Vice President and Chief Financial Officer, and Joe Sweeney, Group Vice President of Legal Affairs and Intellectual Property.

  • Financial results for our second fiscal quarter were released on business wire today shortly after 1:05 PM Pacific Daylight Time. You can obtain a copy of the news release on the investor section of our website www.AppliedMaterials.com. During this conference call we will be discussing non-GAAP financial information. Reconciliations are the reported results under GAAP to the pro forma accounts have been provided as a supplement to the news release that is on the company's website.

  • During our conference call today we also may make projections or other forward-looking statements regarding future events or the company's future financial targets. I'd like to advise you that these forward-looking statements are subject to known and unknown risks and uncertainties, that could cause actual results to differ materially from those expressed or implied by such statements.

  • Such risks and uncertainties include but are not limited to, those contained 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 Form 10-Q for the first fiscal quarter which ended on January 26th, 2003, and subsequent forms 8-Ks filed with the SEC, the company assumes no obligation to update the information presented in this conference call.

  • Today's call will begin with Jim Morgan, followed by Mike Splinter. Joe Bronson will then provide an analysis of the second quarter financial results and provide fiscal 3rd quarter 2003 financial targets. After these remarks, we will open up the conference call for questions. Since we would like to finish by 2:45 PM Pacific time, we would ask each caller to limit their questions to one per firm. With that, I would like to introduce Mr. Morgan.

  • - Chairman

  • Thank you, Carolyn. First, I want to thank the entire Applied Materials team for their hard work in executing the plan this past quarter. It was another tough quarter for our industry, but our employees pulled together and delivered the results we needed to stay on the realignment plan. I'm grateful for their commitment. Joe will talk in more detail about the results of the second quarter.

  • As I discussed six weeks ago, at the Applied Materials annual meeting, a new environment for information technology is emerging. I call that new environment the next reality. That future will affect all companies involved in the IT world, and it will challenge and change the business equations for all of high-tech.

  • Many have interpreted the next reality as primarily cost driven. Rather, I think it is opportunity driven. Let me be clear. I believe the opportunities For Applied Materials in the next reality, far outweigh the challenges.

  • I believe we are transitioning from the introduction phase of the information age to the expansion phase. What we are seeing is a fundamental change in the economics of information technology. All along the IT food chain we must now utilize resources differently than in the past. In our industry, that is reflected in a new imperative to collaborate, up and down the value chain, and to drive resources into product and service differentiation. For their part, our customers are getting closer to their customers and are using more of them spending to emphasize new and increasing chip applications.

  • In turn, they want us, the equipment industry, to partner with them more closely on the manufacturing and process flow end of their business. The idea is to cut R&D redundancies, end development duplication, and speed new solutions to market. This is not a radical change, of course, but an acceleration of an existing trend for us. Both of Applied Materials, and our customers R&D investments, must now go further to develop powerful, portable, application specific chips at affordable price and reasonable profit in order to drive the information age forward.

  • In response, Applied Materials has reduced its cost structure and sharpened its focus even more on customer needs. In February, we empowered an executive next reality task force to reassess our 2003 operating plan, in light of the changes ahead.

  • During last quarter we announced a major initiative to realign our cost structure, and to shift our priorities, accelerating activities in some areas, while de-emphasizing in others. By doing this, we recognize that our customers' priorities have changed during this downturn, and it is not a temporary change but rather an integral part of the next reality.

  • The challenge to our industry is clear. Step up, fill in the gaps, and support the chip industry in new ways. Not all suppliers will be able to step up. Fortunately, Applied Materials is very well positioned to leverage its strengths in the quarters and the years ahead. We will, as we have in the past, capitalize on the opportunities created by change.

  • We are now but a quarter into our realignment plan and the results are beginning to show. We are engaged in numerous partnerships with our customers to bring new solutions and synergies to market. We are actively involved with technical development project to customer sites around the globe, and we are even working with multiple customers to facilitate new multi-party development ventures.

  • We are ramping utilization in the made in center of the test bed of the future, hosting development teams and pioneering new approaches to chip making. We have begun to better leverage our supply chain, launching additional material cost reduction programs that will improve Applied Materials and our customers bottom lines. Our supplier collaboration initiatives are emphasizing lower cost regional outsourcing and procurement opportunities.

  • Our global network is a major strength and we are using that reach to achieve results no competitor can match. And we are using technology to better serve our customer, shed waste from each interaction, and create a quicker response to customer needs.

  • We've used this downtune to put in place information systems for parts and services, personnel deployment, and fast response mechanisms. As a result of our long-standing relationship as a trusted partner, our customers are expecting us to help them with more of their non-core activities. Working together on such areas as process diagnostics and control, management of parts inventories, and a host of fab wide services.

  • We are absorbing more of our customers non-core manufacturing needs. Since these compromise the part of our core strength, it makes a good business sense for them to turn to us, and for us to take on these new activities. As I said, the future will be different, but the opportunities are still enormous when you are in the -- when you are the industry leader. We took decisive action during the past 90 days, actions which will pay off in the months ahead. Perhaps the most decisive action was the selection of Mike Splinter to be our new President and CEO.

  • Coming to applied materials from the chip industry, where he distinguished himself for nearly 30 years, Mike brings exactly the right set of skills at exactly the right time to lead our growth in the next reality. As I said during our conference call to announce his arrival, Mike's intimate understanding of the business from our customers, and our customers customers perspectives significantly rounds out our already strong and diverse management team.

  • Mike's arrival has been enthusiasticly welcomed by our employees, our customers, Wall Street and the press. And I can tell you Mike has wasted no time in getting to know and understand our company. He will lead next quarter's earnings call.

  • If there has been one question people have asked, most often in the past two weeks, it is why did we choose now to bring in a new President and CEO? We needed an executive of Mike's experience and caliber to lead Applied into the future. We needed a genuine customers' advocate at the helm of the company, in order to deal with the changes of the next reality.

  • I believe it was important to put the new leadership in place now, during the downturn, so that the team can adapt and change before the upturn arrives. For all those reasons, Mike's the right person, with the right capabilities. At the right time in this company's history.

  • As Chairman of the Board of Directors, I will be as active with management issues as Mike requests. I will continue to influence our vision and strategy, and will continue to work around the globe to keep world markets open and expanding. As President Emeritus and board member, Dan is continuing to help guide new business and new product development efforts.

  • So a month later, what has the realignment plan shown us? I believe it shows we can respond swiftly to changes in our industry and that we can build upon our strong foundation and plot a path to future growth.

  • We begin this next phase of our corporate growth very well positioned. We have, of course, the broadest product line in the business. With full penetration of our 300 millimeter systems into every key pilot line around the world. As the economic tipping point for 300 millimeter rapidly approaches, we are the best situated to see a springboard for production buys at 300 millimeter, 130 nanometer and below technology.

