應用材料 (AMAT) 2004 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Applied Materials first-quarter fiscal 2004 earnings release conference call. (OPERATOR INSTRUCTIONS).

  • I would now like to turn the conference over to Mr. Paul Bowman, Managing Director of Investor Relations Applied Materials.

  • Please go ahead, sir.

  • Paul Bowman - Director of IR

  • Good afternoon and welcome to Applied Materials first-quarter 2004 earnings conference call.

  • With me today are Mike Splinter, President and CEO;

  • Joe Bronson, Executive Vice President and Chief Financial Officer, and Joe Sweeney, Group Vice President, Legal Affairs and Intellectual Property, and Corporate Secretary.

  • Financial results for our fiscal first quarter were released on Businesswire shortly after 1:05 PM Pacific Standard time.

  • You can obtain a copy of the news release on the investor section on of our Web side at www.appliedmaterials.com.

  • Today's earnings call contains forward-looking statements that 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 set forth in today's earnings release and in the Company's filings with the Securities and Exchange Commission, including its most recent Forms 10-K, 10-Q and 8-K.

  • The Company assumes no obligation to update the information provided in this presentation.

  • Today's presentation also contains non-GAAP financial measures.

  • Reconciliation to GAAP financial measures to non-GAAP financial measures are contained in our earnings press release issued today and on November 12, 2003 for the prior quarter, which are on the Applied Materials Website.

  • Today's call will begin with an update on the business by Mike Splinter, followed by Joe Bronson, who will provide an analysis of the first-quarter financial results, followed by fiscal second-quarter 2004 financial targets.

  • We plan to limit our call to one hour.

  • After the opening remarks, we will open the conference call for questions.

  • With that, I would like to turn it over to Mike Splinter.

  • Mike Splinter - President & CEO

  • Thanks, Paul.

  • Welcome and thank you for joining us this afternoon.

  • For our first fiscal quarter of 2004, Applied Materials posted a very strong quarter.

  • It is reflecting an improving global economy, growing semiconductor unit demand, driving capacity additions, as well as Applied Materials product and service leadership.

  • I am pleased to report that we saw good momentum across the board in nearly all product segments and regions.

  • Revenue for the first quarter was up 27 percent over the previous quarter and up 48 percent year-over-year.

  • New orders were up 32 percent from Q4 '03, and ongoing earnings per share came in above our target.

  • Suffice it to say, we are very pleased with the results for Q1.

  • Our employees did an outstanding job executing a very fast ramp and capturing opportunities.

  • I am very proud of the work they did this quarter.

  • The strength of the world economy showed itself in robust consumer spending in the fourth calendar quarter, and business IT demand began to reemerge and markets continue to show growth.

  • Digital TV, the market still in its infancy, has experienced strong demand with over 3 million units sold globally in 2003.

  • IT spending is on the upswing as companies get back to investing in technology for improved productivity.

  • This is coupled with renewed growth in the PC and cellphone markets, setting a solid stage for continued semiconductor growth in 2004.

  • During the downturn, there was underinvestment in fab capacity, and customers waited longer than usual to place new orders as their demand improved.

  • Now customers have regained their confidence and are prudently making investments in capacity.

  • Our business reflects industry consensus that capital spending will grow substantially over the foreseeable future in order to catch up with chip demand.

  • In the quarter, we saw a substantial increase in 200 millimeter spending as customers expanded existing lines.

  • In addition, we are seeing a 300 millimeter adoption wave continue to gain momentum.

  • Building on existing expansion plans, several new fabs have been announced that are scheduled for production late in 2004 or early 2005.

  • Semiconductor unit demand is strong, exceeding the levels we saw in 2000.

  • Most factories are fully utilized with fab capacity in some areas exceeding 100 percent.

  • Key technology bottlenecks like the adoption of Low k dielectrics have largely been solved for the 90 nanometer node.

  • As we demonstrated on February 4th with a number of our customers, Low k is in volume production.

  • Today there are over 40 million Black Diamond Low k chips powering the latest advances in graphics, DSPs and microprocessors.

  • Applied Materials Black Diamond Low k film is the mainstream solution for 90 nanometers and beyond.

  • We used the downturn to realign our cost structure, to become efficient and to prepare for this upturn.

  • The aim was to gain leverage while preserving our ability to respond.

  • Because of the changes we made, we believe this upturn will be especially positive for us.

  • Our Austin manufacturing operation is responding to the industry's demand for increased shipments, the shorter cycle times and shorter leadtimes.

  • Our flexible factory capacity model allows for quicker response to our customers' business needs, which contributed to our winning a greater share of the business in Q1.

  • We are investing in products that create a differentiated performance on our customers' wafers and in their factories.

  • These products are distinguishing themselves in the marketplace.

  • In CVD, PVD and CMP, our products are positioned to stay strong and gain momentum.

  • In transistor applications and processed diagnostics and control, dielectric etch, electroplating and services, we have outstanding new products presenting excellent growth opportunities for us.

  • In addition, Applied Materials is helping customers meet the growing demand for larger LCD TV screens with our new AKT 40K PECVD System.