  • We currently have underway advanced process development activities with customers [inaudible] demonstrate the perseverance of our product development teams, and the value of our integration ready product strategy. We are seeing our product road map strongly aligned with our customers road maps. We've seen our already strong balanced sheet strengthened by good fiscal management. We have in place the right resources and personnel to carry us through a significant growth ramp. We are better, stronger, and more focused than at any time in our history. In fact, I can't recall a time of more marked energy at Applied than right now.

  • People are beginning to see a glimpse of the future and know we are headed in the right direction. And employees are delighted by Mike's presence and see him as the right choice to spur new growth. And we're excited by Applied's obvious advantages entering the next reality. Indeed, we've been here before, confronted by disruptive change, we've reinvented and reenergized ourselves many times. We've always come out stronger for it. Great companies truly are built in tough times, and time and again, Applied Materials has proven itself a great company and an enduring leader.

  • And finally, I want to thank all our employees, past and present, our investors, many of them I've known since my first day on the job. Our suppliers, the communities in which we operate, and especially our customers around the world, for their support for the past 27 years. It has been gratifying to work in the service of this great company, and it has been a privilege to work with such great people. It has been a honor to shape a industry that touches so many lives for the better. If you think that the past was something to see, I hope you'll join me in launching an even greater period of growth for Applied Materials in the years ahead. Now let me turn the call over to Mike for a few words.

  • - President, Chief Executive Officer

  • Thank you, Jim. And thank you for leading Applied Materials for the last 27 years of growth, accomplishment and change in both the company and the industry. You have created an outstanding company, and an outstanding team.

  • Jim, your leadership and guidance, coupled with Dan Maydan's technical and product genius will be something that we'll continue to rely on during the upcoming months and years, and a source of knowledge and advice that I will personally utilize going forward. Jim, I also really want to thank you personally and publicly for giving me this opportunity. I really appreciate it.

  • - Chairman

  • You're welcome.

  • - President, Chief Executive Officer

  • Well, I've been at Applied for almost two weeks now. And I'm more excited about the possibilities at this company than just those 14 days ago. I've met many of the key people at all levels of the organization. And I have seen the quality of these people, the high standards they set, and their commitment to excellence and winning in the marketplace. It gives me great confidence Applied Materials will come out of this downturn significantly stronger than we went in. So during my first 90 days here, my plan is to do the following.

  • First, I want to continue to meet our employees around the world, as many of them as I possibly can. I want to understand them. And their roles in the company. They are the life blood of everything we do. I want to know what drives them, and do my part to help them succeed.

  • Next, I want to meet our customers. Well, that is not in sequential order, but in parallel. And clearly understand their view of our company, our products and services, and where they believe we need to put more emphasis to satisfy their needs. I want to ensure that our customers' voice is heard loudly at all levels of the company, that we can enhance the excellent solutions we currently offer. I'm going to examine the strategies and organizational structure -- structure in detail, and adjust accordingly to ensure we maximize our effectiveness in pursuit of our strategies.

  • And last, and probably most important, I will be focusing the organization on the areas that will allow us to return to growth. This is obviously critical to our future. And we are going to need to make sure that -- that growth is the future.

  • Jim commented on the Next Reality. And the Next Reality Task Force. I'd also like to thank them for their outstanding work in driving focus on restructuring efforts across the company. They are truly driving the concepts of the next reality into the culture of the company. This will have lifting positive effect.

  • And I agree with Jim. I believe that the emergence of this Next Reality really provides enormous opportunity for us at Applied Materials, it really is a new beginning.

  • Again, I'm excited, happy and proud to be here. I believe Applied Materials has a bright future. I look forward to meeting many of you, getting to know you and working with you in the upcoming months and years. And now, to give you the financial picture for the quarter, I'd like to turn it over to our CFO, Joe Bronson. Joe?

  • - Chief Financial Officer

  • Thanks, Mike. Good afternoon, everyone. We will cover our financial performance for the 2nd quarter ended April 27th, and our outlook for the 3rd quarter. Before we discuss the 2nd quarter's result, I would like to review the 2003 realignment plan that was announced on March 17th.

  • The company announced a plan to realign the company's infrastructure with current business conditions and adjust for the changing nature of the semiconductor industry, which we have termed the Next Reality that Jim covered in his prepared comments. Realignment plan has two major elements. First, restructuring actions, including consolidation of facilities and a reduction in workforce. And, second, refocused product efforts and cost reduction programs. I will discuss both the GAAP results and ongoing results during this conference call, because we believe the ongoing results report how the company is performing against the realignment plan.

  • Ongoing results would exclude charges incurred under the 2003 realignment plan. 2nd quarter net sales of 1.1 billion increased 5% from the 1st quarter of 2003 and were 4.3% lower than the prior year's 2nd quarter.

  • Reported gross margin was 33.7% in the 2nd quarter, primarily due to a 49 million charge to cost of products sold, where excess inventory as a result of refocused product efforts under the re alignment plan, and a revenue shortfall of E-Tech Mask Writer business unit. Excluding the 49 million in inventory charge ongoing gross margin was 31% compared to 37% in the 1st quarter. Reported operating expenses decreased from 508 million in the prior quarter, to 487 million in Q2.

  • Ongoing operating expenses in Q2 were 384 million, excluding 103 million for the costs related to employee reductions, facilities, consolidations and asset write-offs. Ongoing expenses in the 2nd quarter in total were reduced by 24 million from Q1, through savings from ongoing cost reduction programs, shutdowns and the elimination of variable compensation, accruals for employee profit sharing and bonus plan.

  • The reported net loss for the 2nd quarter was 62 million or $0.04 a share, compared to the 1st quarter 2003 net loss of 66 million or $0.04 a share. And the 2nd quarter 2002 net income of 52 million or $0.03 per share. Excluding the 152 million charge related to the realignment plan, the ongoing net income for the 2nd quarter, 2003, was 45 million or $0.03 per share.

  • New orders in the quarter were 971 million, with a book-to-bill ratio of point 88 to one. Orders met or exceeded expectations. In most of the company's product areas and front-end wafer fabrication and flat panel display markets. Mass pattern generation equipment orders were significantly lower than expected and offset the overall gain of other units, causing orders to miss 2nd quarter guidance by approximately 5%.

  • Orders followed -- orders continued to follow a generally weak pattern with selected capacity and technology investments increasing in the quarter compared to the previous quarter. System orders reflected strengthening of market share and were higher than the 1st quarter, as 1st quarter orders contained seasonal service contract business. The business environment continues to be impacted by the sluggish global economic performance and upstream demand for semiconductors is insufficient at the current time to justify significant increases in capacity investment.

  • The business climate continues to be difficult, but there are some positive developments. First, geopolitical uncertainty appears to have decreased and may cause customers to evaluate the fundamentals of their business instead of defaulting to postponing investment. Second, high-technology, capacity utilization, increased in the quarter, including the Taiwan foundries as 130 nanometer capacity is tightening. With book-to-bill at foundries greater than one to one, foundries are forecasting further utilization rate increases.

  • Three, customer technology implementation continued to progress at 130 and 90 nanometer towards 300 millimeter crossover for cost benefit. And fourth, investment in Japan and Europe increased somewhat.

  • There were some negative factors as well, such as poor DRAM pricing environment and second customer financing issues are still impacting the investment climate. Order percentages by geographic region for the 2nd fiscal quarter were as follows, Japan 28%, Europe, 25%, North America 23%, Korea, 12%. Taiwan, 7%. Southeast Asia and China, 5%. Japan business was relatively strong as some order momentum occurred in the quarter as the capital budgets for Japanese customers were released. Orders in Japan were 26% higher than the 1st quarter, and 66% higher than the 2nd quarter of the prior year.

  • Orders in Europe increased from 181 million in Q1 to 245 million in Q2, which is 35%. One customer implemented 300 millimeter manufacturing in Europe. Order weakness continued in Taiwan, and Southeast Asia, where little capital spending was made in the 2nd quarter relative to 1st quarter levels. However, advance capacity utilization in the foundries increased to approximately 75% in the 2nd quarter, which was higher than 1st quarter levels.

  • DRAM orders represented 25% of total system orders for the 2nd quarter, compared to 30% for the 1st quarter. In the second fiscal quarter of 2003, 16 customers placed system orders in excess of 10 million, versus 11 in the 1st quarter. Of the 16 customers, three system orders were in excess of 50 million, versus two in the 1st quarter. And one system order was in excess of 100 million versus none in the 1st quarter. Backlog for the quarter was 2.76 billion, down from 3.05 billion for the 1st quarter. Backlog adjustments totalled 161 million, consisting of cancellations, currency and other adjustment.

  • Cash equivalents and short term investments increased by 231 million from the prior quarter to 5.2 billion at April 27th. Increasing cash for the quarter primarily reflects continued excellent working capital management. Accounts receivable decreased by 149 million in the quarter, with net collections of 1.26 billion. DSO performance, 61 days, compared to 77 in Q1.

  • Inventory decreased by 102 million in the quarter, due primarily to product refocused efforts and ongoing inventory reduction management programs, particularly in spares. Spares net inventory now has been reduced by 97 million, or 15% during the first six months of the fiscal year. Capital expenditures in the 2nd quarter totalled 35 million, and depreciation and amortization was 98 million.

  • Under the company's ongoing stock repurchase program, we repurchased approximately 4 million shares of common stock during the quarter for 50 million dollars at an average price of 12.52 per share. The company's performance in the 2nd quarter met our expectations, achieving financial guidance and made significant progress in a number of areas.

  • Highlights were external reports on market share achievement for calendar 2002, indicated that Applied Materials continues its number one position in the market and achieved market share gains in CVD, RTP, FE, while maintaining leading share in most of our other product areas, including PVD, and CMP. We continued to win business in the important PVD copper barrier C business as well as locate films with Black Diamond. Sales and service, achieved revenue and profit expectations, improving its results over the 1st quarter. And was the main contributor to the ongoing gross margin improvement in the company.

  • In addition, spares net inventories were reduced by approximately 40 million during Q2, while improving performance to customer commitments. System gross margins in the semiconductor processing equipment group achieved expectations despite continued weakness in these markets. However the mass patterning equipment business continued to weigh down overall company performance in margin with no system revenue for the second consecutive quarter.

  • Spending reduction targets were achieved across the board, and the company is nearing release of a series of new products in electroplating, process diagnostics and control, and other areas in order to win additional market share in these areas, despite the overall business environment. The company also believes that it will continue to develop and improve copper and low K capabilities, with existing and improved products, such as process modules, to enable our customers' advanced manufacturing capability and position the company for a upturned environment.

  • Global economic trends continue to be lackluster, with anemic rates of growth, and little discernible changes in the level of IT spending. The apparent decrease of geopolitical concerns should begin to provide a more robust environment for investment towards the end of this calendar year. The semiconductor industry continues to plod along, with modest sales growth in 2003 over a weak 2002, implying a slight bounce off the bottom.

  • Industry capital spending is expected to show modest sequential increases in the second half of the year, over the first half of the year, as the industry is utilizing existing capacity, and improving productivity to achieve modest sales growth in the aggregate. The production capacity for advanced notes is tightening, with high rates of fab utilization, but the design pipeline has not yielded a significant demand for increased capacity spending.

  • Spending on wafer fab equipment will be flat in 2003, almost 50% of the spending for front end capital equipment, will be 300 millimeter, primarily for capacity as the learning curve on 300 millimeter has now yielded or is close to yielding cost advantages for the customers over 200 millimeter in the advanced capacity nodes. We believe that the short term will continue to reflect these trends with little growth. However, we anticipate that the intermediate term will begin to show some signs of strengthening in the latter part of 2003 and the beginning of 2004 as momentum for advanced products of 300 millimeter and 130 nanometer improves.

  • We expect order activity in the near term to continue to be volatile and generally weak. We expect orders in the 3rd quarter to be flat to 2nd quarter levels. Significant orders for 300 millimeter and 130 nanometer capacity are pending. But timing remains uncertain. Revenue is expected to be at or slightly below 2nd quarter levels. And we expect ongoing earnings per share to be in the range of $0.03 to $0.04 as cost savings from the 2003 realignment plan begin to be realized.

  • The plan calls for expectancy to be approximately 50 to 100 million dollars in the 3rd quarter. The company is continuing its realignment plan to revitalize itself and prepare for the Next Reality. We believe that the substantive restructuring and product refocused program will align Applied Materials's cost structure to meet the changing business environment and enable us to focus more resources on our core R&D programs and to enhance our customers' capabilities. We are determined to remain a leader in our product development capability, our product lines, and our commitment to providing solutions for our customers' technical road maps. Our objective is to increase our leadership in the industry by adding more value to customers and by providing more profitability for our shareholders. Carolyn?

  • - Managing Director of Investor Relations

  • Thank you, Joe. Operator, we are now ready to begin our Question and Answer session, I would like to ask you, again, to please limit questions to one per firm, if possible. You may now 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, please pick up your handset before entering your request. To place a request, you will need to press star, and then the number one on your telephone keypad. You will hear a beep to acknowledge your request. If your question has been answered and you wish to withdraw your question, you may do so by pressing star and then the number 2 on your telephone keypad. Again, please limit yourself to one question. Once you have asked your question, you will have the opportunity to requeue to register for another question. One moment, please, for your first question. Your first question is from Jay Deahna, with JP Morgan.

  • Good afternoon. First of all, I would like to congratulate Jim on an absolutely spectacular career.

  • - Chairman

  • Thanks, Jay.

  • You're welcome. The question is regarding long lead time equipment. If we look at long lead time AMHS systems, factory automation, and long lead time photo lithography systems, demand in the current time frame is extremely weak. I'm wondering if you view that as a viable leading indicator for process tool demand, and what that means for the next quarter or two. Thank you.

  • - Chief Financial Officer

  • Jay, I don't think that is a particularly leading indicator for us. I think that the key indicators for us are the rate of technological achievement as the customers implement the new technologies at point 13 and 90 nanometer and get their yields up. Those are much -- very important indicators to us, whereas the photo lithography is something that is beset by, you know, rates of technology change that are further out. And our lead times, just for getting our machines together and shipped, are no where near those situations. So we do not view that as a leading indicator.