  • By handling substrates measuring 1.8 meters by 2.2 meters, this machine is capable of producing up to 640 6-inch TVs per panel, creating a significant cost reduction in helping to increase our customers' market penetration.

  • We got back to basics this year by refocusing on our customers' challenges.

  • Our pipeline of new product reflects this close collaboration with them.

  • Products like the slim cell (ph) or innovative electroplating system demonstrate the new standard in customer-driven product development.

  • At customer sites, the slim cell has demonstrated break-through (inaudible) activity, and it is driving substantial yield improvements.

  • Yesterday we launched the Endura2, the latest generation of our Endura family, a product family that has already processed more than a billion wafers.

  • Endura2 is designed to satisfy our customers desire for higher productivity, improved reliability and ease of serviceability.

  • We are listening and working together with chipmakers in new ways.

  • Successful implementation of challenging new technologies requires a collaborative approach across the supply chain, and Applied Materials is uniquely positioned to create this industry changing model.

  • What does the future hold for Applied Materials?

  • We are fully focused on growth by meeting our customers' needs.

  • The differentiated performance we have shown in the last few quarters is due to fundamental strengths.

  • Our new products are hitting their targets, and our foundation remains strong.

  • We have a long history in Asia, and we are benefiting from those relationships, particularly in Taiwan, China, Korea and a resurge in Japan.

  • The Japanese semiconductor industry is seeing strength reminiscent of a decade ago, much like their economy during the last quarter.

  • Investments in new capacity are coming from newly formed, as well as established companies, and no company is better situated to support this growth than we are.

  • Applied Materials is in its best competitive position in years.

  • As a whole, we are faster, leaner and more driven than ever.

  • We remain focused on our customer's need for increased productivity and our engineers, technologists, manufacturing experts and customer engineers are delivering the solutions that meet their goals.

  • We're extending our lead in the equipment industry, and as our customers go deeper into the nanometer era, we are delivering the products and services that enable them to get there.

  • As envisioned by our Chairman Jim Morgan, our results over the past few quarters are evidence that we have truly moved to what he called the next reality.

  • Thank you very much.

  • I will now turn the call over to our Chief Financial Officer Joe Bronson.

  • Joe?

  • Joe Bronson - Executive VP & CFO

  • Thanks, Mike.

  • Good afternoon.

  • We will now cover our financial performance for the first quarter ended February 1 and our outlook for the second fiscal quarter of 2004.

  • The presentation of the first quarter's financial performance discusses GAAP, as well as ongoing results.

  • Ongoing performance excludes charges incurred as a result of the Company's realignment activities and is presented as supplemental, consolidated, condensed statements of operations in the press release.

  • This quarter's realignment activities consisted primarily of the consolidation of facilities.

  • First-quarter net sales were 1.56 billion, an increase of 27 percent over last quarter and 48 percent higher than the prior year first quarter.

  • Reported gross margin was 43.5 percent in the first quarter as compared to 40.5 in the fourth quarter and 37 percent in the first quarter of last year.

  • Reported operating expenses of 579 million were 89 million or 18 percent higher than the prior quarter and 71 million or 14 percent higher than the prior year first quarter.

  • Excluding the charges associated with realignment activities, ongoing operating expenses of 411 million in the first quarter were 35 million or 9 percent higher than the preceding quarter and 3 million or 1 percent higher than the prior year first quarter.

  • Expenses in the first quarter reflected the cost savings that resulted from the implementation of the realignment activities offset by an extra week of operating expenses due to a 14 week quarter compared to the quarter and prior year 13 week quarter and the impact of a full provision for variable compensation costs resulting from the quarter's profitability performance.

  • Charges associated with realignment activities were 167 million.

  • During the first fiscal quarter of 2004, the Company completed the re-evaluation of its facility requirements and determined that a laboratory being held for future utilization would not be required in the foreseeable future.

  • This facility was not contemplated in the guidance provided in the fourth quarter of '03 conference call.

  • The realignment activities have now been completed, and no future charges are expected to be incurred.

  • Reported net income for the first quarter was 82 million or 5 cents per share compared to the fourth quarter of 15 million or 1 cent per share and net loss of 66 million in the prior year first quarter or 4 cents per share.

  • Excluding the 167 million charge related to the realignment activities, ongoing net income for the first quarter was 200 million or 12 cents per share or 13 percent of net sales, an increase from the fourth quarter of 95 million or 6 cents per share or 8 percent of net sales.

  • New orders for the quarter were 1.68 billion, 32 percent higher than last production and exceeded our target for the quarter.

  • Order percentages by geographic region for the first quarter were as follows -- Southeast Asia and China, 25 percent;

  • Taiwan, 18 percent;

  • North America, 17 percent;

  • Japan, 17 percent;

  • Europe, 12 percent;

  • Korea, 11 percent.

  • Orders reflect the continuing trend of our customers to buildout 300 millimeter capacity in both logic and memory, as well as increased demand for copper production capacity and 130 nanometer and below production capacity.

  • Broad-based order strength was also evident for 200 millimeter capacity and 130 nanometer.

  • The Company's order growth reflected continued market share gains from the transition to 300 millimeter, and advanced technology applications, including Low k dielectrics, CMP, copper barriers (inaudible), and front-end applications such as implants and rapid thermal processing.

  • Strong demand was evident throughout Asia where the Company had significant product penetration and presence.

  • Japan orders reflected continued investments in memory, logic and customer's transition to 300 millimeter, as customers in Japan continued to invest in advanced technology capacity.

  • DRAM orders represented 26 percent of total system orders -- the same as the fourth quarter of 03.

  • Foundry orders were 35 percent of total system orders compared to 31 percent in the fourth quarter. 300 millimeter orders represented approximately 45 percent of total system orders received in the first quarter compared to 60 percent in the fourth quarter.

  • Orders were also up sequentially from the prior quarter in almost all of the customers product lines.

  • In addition, orders were received in a number of areas for 200 millimeter incremental capacity, as utilization rates in the established technologies continued to improve.

  • As the pressures of this ramp environment expanded, our reduced manufacturing cycle times translated into order wins.

  • The order strength is broad-based across the globe.

  • During the first quarter, two orders were in excess of 100 million compared to one for the fourth quarter of '03.

  • Four orders were between 50 and 100 million versus three for the fourth quarter of '03, and 13 orders were between 10 million and 50 million compared to 20 for the fourth quarter of '03.

  • Backlog for the quarter was 2.63 billion compared to 2.5 billion for the fourth quarter and 3.05 billion for the prior year first quarter.

  • Backlog adjustments netted to an insignificant amount -- less than 500,000 in this quarter.

  • There were cancellations of 16 million offset by foreign exchange and other adjustments totaling almost the same amount.

  • Cash equivalents and short-term investments increased by 204 million from the prior quarter to 5.7 billion at the end of the first quarter of '04.

  • The increase in cash for the product primarily reflects continued focus on working capital management.

  • Cash requirements for realignment activities totaled approximately 56 million in the quarter.

  • Accounts Receivable increased by 168 million or 18 percent from the prior quarter due to higher sales volume with net collections of 1.41 billion and DSO performance of 68 days -- the same as the fourth quarter of '03 -- as compared to 77 days in the first quarter of '03.

  • Inventory increased modestly by 49 million or 5 percent from the prior quarter.

  • Systems inventories have increased slightly.

  • Improvements in manufacturing cycle times and supply chain management resulted in significant operational benefits as production has ramped.

  • Spares inventory has continued to decline.

  • Capital expenditures in the first quarter totaled 76 million compared to 72 million last quarter and 112 million in the first quarter of '03.

  • Excluding asset write-offs for restructuring, depreciation and amortization was 89 million comparable with the preceding quarter and down by 15 million from the first quarter of '03.

  • The Company repurchased approximately 3.25 million shares of common stock at an average price of 23.05 per share for $75 million.

  • We were pleased with the performance of the Company as improving and demand caused our customers to increase investments in capital equipment.

  • Our strong products enabled us to gain market share, and we continued to realize the effect of the cost savings from the implementation of the realignment activities that translated to profit leverage for the Company.

  • Flow through of ongoing pretax income for the increase in revenue was over 40 percent for the quarter.

  • The Company has successfully penetrated the markets with its 300 millimeter product offerings and advanced technologies.

  • Significant market share gains are evident in the comparisons made with publicly released competitive financial reports.

  • Some highlights for the quarter.

  • Gross margins, particularly in the product areas, made good progress during the quarter as 300 millimeter product costs continued to decline reflecting the leverage gained from our Austin manufacturing operation.

  • Our service business margins are improving from prior quarter's performance as revenue increased and inventory management programs are beginning to yield results.

  • We are confident that this business will continue to improve its profitability throughout the year.

  • Process diagnostics and control continue to make significant market progress and has introduced new competitive products in the inspection market.

  • Notable market share gains and positions have been achieved in Low k CVD with Black Diamond.

  • In addition, PECVD, CMP and PVD copper barrier seed (ph) and front-end products continue to set the industry benchmark for performance and capability in advanced technology.

  • The etch business grew strongly in the quarter, especially in the Asian markets with both dielectric and conductor products. (inaudible) electroplating tool continued to penetrate the market.

  • The Etec operation has met important technical milestones in its advanced technology ebane (ph) product with a major customer and is also improving its operating results after restructuring.

  • AKT financial performance was outstanding in the first quarter of '04.

  • Turning to the outlook, the outlook continues to be promising as expectations for capital spending are up significantly from prior industry estimates.

  • It is clear that technology is benefiting from the economic recovery, coupled with demand for advanced products for both consumer and industrial applications.

  • In addition, the development of new products from these advanced applications in proper and 130 nanometer and below is storing capacity investments by customers.

  • The semiconductor business has also been fueled by large investments in China, which is just beginning to develop its infrastructure to serve a vast internal market and also in Japan where the semiconductor industry has been reborn with increasing confidence.

  • Industry volatility has been a historical fact, and a note of caution is always appropriate.

  • However, we believe that our broad product and technology portfolio, extensive service capabilities, balance sheet and completion of our realignment activities will enable us to continue to demonstrate improved performance.

  • Orders in the second quarter of 2004 are expected to grow sequentially by approximately 30 percent.

  • We expect further capacity buys from the large IDN foundry and DRAM customers, as well as order strength from our new product offerings.