  • Okay. Thanks.

  • Your next question is from Suresh Balaraman, with ThinkEquity partners.

  • Yes. In terms of your outlook, you said that you expect calendar revenues to be flat as compared to last year. Given the level at which we are starting, and given that bookings lead the revenues by at least three to four months, I mean, what kind of -- I mean, it seems like one should have a pretty steep bookings growth in the second half. Is that your sense?

  • - Chief Financial Officer

  • We didn't say that our calendar revenue would be flat. The last year. We did not say that. We said our revenue for next quarter would be flat to down from this quarter.

  • Yeah. I understand. But I think you said that you expect industry revenues to be flat with the last years.

  • - Chief Financial Officer

  • Yeah. But that is with respect to total capital spending and total WFE spending, and that WFE spending includes all the -- all the tools in the business.

  • Is there any --

  • - Chief Financial Officer

  • Not just the tools that we have.

  • Okay. Is there a disconnect because of any specific regions that you are more exposed to that could account for the difference in terms of your bookings performance relative to industry?

  • - Chairman

  • Say -- ask your -- say -- ask your question again. We're not getting the context of what your question is.

  • Yeah. When you look at other companies and compare their bookings performance over the last quarters to yours.

  • - Chairman

  • Okay.

  • The mate had done really well in the first half of last year, but in the recent quarters your growth has been different related to your peers, and I'm wondering what could explain the desparity.

  • - Chief Financial Officer

  • I'm not getting a desparity.

  • For example, to compare --

  • - Chairman

  • oh, I think I understand one of the things. What Joe said was that our silicon systems business was up. But it was somewhat offset by the service was down from 1st quarter, because 1st quarter is a off -- just happens to be heavy renewal, or heavier renewal of orders. And so the relative amount of systems business is actually up over 1st quarter. That may be what is confusing you. Plus E-Tech is down.

  • Okay.

  • - Chairman

  • We had two things that were down, but the business that you compare with other silicon suppliers is up. Is up.

  • - Chief Financial Officer

  • Up a lot.

  • - Chairman

  • Up a lot. Okay? So we're doing fine, we think.

  • Okay. Thanks, guys.

  • - Chairman

  • You bet.

  • Your next question is from Robert Maire with Semiconductor.com.

  • Yes, I. Hi. A question related to E-Tech. You mention that you have not had system orders in -- in two quarters here. Would you attribute that to share issues, or lack of investment in the mask writing? And could that be in any way related to the weakness we're seeing from the stepper manufacturers? And what -- what are your plans for that sector of the company? What are you looking at doing? Do you have new products or a different strategy, or what are you going to do about that situation?

  • - Chairman

  • Well, I think that is -- you know, in terms of our plans, that is something that we're currently assessing, so we're not at liberty to discuss that now. But the issue is not products. We have the products. The -- the mask industry simply is not ordering equipment. There's fewer than three to four systems that have been shipped for the last six months. And very little, if any, capital is being spent by the merchants. A lot of business is simply upgrades to existing tools. Since most of the 100 nanometer mask tools have been shipped in, but they're operating at very, very low capacity at this point, -- less than 50%. In the situation in laser -- laser tools, there has not been a laser tool shipped in six months by anybody because we have virtually the entire market. So it -- it is something that we have to assess and we're in the process of doing that. But the -- it is not a -- a product issue at the current time.

  • Okay. So it is more of a technology issue? It is that the -- it is not a share issue, it is the industry as a whole has --

  • - Chairman

  • yeah. The industry as a whole is simply not investing capital.

  • - Chief Financial Officer

  • It has stopped at the moment.

  • Is that perhaps because [inaudible] and the rest of wafer processing is now catching up to where lithography has been?

  • - Chairman

  • I just think that the advanced designs, there just isn't a lot of new designs that are going into the shops at this particular point in time. And what is going in, they are able to use either existing tools or upgrades from us, because we have been selling upgrades. And the competitors are doing the same.

  • Okay. Thanks.

  • - Chairman

  • The whole industry is not doing well from merchant to equipment supplier.

  • Okay. Great. And congratulations again to Jim for building the best company in the business.

  • - Chairman

  • Thanks a lot.

  • Your next question is from Steven Pelayo, with Morgan Stanley.

  • Just a few more clarity, on the bookings, the booking report in your guidance is flat going forward. Given that Taiwan was down it looks like about 50% sequentially, 90% year-over-year, I would expect that given the flat guidance to maybe see something coming back there. Can you talk a little about the regional mix next quarter and what would make up the flat guidance? Do you expect it to stay roughly the same?

  • - Chief Financial Officer

  • Well, we do not -- do not expect Taiwan to be back, otherwise I think we'd have different guidance. You know, it is -- they are still going through this technology shift and, you know, taking a look at their situation. And we -- we do expect them to order, but not next quarter.

  • And the other regions, Joe?

  • - Chief Financial Officer

  • Japan has been reasonably good. Perking along. U.S. is perking along as companies, you know, the leading companies continue to spend their capital ratable now after kind of a slow beginning, and that is what you are seeing. You are seeing a pop in one region and then next quarter they're not there and next quarter they're back, you know, particularly in DRAM, this has been the case as well. So it has been a matter of where not everybody is on all cylinders at the same time to get this thing going.

  • My last question was just a clarification.

  • - Chief Financial Officer

  • One other thing Steve and I want to make sure that everyone understands. The service business spike is big quarter to quarter. Because the systems business is actually up in double digits, quarter to quarter. We have a -- a large service business contract renewal in that -- in that calendar 1st quarter. And that -- that -- once that happens, the business tends -- the orders -- the succeeding quarters tend to be at a ratable rate and more dependent on utilization of the customers.

  • Okay. And if I can just get some clarification I think on Suresh's question, you guys were talking about the wafer side of equipment market being flat this year. I would expect Applied Materials to be in line to, if not better due to some of their share gains. In order to do that, from kind of a revenue perspective, it seems like we need to talk about some pretty significant sequential revenue growths despite the fact you are guiding to flat bookings now. How do I try to reconcile that, Joe?

  • - Chief Financial Officer

  • Well, you have to look at the timing of these investments. Some of them may -- you know, since the estimates we're giving you are calendar year, it may turn out that some of these end up happening at the -- in our first fiscal quarter of 04 which will still be in calendar 03. I mean, it really depends on how those fall. And as I just said, that's how we see it at the current time. There are a lot of orders. There are some very large orders out there that we all know about that are percolating but they are not in our numbers because, you know, there is a lot of uncertainty about them.

  • Joe, when I do the.

  • - Chief Financial Officer

  • Accounts for I think quite a bit of the issue.