  • Revenue will be approximately 20 percent higher than the first quarter with earnings per share in the range of 17 cents to 19 cents per share depending on the revenue achievement.

  • The Company's ongoing results will be the same as GAAP results for future quarters.

  • However, comparisons to prior periods will require a reconciliation of GAAP results to ongoing results for all preceding periods due to the realignment activities in those periods.

  • Mike Splinter - President & CEO

  • Thank you, Joe.

  • We will now begin our question-and-answer session.

  • Because we would like to entertain questions from as many callers as possible, please limit your questions to one per firm.

  • Operator, please begin with the first question.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Glen Yeung, Smith Barney.

  • Glen Yeung - Analyst

  • Great quarter.

  • The five-year on the outlook for orders.

  • We saw Asia-Pacific and Taiwan up so strongly and the U.S. and Europe lagging.

  • Given your industry outlook -- I am sorry -- your order outlook for the April quarter, is it fair to say that those regions are coming back?

  • Maybe just within that question, also could you give us a sense as to where you feel this share gains versus just a broader industry environment?

  • If there is some way to break that out, that would be great to know.

  • Mike Splinter - President & CEO

  • Well, let me try to give you some insight.

  • First of all, I think we believe during the next quarter and beyond that Asia is going to stay strong.

  • So even if we see a resurgence in the U.S. and Europe capacity spending, I think you know there have been some fabs announced that we will still see a very very strong Asia.

  • Now breaking out between market share and just overall revenue growth, that is pretty hard for us to do.

  • But I would encourage you to go look at the competitive (technical difficulty) announcements and really look at the comparison of our revenue growth to theirs.

  • The data will tell the story.

  • Operator

  • Jay Deahna, J.P. Morgan.

  • Jay Deahna - Analyst

  • Thank you.

  • Good afternoon and congratulations on a great turn in your business.

  • Can you give me a sense as to what your outlook is for orders as you move beyond the April quarter?

  • Really how is sustainable do you see this cycle?

  • Is it more like the 93 to 95 cycle, or is it more like the 1999/2000?

  • Mike Splinter - President & CEO

  • Well, I always say all these cycles are different.

  • But I think some salient points about I think this one, I think the 300 millimeter buildout continues.

  • I don't think we will be complete by any stretch of the imagination.

  • We see many more projects on the drawing board that are currently being shipped to, so that is one thing.

  • Another thing is copper penetration in terms of capacity.

  • Our estimate is that we are really about 16 to 20 percent penetrated in terms of copper capacity.

  • So with the products that are being developed, particularly in a number of these telecom and other applications, there certainly is a long way to go with building out that capacity.

  • A lot of the issues in wireless and all of these types of end-user demand are also evident.

  • We also think that there is, particularly as you get towards the end of the calendar year, there is a potential capability for telecommunication spending to begin because that has been obviously a pretty slow sector for a long time.

  • So we think this thing still has quite a bit of legs to it.

  • Mike Splinter - President & CEO

  • I would just add that as long as the overall world economy stays strong, we believe demand in semiconductors are going to follow that and be a strong player in moving that up.

  • Jay Deahna - Analyst

  • Do you get the sense that order momentum can continue even with a little bit of an ebb and flow throughout the year in the upward direction?

  • Mike Splinter - President & CEO

  • We think so, yes.

  • Operator

  • Bill Lu, Morgan Stanley.

  • Bill Lu - Analyst

  • Congratulations on a very nice quarter.

  • I have a quick question.

  • I just got back from a trip to Asia, and the major foundries in Asia are telling us that they have booked their increment equipment orders for the whole year already, and that has already been done.

  • Is that consistent with what you are seeing, and if that is the case, who is going to make up for the difference going forward?

  • Mike Splinter - President & CEO

  • Well, I would like to say that that isn't the case from our prospective and based on the projects that we know that are booked.

  • They may have agreed internally as to what they are going to do and their plans may be completely firm in terms of the projects, but they have not booked everything by a large measure.

  • Bill Lu - Analyst

  • So they will (multiple speakers) --

  • Mike Splinter - President & CEO

  • I would think that their plans are set in terms of what they want to do and what selections they have made, etc..

  • But as far as the orders being let to the suppliers, I don't believe that has occurred.

  • Bill Lu - Analyst

  • So then would you expect that to be pretty linear through the year then in terms of orders from the foundries?

  • Mike Splinter - President & CEO

  • It is their decision when they let the POs lose.

  • It is hard for us -- we just have -- we know what the projects are.

  • We have some idea as to the timing.

  • It is the customer's job to release the orders.

  • Operator

  • Timothy Acuri, Deutsche Bank.

  • Timothy Arcuri - Analyst

  • Great quarter.

  • I actually had a two-part question.

  • First of all, Joe, for you, can you talk a little bit about gross margin?

  • You talked before about a linear progression.

  • At 1 billion, you would be doing 40 percent, and at 2 billion, you would be doing 50 percent.

  • And at 1.5, that line should be roughly linear.

  • So we are a little bit below that 45 percent mark here kind of in the middle of that range.

  • Do you think that 50 percent is still achievable at that outer end of the spectrum?

  • Joe Bronson - Executive VP & CFO

  • Well, at the time -- and we have showed you these charts for a long time.

  • At the time those charts were prepared and we stuck with them, the service business from a margin standpoint, there were two items on the chart.

  • One was gross margin; the other was operating margin.

  • The service mix of our business is growing, and so the gross margin impact of that dampens the gross margins a little bit.

  • Our product margins are right on track, and the operating margin performance at this revenue level is exactly on track.

  • So what I would say about 2 billion is that we may be short of the margin number, but we will definitely hit the operating margin number.

  • Timothy Arcuri - Analyst

  • Thanks, Joe, and then just as a follow-up to that, given all the cash now on the balance sheet, is there any plan to over time pay a dividend maybe, or what is the long-term view here on the cash on the balance sheet?

  • Joe Bronson - Executive VP & CFO

  • Well, the cash strategy has always been serve first generated in all cycles through good operating performance.

  • I really have to really congratulate our division heads, who I think are unique in our business in really understand how to manage working capital, and I think we are doing a good job.

  • They are not too many companies, no matter what size they are, that can beat this kind of ramp and generate cash.

  • So that is always the first order of business.

  • The second order is what to do with it.

  • Obviously if there were acquisitions out there that we could make for cash equivalents, we would like to do that if that is possible.

  • We have not been able to find anything significant yet.

  • We do have a significant repurchase of stock authorization.

  • We will always look at whether we have buying stock at a relatively low rate of about 300 million a year, we may decide to step that up.

  • We are currently looking at our capital structure to do that.

  • Certainly as far as dividends are concerned, there is always -- it is a consideration of the mix, but there is no decision (inaudible).

  • Timothy Arcuri - Analyst

  • Thanks, guys.

  • Great quarter.

  • Operator

  • Brett Hodess, Merrill Lynch.

  • Brett Hodess - Analyst

  • Good afternoon and also a great quarter.

  • Just one question.

  • Joe, when you're talking about the margins on the service business and the dampening impact going forward, since that does seem to be a growing part of the business, can you ballpark what the percentage of that is and where you might see that going over the next year?

  • Joe Bronson - Executive VP & CFO

  • Well, as I think we disclosed in some prior quarters, we had a complete change in distribution strategy in the second half of last year, which caused a lot of margin headache with getting through all that.

  • I think this quarter we started to make progress really and good margin improvement.

  • So we are starting to do that, and I told representatives on prior calls that it was going to take us about three quarters to kind to get to where we would like to be in the business, and I think we are making progress toward that.

  • I think we will continue to improve.

  • Brett Hodess - Analyst

  • And service as a percentage of the mix, Joe?

  • Joe Bronson - Executive VP & CFO

  • It is getting close to 20.

  • It has been over 20.

  • But two good things have been happening.

  • One, their business has been growing, and our systems business has been certainly coming back.

  • So the fact that that service mix is still high is really to me says there is a lot of room to grow.

  • Operator

  • Jim Covello, Goldman Sachs.

  • Jim Covello - Analyst

  • Thanks so much.

  • Just a couple of quick question.

  • Leadtimes and ASPs, if we could get some color around that?

  • Mike Splinter - President & CEO

  • Leadtimes are staying constant, and ASPs, you know, we have not chosen to do a price increase.

  • But certainly we are seeing more pressure on delivery time than on ASP.

  • Jim Covello - Analyst

  • Can you talk about maybe the decision-making process around leaving ASPs where they are?

  • With this business as robust as it is, it seems like you would have the ability to put through a price increase a little bit.

  • Mike Splinter - President & CEO

  • Well, I think the thought process around this is to really look at what we can do at growing share at the current time.

  • This is a market where we feel like we should be able to grow share, and we are really going to be focused on that.

  • And, frankly, with our big customers, they are on volume purchase agreements that extend over a fairly long period of time.

  • Jim Covello - Analyst

  • Great.

  • Thanks so much and congratulations.

  • Operator

  • Ali Irani, CIBC World Markets.

  • Ali Irani - Analyst

  • Good afternoon, gentlemen.

  • The market share tear (ph) is off this year, and it seems that your Asian customers are contributing a lot of that because they are spending more than other people.

  • I am hoping that you can give some visibility on where you see the trends in North American spending given that they are a low percentage rate of the overall orders?

  • And with your visibility, I am hoping you can add some color on when the North American customer base comes together to put some 300 millimeter fabs together.

  • Thanks.

  • Unidentified Speaker

  • Splinter: I think the big question is how many new projects have been announced in North America?

  • I think (inaudible) and most of the major players have announced a project or an addition, and you just have to take a look at the timing of when those are really going to get brought into production.

  • Operator

  • Mark Fitzgerald, Bank of America Securities.

  • Mark Fitzgerald - Analyst

  • In keeping these leadtimes short, do you have to pay any penalties?

  • Is there a gross margin issue here in terms of dealing with vendors?

  • Joe Bronson - Executive VP & CFO

  • We have not had to do that.

  • Obviously there are times what you experience expediting and you have got to run the extra mile or run extra hard, but it is not a margin detractor in the main.