  • I guess when I do the math, going through to your fiscal 1st quarter, I need to see like 20% quarter over quarter revenue growth off of the flat July revenues, does that seem possible to then drive a flat full year, kind of on a calendar basis, using the 1st quarter as the end of the year? That is the --

  • - Chief Financial Officer

  • The flat year is not our forecast of our business, the flat is the capital spending in WFE, that is what we are saying is flat.

  • Ok, so there is some risks that apply to the underperforming wafer equipment market.

  • - Chief Financial Officer

  • I think we'll outperform. Once again, it is going to depend on the timing of when those orders happen.

  • Ok, so then, I guess the best way to look at it, there is a potential for a pretty big hockey stick here in the second half to get to flat for the full year.

  • - Chairman

  • There is always the potential. Let's don't get a forecast going that we've got a big hockey stick until we begin to see some upturn. If you go back to a year ago, we had a pretty significant uptick in the -- in the second and third quarter, and then it rolled over on us. So it can move up pretty quick because the business -- the business is there, I just think it is a mistake for us to get all excited about something happening until it -- we begin to see some more confidence in people further out the supply chain. And you -- and, you know, some of them are feeling a little better, but I cannot tell whether it is because they're -- it is not getting worse for them, and I've kind of done a poll of several CEOs further out the chain in retail, autos, networking, telecom, wireless and so forth. So, I mean, you know, they are all kind of waiting for more to happen. And that's kind of affecting the whole chain. So I just -- I -- I think we can't forecast that, even though we see a lot of identified business, we can't forecast that we should forecast it up till it begins to get more confidence that someone is going to spend some money.

  • - Chief Financial Officer

  • The other thing, on the total capital, I mean we gave you an estimate of flat. The estimates from all the sources range from minus 15 to plus 7. So that -- that would have a -- quite a bit of variability on the -- on the numbers, depending on who is right.

  • Yeah. Fair enough. Great, thanks guys.

  • - Chairman

  • You bet.

  • Your next question is from John Pitzer with CSFB.

  • Good afternoon guys. Joe, just a follow-up to the previous question, to make sure that I understand. When you look at the makeup of the July bookings by geography, I know it will be a rough guess at best, but can you basically tell me flat down or up for each region or does the mix stay pretty much the same? And as a follow-up, the yen/dollar relationship here, can you help me understand, with Japan becoming a more important part of the order book, if the yen strengthen against the dollar, how will that impact your business, if at all? Thanks.

  • - Chief Financial Officer

  • The yen will have no impact. Because we've actually gone dollar functional currency. Our business is in dollars, so we're not exposed to any of that. We don't forecast by geography. And, you know, as I -- as I answered in the previous couple of questions, we have some major orders that either happen or don't happen, and that is going to swing all the geographic trends so to -- you know, to quote any kind of geographic forecast is pretty foolish. It would be misleading. So we -- we really can't do that. There is too much variability and volatility in the numbers.

  • Your next question is from Shekhar Pramanick, with Prudential Securities.

  • Hi, good afternoon. Joe, on this disconnect between WFE and Applied's number, will this be explained basically by PDC -- by flat panel as well as E-Tech numbers, which is clearly not in WFE and then I have another question.

  • - Chief Financial Officer

  • Well, it is part of it, for sure, just by logic.

  • My next question is on the PDC side. You know, you folks are coming up with a couple of new tools here. Not -- on optical defect inspection, I think both -- think both the bright field and dark field also, an [inaudible] inspection tool, and I believe an E beam inspection tool, which tool do you expect -- if you could give us a little general commentary, where do you expect some traction and what not?

  • - Chief Financial Officer

  • Well, we -- first of all, not all the tools are released. In other words, they are not complete. The E beam inspection tool is in the field, and it has had customer acceptance. And we are getting revenue for the tool. We have not formally announced it yet, but I think we will shortly. And we think we'll get traction throughout the installed base. And the other, we've -- we've shipped the first mask inspection tool as well. And that is -- also has been viewed as highly promising. The -- the other tools that you mentioned are not scheduled for release towards later in the calendar year. So it is hard for me to comment on those. But I -- I think we feel very good about our prospects for success. With all of these tools.

  • And -- and lastly, if it -- one question I -- if I may, what do you see in the FBD flat panel business order dynamics in the second half relative to the first half.

  • - Chief Financial Officer

  • There is a lot of new product development going on in this space. And we continue to do extremely well. But we're only in one segment. We're in the CVD segment and we -- we have a very high share. So the investment pattern has been kind of a -- at a -- what I would call a normal rate. In other words, a ratable kind of predictable rate because of all the new products that are -- that are coming in the -- in the gen 6 and even some gen 7 type of tools that are being developed, so we have done extremely well throughout the world in this area. And we'll continue to do that. But the business is -- is at a ratable, predictable rate at the current time.

  • Thank you.

  • - Chairman

  • I think the other thing about the flat panel business is that it really is becoming a enabling technology for mobile products and -- and, you know, more portable, more affordable, more usable kinds of -- of applications, both for consumer and in -- and industrial applications. And so if -- that is why I think you are seeing some of the major companies really focused on this. Because if you take that, and combine that with advanced chip technology, that is -- that is -- that is already here or -- or in the pipeline, you really get a dramatic set of -- of cost benefit products that -- and appealing products that people, I think, will -- will really want to use and will help drive us out of this downturn, eventually.

  • Your next question is from Glen Yeung with Smith Barney.

  • Thank you. Could I just ask you one clarification, on the E-Tech business, I'm not quite sure if I understand the miss in the quarter was a function of a missed estimation of what could happen or bookings that may have fallen out of the quarter that you may be able to rebook in future.

  • - Chief Financial Officer

  • I think it was a little bit of both.

  • Okay. I don't suppose that can you quantify what you may be able to rebook.

  • - Chief Financial Officer

  • No. Wouldn't be able to do that.

  • The question I had was about share again, I wonder if you can just discuss a little bit about where some of the share gain has happened, particularly on some of the leading edge stuff, like ECD, low K. It seems there is some etch share up for grabs in the U.S., and any thoughts that you may have on that.

  • - Chief Financial Officer

  • Well, I think we're competing for all of that business, and I think we have pretty high confidence that a number of the new etch products that were -- we're coming with, particularly in dielectric etch work are going to hit the mark. So we have very high confidence and the company is very focused on -- on this activity. And I think we'll be successful. We've been successful with this in the past, and there's no reason why we cannot do it down the road. And it is all for the latest 130 nanometer type activity. The -- we continue to gain share in CVD. I think that is published data. I think we have some pretty good momentum in the U.S., as well as in Taiwan. In this space. So, you know, we've got to continue to work at it, but we've made pretty exciting progress. And I think we're doing a good job defending our position in barrier seed. There has been a lot of talk, but the share data speaks for itself and we're -- we're continuing the main share in that space.