  • Mark Fitzgerald - Analyst

  • So basically the short leadtimes are just what you've done with restructuring and manufacturing?

  • Joe Bronson - Executive VP & CFO

  • It has to do with a significant concentration on reducing attack times in the factory and overall cycle times throughout our business cycle.

  • We have been working on this for a long time, and it has really started to bear fruit.

  • Particularly we made the entire transition from 200 millimeter manufacturing to 300 millimeter manufacturing without sacrificing leadtimes, which I thought was a pretty good effort by some people in office.

  • Mike Splinter - President & CEO

  • The other thing is we really tried to insure that the suppliers had visibility into what we thought growth late last summer.

  • So we thought that we were going to see growth.

  • We made sure that they have the visibility so they can invest and ensure they have the capacity.

  • Mark Fitzgerald - Analyst

  • Are some of your customers making decisions at this point based on delivery leadtimes?

  • Mike Splinter - President & CEO

  • Yes.

  • Joe Bronson - Executive VP & CFO

  • Some of them are, yes.

  • Mark Fitzgerald - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Ed White, Lehman Brothers.

  • Ted Byrd - Analyst

  • Hi.

  • This is Ted Byrd (ph) for Ed White.

  • I was wondering if you can talk about the profitability of your 200 millimeter tools versus your 300 millimeter tools?

  • Are they essentially equivalent today, or is there still more work to be done on the 300 millimeter front?

  • I was wondering can you discuss a little bit more about you mentioned copper as I think 15 to 20 percent of that manufacturing base.

  • I just want to check if that is right, and where you see that by the end of this year and into '05?

  • Thanks.

  • Joe Bronson - Executive VP & CFO

  • What I meant by the copper penetration is essentially the applications, the amount of the way to go to 100 percent.

  • So that is not total capacity number.

  • That is basic penetration of copper into the aluminum market.

  • As far as margins on 200 and 300, they are essentially the same.

  • Operator

  • Raj Seth, SG Cowen.

  • Raj Seth - Analyst

  • I am curious in Q2 would you characterize your visibility in this quarter as meaningfully better than the same point headed into Q4?

  • I guess I am wondering if at the end of this quarter you pushed off some orders into Q2 that have give you better visibility?

  • Joe Bronson - Executive VP & CFO

  • Well, as far as the second point, we are not in the business of managing orders and backlog that way.

  • I think that would be -- I don't think our customers would like us to do that.

  • Our visibility is pretty good.

  • I would say that our visibility has been good since the fourth quarter of last year.

  • But the businesses certainly in the first quarter came better than even we expected, so we have pretty good visibility going forward.

  • Raj Seth - Analyst

  • And in terms of your big deal pipeline and the concentration orders, is what is coming feel a lot like what you saw fairly broad-based?

  • Were there big chunks in there that help give you confidence --?

  • Joe Bronson - Executive VP & CFO

  • It is definitely broad-based.

  • Operator

  • John Pitzer, CSFB.

  • John Pitzer - Analyst

  • Congratulations.

  • A couple of questions, Joe.

  • First, when you look into the April quarter, do you think 200 millimeter will stay as significant a portion of the order mix that we saw in the January quarter and then a quick follow-up?

  • Joe Bronson - Executive VP & CFO

  • I think it will, but I could not quote exact numbers.

  • I think the momentum is still there for 200 millimeter capacity.

  • If I look at the build plan for the second quarter, it seems to be 200 millimeter demand is still quite strong.

  • John Pitzer - Analyst

  • And then second question, typically the January quarter is a seasonally strong quarter for service orders.

  • Does that mean as we look at to April that the product orders are growing faster than your stated guidance?

  • Joe Bronson - Executive VP & CFO

  • You know this.

  • It is a very similar historical pattern.

  • Our orders in the service business will actually be down sequentially in the first and second quarter because that is a normal situation with the customer's year-end a 12/31 year-end.

  • So usually what happens is that first quarter tends to, say, be 32, 33 percent of the year, then the remainder is split evenly throughout the next three quarters.

  • Now there are some opportunities we are working on that could change some of that, particularly since the refurb business is very strong at the moment.

  • But basically we expect those patterns to be relatively the same.

  • John Pitzer - Analyst

  • So, Joe, it is fair to say your product orders are growing faster in April than they did in January on a sequential basis?

  • Joe Bronson - Executive VP & CFO

  • Yes.

  • Operator

  • Theodore O'Neill, A.G. Edwards.

  • Theodore O'Neill - Analyst

  • I wonder if you can give us some additional color on the copper electroplating side of the business?

  • We have been hearing very good things from customers about how that tool has been performing, (inaudible).

  • I was wondering if you could talk about, have we got any orders in that and what the outlook is for it?

  • Thank you.

  • Mike Splinter - President & CEO

  • We do have orders.

  • We do have penetration.

  • We have machines at roughly half of the top 10 customers, and the big thing about the slim cell (ph), it is, in fact, as you stated, the (inaudible) activity is substantially better than either our previous tools or competitors tools really motivated.

  • Obviously customers get pretty excited about that when it gets translated into yield improvements and additional outflows.

  • Theodore O'Neill - Analyst

  • Have you got any repeat orders, and do you think you will see some of those in the next quarter?

  • Mike Splinter - President & CEO

  • We will see them in this quarter.

  • Yes.

  • Operator

  • Suresh Balaraman, ThinkEquity.

  • Suresh Balaraman - Analyst

  • In terms of copper penetration, I have a follow-up.

  • You guys talked about wafer starts at 130 nanometers and below going to 17 (ph) million wafers or so by end of 2004.

  • And there is a 300 millimeter (inaudible), and this was at your analyst meeting last year.

  • And I was wondering if there is any fresh update on that kind of an estimate?

  • Mike Splinter - President & CEO

  • (multiple speakers)

  • Joe Bronson - Executive VP & CFO

  • I think you have stumped us.

  • We will have to get back you on that one.

  • Paul will be happy to answer that, but we are not prepared for that one.

  • Suresh Balaraman - Analyst

  • Also, any thoughts on when you expect Flash to convert to copper?

  • Mike Splinter - President & CEO

  • You know really it does not require it.

  • Even in DRAMs, it is very much the same kind of technical problem, very few DRAM makers utilize copper.

  • There will be very few Flash manufacturers that utilize copper.

  • I don't ever expect a wholesale conversion.

  • Copper will be focused on logic devices.

  • Operator

  • Shekhar Pramanick, Prudential.

  • Shekhar Pramanick - Analyst

  • Congratulations on a good quarter.

  • Mike, you talked about that pricing is relatively stable or almost you mentioned maybe the discounting is going away.

  • My sense is are we going to get a bigger kicker going forward on the margin side, particularly in the product gross margin as the price discounting is going away as well as the revenue is, of course, increasing?

  • Mike Splinter - President & CEO

  • Would that be a right assessment?

  • Well, I think the bigger factor is how well we do on our operations, how well we gain market share in this upturn.

  • I think those are the biggest factors that are going to affect our gross margin.

  • We continue to get leverage from restructuring that we did, the way we restructure our manufacturing operations, and the entire supply base, how well they are supporting us.

  • They have done a great job through this first quarter.

  • Shekhar Pramanick - Analyst

  • A question for Joe.

  • If you could go over one more time at what revenue level you would be achieving what gross margin or what operating margin one more time?

  • Joe Bronson - Executive VP & CFO

  • Let's see.

  • I think we said that at 1 5 we would be at 19 percent and at 2 billion, 20.

  • A little over 20.

  • Shekhar Pramanick - Analyst

  • And 2.5?

  • Joe Bronson - Executive VP & CFO

  • Well, at 2.5 I would hope -- I would think we would be at 23 percent after-tax.

  • Operator

  • Cristina Osmena, Needham & Co.

  • Cristina Osmena - Analyst

  • Joe, that guidance that you gave for 20 percent operating margins on 2 billion in revenue, that is different than what you had said before (multiple speakers) when you said 25 percent.

  • Joe Bronson - Executive VP & CFO

  • No.

  • I meant 20 percent after-tax.

  • That is what I stick with, the 25 percent operating (multiple speakers).

  • We have not changed that.

  • Cristina Osmena - Analyst

  • In which case, perhaps I could squeeze another one in.

  • Could you talk a little bit -- Michael, you made some comments about how well the etch division is doing, and it has been awhile since we have heard you talk or we have heard Applied talk positively on this division.

  • What is driving that?

  • Is there a substantial turnaround there, and what is behind it?

  • Mike Splinter - President & CEO

  • Well, I think since the last nine months we have really been focusing both on our new products and getting our existing products out into the marketplace.

  • I think you know we have two new products -- Enabler and Producer -- that do different jobs in the etch field.

  • We have stayed strong in our metal and polyetching, and we are just gaining share right now in both dielectric, metal and polyetch.

  • We are able to deliver products and customers want them, and we are very strong in the DRAM area, and as the DRAM guys invest, we are gaining from that.

  • Cristina Osmena - Analyst

  • Okay.

  • Wonderful.

  • Thank you.

  • Operator

  • Nick Tishchenko, Fulcrum Global Partners.

  • Nick Tishchenko - Analyst

  • Good afternoon.

  • Just one question.

  • Applied Materials is doing a great job keeping short leadtimes.

  • But why do tools not cover the whole set of tools for production line?

  • What kind of risks are you seeing right now relative to other vendors of tools that are not manufactured by Applied Materials, not keeping up with leadtimes because of internal problem or supply chain?

  • How serious this could be a risk for Applied Materials in terms of accelerating growth?

  • Mike Splinter - President & CEO

  • We really cannot comment on what other companies are doing because we really don't know.

  • Obviously we are concerned because for us to sell our tools, customers buy wafer capacity, right?

  • We are going to keep focused on doing the right thing for our company.

  • Nick Tishchenko - Analyst

  • So you do not see immediate risks?

  • Mike Splinter - President & CEO

  • I don't know how to assess it.

  • Nick Tishchenko - Analyst

  • Okay.

  • We will try to help you.

  • Thank you.

  • Operator

  • Michael Bryan (ph), Schwab Soundview Capital Markets.

  • Michael Bryan - Analyst

  • Good afternoon.

  • Just two questions.