  • - Chairman

  • I think one of the things that -- let me just kind of add a little flavor to -- to Joe's comments, and some of the other comments we've made during the call. I think what's clear, as you spend time -- with the peak product business group heads and the accounts, and as I talked to the customers, the product groups, and I think you saw that with the increase, it is a little bit camouflaged, but their performance, basically all the product groups, except for -- for the -- the E-Tech hit their targets for -- or beat them this -- and -- and their product selections in -- in kind of key -- key applications and new applications were -- were quite good. So -- and it -- you can -- you can tell by the -- when you talk to them, they are really confident about how they're -- what they're doing and how they're going to get it accomplished. And so. I think you -- I -- I'm really proud of the -- of what the team's done. They've been through the wringer the last two years, but they're coming out of it a really tough, competent, effective team and also with good products.

  • I wonder if you could just clarify where you think maybe your top three opportunities for share gain are in terms of tool type?

  • - Chief Financial Officer

  • Well, I think -- we could -- I mean, it is -- it has been the same story. We continue to want to add products in the whole PDC space and I think that the previous question just addressed all of that, and we have a whole slough of products coming. Some are already released. So that is one major -- a major area, and certainly the dial etch area is a very large market and we can increase our -- our participation there very significantly. Certainly in the advanced technologies, we're -- where the money will be spend down the road, we've got good share. And we need to defend that share. But there is certain applications we can actually do better. So there is plenty of room for us -- us to move, and in the --

  • - Chairman

  • and the group has been doing a good, good job, and Derek and his team have been doing a good job on the transistor side.

  • - Chief Financial Officer

  • On the transistor side.

  • - Chairman

  • We do not talk about that too much. But that team has really come together and they're going to do fine.

  • Great. Thank you very much.

  • Your next question is from Gerry Fleming with Fahnestock.

  • Yes. Could you -- could you tell us how much of the revenues were -- came from the service business and also were there any large cancellations in the backlog adjustments?

  • - Chief Financial Officer

  • Yeah. The service business is kind of running along the same trends as it ran the last quarter, which is somewhere around the high 20s. As a percentage of the total. And the cancellations are -- we're getting down to where there is just a few now, a few customers. And the -- there was about three that were reasonably sized. But we seem to be getting towards the end of this type of issue going forward.

  • Great. Thanks, and congratulations to Jim on a great career.

  • - Chairman

  • Thanks a lot.

  • Your next question is from Mike O'Brien with SoundView.

  • Yeah, hi. Good afternoon. Could you just give a idea on what you are expecting from memory if you think those projects still go forward, since they are kind of strategic, and also Japan has been strong, signs that it is going to remain strong or could you see some push outs there.

  • - Chief Financial Officer

  • I think that the projects are definitely going forward. But, you know, it is really difficult with the pricing environment to figure out when they are going to happen. Although they are on the table. The selections are being made and things of that type. Do I think they're going to happen, yeah, absolutely. Do I not know if it is going to be this quarter or the following quarter, but it is going to happen.

  • Okay. But you do not see them slipping out, some of these major products slipping out --

  • - Chief Financial Officer

  • I do not see the projects slipping out indefinitely, I mean because the technology has been implemented and they are going to need the capacity and in some of the cases they are a consortium type thing and these things are going to happen. A lot of people have been spending a lot of time not only on our side but the customer side making this happen.

  • [inaudible] because it is consortium in Japan similar things that they'll --

  • - Chief Financial Officer

  • It is not just Japan there are others as well.

  • No. But not only -- not only Japan consortium from memory but some of the consortium on the logic side that.

  • - Chief Financial Officer

  • Yes.

  • Helped them maintain their spending and stay strong.

  • - Chief Financial Officer

  • I think so. I mean, you know, one of thethings that we're not realizing is that we've just spent three years investing in technology for 130 nanometer, for copper and for 300 millimeter. And, you know, while there is more to do and the customers want to take us further down in a specification lane, we're -- we're -- these products are done. And the capacity is yet to be added. So it is just a question of time.

  • Thank you.

  • Your next question is from Tim Arcuri, with Deutsche Bank.

  • Hi. Thanks. First of all, Joe, am I kind of thinking about this correctly, you kind of suggested there will be some modest growth into the second half of the year. Am I thinking about it right that maybe Japan, and Europe and the U.S. probably, roughly at their same level, and if there is any growth in the second half of the year, it will probably be geared out of Taiwan and/or China.

  • - Chief Financial Officer

  • Well, once again you are asking me for a forecast by region. It is hard to do. Certainly if -- if you go by any published information about -- and take the capital spending that's been done to date, and compare that to what it -- what needs to be done, you would draw some conclusion along those lines, perhaps. I'm not sure about China. But, you know, it -- who knows? Once again, it is going to matter. They have to execute and implement. And I believe that if they do so, they'll invest.

  • Okay. Great. And then I think Joe in the past you've also given the percentage of orders from the foundry as well. Do you have that handy?

  • - Chief Financial Officer

  • It is pretty low. I think that is enough. One of the things, just from coming out of the downturns, we kind of get focused on different regions doing something, but there's been so little generic investment that I -- when there is a demand, it is kind of going to be a -- across a -- I think a lot of regions, because the amount will really depend on the total outlook for everyone.

  • But there's just really no -- no capacity. There's a -- if the -- if the demand spreads out -- like, one of the things we talked about a while back, which hasn't occurred yet, but if you think about these early products at the next -- at a new generation, you get the early adaptors. And to get the early adaptors into the game, you do not need a huge amount of production capacity. But with these global markets, most of us underestimate the size and -- of these markets.

  • But what -- what is different than 10, 15 years ago, 20 years ago, was the markets used to kind of evolve sequentially and now they go globally, and so it goes from some low demand for a particular device category, or application, and if it is a successful application, then everybody in the world wants one. And so you have to feed not only the end demand, but you have to fill in the pipeline. The -- the -- the distribution structure. So the -- the demand changes pretty quickly. And that is what we're trying to kind of work with our customers on, to be sure, you know, they do not all call the same morning and want it by afternoon. Which we don't -- isn't good for us.

  • Your next question is from Jim Covello, with Goldman Sachs.

  • Hi, thanks so much. One quick question, on the pricing environment, what kind of pricing environment are you seeing now, and how about the price differential between 300 millimeter tools and 200 millimeter tools at this point? Thanks so much.

  • - Chief Financial Officer

  • I'll say -- I -- I think I need a replay answer for this every -- every quarter. The answer is -- is really no change. You know, you -- you win the business on the basis of your capability and you get the price. It usually is -- is not a issue. And it hasn't been. And the -- and the spreads on 300/200, there's really no change. It ranges anywhere from 15% to 50 to 60%. Once again based on the capability and what the tool provides. So the -- as I've said, just to add a little color to this, our margins on 300 millimeter today are the same or pretty close to the same as 200 millimeter, because the learning curve is -- is done and we're ready to -- to sell a number of these things, so we're ready to go.

  • Great. Thanks so much.

  • - Chief Financial Officer

  • Okay, Jim.

  • Your next question is from Mark Fitzgerald with Bank of America Securities.

  • A couple of questions on the realignment program. I was curious if you are assuming a new revenue target for the company going forward. You used to talk about 20 billion dollars, from what it is now. And what the break even would be and how long is it going to take to implement the program?

  • - Chairman

  • Well, I'll let Mike work that one. But just from a -- from a perspective, we -- we -- the opportunities that we've identified, I mean, don't forget the last couple of years we've been working on our -- our strategy -- strategy and thinking through what this -- what we eventually kind of decided to call the Next Reality, is there's just huge opportunities not only in the basic business that we are already doing, but as the customers focus on their core applications, and the things they need to do to respond to their customers, it is opening up a broad range of opportunities for us. And we're already there. I mean, it is kind of like being outside the factory door, and the customer says, you know, have you thought about helping us with this? We look in our basket and if we have it, we can help them, and if we don't, we'll go find out how to get it.

  • That is what is so great about having Mike join us is that he sees what his customers -- the customers of our customers have seen in terms of chip application, but he's also intimately involved in what it is that would help our customers be more successful and be able to have us do things for them, just as we're outsourcing more and more the things that are context for us, or not -- not -- not poured. So I think that you -- you know, as usual we're going to over time underestimate the potential of what we do because we kind of only forecast the opportunities we have. But with the breadth of technical talent and the breadth of the global infrastructure and the great global culture we have in place, and sort of the can-do drive --, I mean, our problem has been getting the application -- the opportunities we have effectively implemented. And -- and we're hoping to do that, and -- and pick up some other applications.

  • But I would assume in the short term you have to make some hard decisions of what kind of cost structure to lay in for the next several, you know, two, three, four years for revenue opportunity here.

  • - Chairman

  • But it -- but so far -- I mean, I -- you know, the -- Mike can make a -- make a recomment after he's been here and has a good perspective on it, but -- but we've generally not been [inaudible] to do the right things, by either by either profitability or cash flow. Because fortunately our balance sheet is strong.

  • So it's really can we get the right concept and the right team on it, and -- and capitalize on -- on the opportunities? So we've kept most of our long-term initiatives, both in terms of products, or essentially all of them, in terms of products, and most of the long term initiatives on terms of infrastructure and -- and business processes and things like that during this tough -- toughest -- one of the toughest downturns we've ever been in. I think, you know, we're going to be well set to capitalize it with -- with -- if everybody kind of pulls together and really nails the things that we need to get done effectively. It -- the opportunities are there.

  • And can you just give us a time frame for the realignment plan to be implemented?

  • - Chairman

  • It -- it is ongoing right now. And -- and we'll just -- don't forget, it is not just the cost side, but it's also the opportunity side, so that'll extend over years It will not be -- you know, it is not a -- it is not a short-term thing.

  • Okay. Thanks.

  • - Chief Financial Officer

  • The period covering the charge is about four quarters.

  • - Chairman

  • I'm sorry, that is probably more --

  • - Chief Financial Officer

  • so in other words as -- under the new accounting rules, you just don't create a big reserve and then spend against it for a number of things. You have to -- to do the work that you specified in the restructuring, so it is a very specific task. And that is why the charge is spread out over the four quarters. So what we're really trying to do with respect to the cost structure is get more R&D spending out of it, in terms of both men, women, and materials, as opposed to depreciation, and get more effective at utilizing the assets that we have. So, for example, trying to get the the Process Module Development Center to run three shifts a day with the right equipment and the right people, and get a -- a much different kind of discipline through that facility will -- will pay huge dividends with respect to our ability to implement R&D programs faster.

  • And Joe could you give us a head count at the end of the quarter.

  • - Chief Financial Officer

  • A little over 12,000.

  • Okay. Thank you.

  • Your next question is from Edward White with Lehman Brothers.

  • Thank you. Jim, inherent in what you were saying before is the -- is the idea that there may be some changes in the way the equipment industry and particularly Applied Materials can add value to its customers over time, you know, maybe some subtle changes and some additions to what you can do. Can you talk a little bit more specifically about what some of those might be? And then related to that, you know, as you look at some of the challenges that your customers are facing as they start to think about sub-90 nanometer technology in R&D, what are some of the issues that they are coming up with, and how do you think that you can help them.

  • - Chairman

  • Well, I think one of the key -- key things is that the industry will need to spend its R&D dollars once instead of three times. And so that's causing -- and we've seen this over the past six months, where all of the customers have -- have been taking a proactive effort to see how we could better align our efforts, so that we do them once and then they do what they need to do to differentiate once, instead of trying to, each of us, do something -- do the same thing twice or three times.

  • So that is a -- I think a significant change, and a great opportunity because of our breadth of products and experience. The -- the total service solutions, and a lot of those areas are being expanded as we go forward, pretty aggressively. And there is a whole set of things that, in the product areas, that we've talked about specifically, which allow us to expand our -- our market. So it is just a -- you know, it is a -- there is a significant opportunity. And I think, you know, you -- you started to follow the company back when no one taught that we had a prayer of being a -- a significant company. And you've seen the opportunities that -- that because of the great capability, technical, managerial and cultural, and global, I see those accelerating, not -- not declining as we look ahead.

  • Thank you.

  • Your next question is from Theodore O'Neill with AG Edwards.

  • Thanks very much. Joe, you gave us an estimate here for wafer fab equipment orders being about 50% in 300 millimeter, and I was wondering if you could give us an estimate on what you think the copper interconnect percentage would be for the year, as well.

  • - Chief Financial Officer

  • I really don't have that. You may want to call back with that. Do I not have that data at the top of my head.

  • Well, would you be able to talk about the growth rate for the copper interconnect market going forward over the next six, 12 months.

  • - Chief Financial Officer

  • Certainly it will be faster than the overall market. That is a pretty safe -- a pretty safe bet. But to quantify it depends on a lot of implementation type issues as you go forward, and also the rate of designs that they get. So I think it -- suffice it to say it is going to be a faster growing market than the rest. But it is kind of hard to quantify.

  • Thank you.

  • - Chairman

  • So you have a choice. I mean, you have the decisions between 200 and 300. As well in that -- in that mix. And the success that different companies are having with their copper efforts, and -- and of course we've been able to be helpful with that, fortunately, and so that has given us some advantages.

  • Okay. Thank you.

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

  • Good afternoon. Intel recently reported the percent of earnings that were attributed to options, how much did the option accounting affect Applied's earnings per share in the reported quarter?

  • - Chief Financial Officer

  • No idea. We have to do that for the regulatory 10-Q filings and that is next on the agenda.

  • No idea what it was for the given quarter?

  • - Chief Financial Officer

  • First of all, I wouldn't quote it anyway, because I do not believe in the concept. Anybody that relys on this information, Black Shoals, you've got to wait for the accounting profession to come up with a measurement system that makes some kind of sense. You know, so, you know, we'll do what we have to do to comply but, you know, it is -- it is not a number that we track or even manage with. We just compute it and disclose it.

  • Joe, you, I guess, in your first two years at analysts' meetings would go through ROA targets, working capital targets and the like, do you still track that for your own purposes and can you share where you would like to take the company going forward?

  • - Chief Financial Officer

  • You know that we've generated 3.8 billion dollars in cash since 2000, and we managed the cash and assets very, very hard in the company, as for anybody that is in operating management can attest to. And I think we've set some pretty good examples of how bills ought to be collected in the industry and how things ought to get done. So we continue to focus on that with our asset management matrix, and we've always sought to get high returns on assets. Because the fewer assets you have, the higher the profitability in our view. So we -- we did -- in 2000 we did over 3% -- 30% ROA, and we continued to have our models really be unchanged because interest is no reason why we cannot perform and execute to those kinds of things. And it -- so the so the -- what I've been telling the community for the last couple of years is -- is virtually unchanged. We'll continue. We've generated cash in downturns and we've generated cash in upturns and, you know, we'll continue to do that.

  • Your next question is from Brett Hodess with Merrill Lynch.

  • Two questions, Joe, I missed it if you said if you have an estimate of what the charge is going to be in the third quarter for the realignment.

  • - Chief Financial Officer

  • Yeah, 50 to 100 million.

  • Okay.

  • - Chief Financial Officer

  • It tends to vary based on the actions if you get them done enough so --

  • okay. And then over the last -- seven out of the last eight quarters you've had about a 10 to 15% range of, you know, backlog correction. And you -- you mentioned before that you thought that you were coming to the end of that. Is -- is -- but you've said that a couple of times over the last few quarters. Is there something.

  • - Chief Financial Officer

  • Yeah, yeah.

  • -- changing in the customers now that you were -- have more confidence at reducing.

  • - Chief Financial Officer

  • Fewer, there is just fewer of it. As you get close to zero, you are getting close to being right.

  • Okay. Thank you.

  • Your next question is from Patrick Ho with Morris and [Kebba].

  • Quickly on Taiwan, from what they said on their earnings releases where they are seeing more of their fabless customers moving to leading edge manufacturing and they're see both utilization and yields improving on the leading edge, what is your take on disconnect on why they may not be spending yet for more equipment purchases particularly at the [inaudible] manufacturing processes that you'd described.

  • - Chairman

  • Well, it is -- you know, until you can see a -- a upturn, they -- they've -- have made some investment. So it -- I think it is -- somewhat goes back to the early adapter idea, potentially, a -- that, you know, they can see a -- the need, but they hate to get it ahead -- they are trying to hedge the commitment.

  • - Chief Financial Officer

  • Well, it is also a matter of confidence as well.

  • - Chairman

  • Yeah.

  • - Chief Financial Officer

  • You know, they've gotten somewhere. They need to continue to see more demonstration of the proof. And I think they'll invest.

  • Okay. And one -- one final -- one last question. Any impact from the SARS epidemic on -- in your case, given your high exposure to China?

  • - Chief Financial Officer

  • Well, the first thing, certainly this is a very serious matter for anybody. And certainly for all companies. But in our situation, we have a -- a -- on the ground infrastructure in all of these countries. Now, of course, we're taking the appropriate precautions, and we have a whole policy and process and procedure for dealing with this. And the -- you know, we still are conducting business in a normal -- as normal a way as we can. But it is -- you know, it is -- it -- it is just made it a little bit more complex, particularly if you need to get an expert from -- from -- from California or some other part of the globe, you know, to that region. We are very careful of going through the screening procedures and all of the local laws of the country. It is not a factor that I would say is -- is impacting our -- our business levels, but it is something that needs to be managed and is actively being managed throughout the company.

  • Thanks a lot, Jim. Best of luck.

  • - Chairman

  • Thanks a lot.

  • Your next question is from Fred Wolf, with Adams Harkness and Hill.

  • Joe, you talked about not having sufficient new state of the art designs to fill out the existing mask making equipment. Could you talk about why this is not a sort of bearish sign for a upturn later this year, and when would you expect to start bill -- booking E-Tech orders.

  • - Chief Financial Officer

  • I do not know the answer to either of those, to be honest with you. You -- you really -- would get a much better answer from the chip guys than -- than us. We're on the -- you know, we're on the other end of that. So we -- we cannot really say why the designs are -- are not increasing. We do see, though, that there -- that they have been able to make do with the capacity that they have. By upgrading some of the tools. So they have not needed the capacity yet in these advance designs. So it is -- that is what is impacting the market.

  • Okay. Thank you.

  • Your next question is from Ali Irani, with CIBC world markets.

  • Yes, good afternoon, gentlemen. Looking at your head count now down to 12,000, where is the ultimate goal. Could you give us an idea there. And it sounds like a lot of this came late in the quarter, looking at your influction in margins, it seems that we should look for a much sharper pickup next quarter. Could you comment on that please.

  • - Chief Financial Officer

  • We are not going to prognosticate margins because it is a function of revenue as well. But we did -- this is part of the realignment plan. I do not think we need to go deeper than the employment that we've -- that we've talked about. Because we -- we've essentially -- are now working on what we call reducing the fixed costs, and some of the infrastructure alignment. So I think the -- you know, the head count is sufficient to, you know, to run -- to run the business. Now, margin improvement, certainly would come from some better performance -- certain -- I think the -- the equipment groups are doing pretty well. And we're pretty -- for this level of business, they're doing fine. I think we need a boost from certainly the E-Tech unit, anything would help. And that would actually have a pretty positive impact on margins, as well as some improvement in the service group which actually improved quite a bit this quarter, and we expect to improve again next quarter and the quarter thereafter, and so we're actually performing to the plans that we've set out for that group. So we -- we do look for margin improvement. That is the purpose of the realignment plan. That is what we disclosed. And we'll -- we'll -- of course a lot of it will depend on making sure that the revenue levels are at least where they are now, if not higher.

  • Joe, looking at the revenue contribution from spares and service, is that tracking utilization at your customers, as we pick up a little bit here on the high end, and could you give us a mix if you have that handy, and one final just number on the cancellations versus currency, do you have a breakout there, please?

  • - Chief Financial Officer

  • Well, the currency was positive. So the -- the -- it -- it -- the cancellations, and don't forget, we take things out of the backlog where customers have scheduled them beyond 12 months and so there was -- some of that is in that number that I quoted 160 million dollars. So --

  • So a deep scrubbing this quarter.

  • - Chief Financial Officer

  • This was -- some cancellations and some judgment on our part that pulled it out after customers have rescheduled them beyond 12 months, and so that's what we have done. The currency was -- was insignificant compared to the other things.

  • Great. Thank you.

  • - Managing Director of Investor Relations

  • Operator, I'd like to turn the call back to Jim Morgan at this time.

  • - Chairman

  • Well, thank you very, very much. I have appreciated working with you during the past many years, and I -- I am -- I just want to thank you for your support. We've been through some good times and some great times and some tough times, but I've always felt that it has been a good working relationship with all of you in the investment community and the press. So thanks very much for your support during that period.

  • - Managing Director of Investor Relations

  • Thank you, Jim. I want to thank everyone for listening to our 2nd quarter earnings announcement today. As a reminder, the webcast of the call is available until May 27th on our website. Again thank you for your interest in Applied Materials and this will conclude our conference call for today.