  • Joe, you said you had similar gross margins at 300 millimeter and 200 millimeter.

  • How many points higher do you think 300 millimeter can be above your 200 millimeter peak, or do you think it can be higher gross margin at the peak?

  • Joe Bronson - Executive VP & CFO

  • Well, you know the purpose of the whole realignment plan -- and we have said this at conferences many times -- we tried to structure the Company to achieve the kind of margins we got at the 2.9 billion level at much lower revenue levels.

  • Of course, that depends a little bit on mix and all the rest of it.

  • But that is what the realignment plan was designed to do, and I think we have a good chance of doing it because the structure is there, the cycle times are there.

  • The more throughput we can get through the factory, the more leverage we get.

  • You can see a 40 percent fall-through going from fourth to first.

  • I think we can do that again on higher revenue and maybe even at a higher rate of pass-through.

  • So, as you get up the revenue curve, you really get leverage out of the situation.

  • It is hard to see what mix -- it has to be a certain mix for that to happen, but I think it can happen.

  • Michael Bryan - Analyst

  • Just one question on Low k CVD.

  • In the typical device -- I know it is different from every device -- what percentage of the CVD layers are you seeing Low k in a typical device, and where do you see it going maybe by the end of the year?

  • Mike Splinter - President & CEO

  • When people utilize Low k, they utilize it as N minus 1 (ph) of the middle layers.

  • So if somebody has 10 middle layers, they will have nine layers of Low k.

  • Operator

  • Byron Walker, UBS.

  • Byron Walker - Analyst

  • I have heard some rumors that some deposits -- cash deposits -- have been taken in certain cases to assure production slots outside of AKT.

  • Have you experienced that?

  • Joe Bronson - Executive VP & CFO

  • I wish there were the case.

  • But other than AKT, that is really the only situation that we have, where we get deposits for tools.

  • Byron Walker - Analyst

  • The other question is on the supply chain.

  • You guys are ramping and taking orders pretty quickly.

  • Can you give us a little bit of insight on the care and feeding of the supply chain under a steep ramp?

  • Joe Bronson - Executive VP & CFO

  • The first quarter this past quarter I think the supply chain performed extremely well.

  • We were able to get the materials.

  • I think that is not necessarily a given that it will happen again, but I think the key issue for the supply chain is the management of the sub-suppliers.

  • In other words, their suppliers.

  • We are working a lot closer together with our suppliers to help them with these issues and get through them.

  • So it is not easy, but I think we are going to be capable of beating it.

  • Byron Walker - Analyst

  • Any near-term showstoppers?

  • Joe Bronson - Executive VP & CFO

  • No.

  • Byron Walker - Analyst

  • Lastly, at points in the past you had shared with us an industry forecast where you think a given year might come out for the industry, not necessarily for yourself.

  • Do you have a number like that today?

  • Joe Bronson - Executive VP & CFO

  • Well, I think the industry forecast started out -- and I am talking about capital spending for equipment now -- we started out I think in the November/December timeframe at numbers like 20 percent, 25 percent.

  • They have been steadily rising, and I think right now most of the pundits of the industry are close to 40 for the year.

  • Operator

  • Patrick Ho, Moors & Cabot.

  • Patrick Ho - Analyst

  • Thanks a lot.

  • Congratulations guys.

  • Two quick questions.

  • First on the market share gains.

  • It looks like it is obvious you are gaining some share at the 90 nanometer node.

  • Can you give a little color whether you are also seeing at the 65 nanometer node?

  • The second question is on R&D spending trends.

  • Do you continue to see it go up at the same kind of percentage basis as your revenues ramp?

  • Mike Splinter - President & CEO

  • We are gaining.

  • We gained share at 90.

  • We are gaining share at 65 nanometers.

  • It really has been our sales team and product division's focus on the customers and the needs of the customers and really the acceptance of our new products in those advanced technologies.

  • So we are really tightly focused on that and believe we are gaining share.

  • As far as -- the second question was on R&D spending?

  • R&D spending, we want to take a long-term view on R&D spending.

  • We spent about $900 million last year on R&D.

  • It will be roughly similar to that this year.

  • We really want to think about things like R&D spending on the long-term growth of the Company, rather than just the up-and-down cycle of the industry.

  • Joe Bronson - Executive VP & CFO

  • The point I want to make about R&D spending though, the realignment activities really focused on getting rid of redundant infrastructure and laboratories.

  • In other words, fixed expenses.

  • If you could spend more money on engineering salaries and engineering materials and tools for engineers to develop products instead of heat laying power and depreciation, you get much more effective use of the R&D dollars.

  • So we are hoping to get more effective utilization of the R&D dollar by doing those things.

  • We have already completed the closure of the facility.

  • So we are pretty concentrated now in our R&D activities in Santa Clara and Israel and in England.

  • So I think as revenue goes up, we get some operating leverage out of that without sacrificing programs.

  • Patrick Ho - Analyst

  • Great.

  • Thank you.

  • Operator

  • Stuart Muter, Adams Harkness Hill.

  • Stuart Muter - Analyst

  • Nice job on the bookings.

  • A question for Joe.

  • A couple of years back in the early part of the downturn, I think at a Seven Best (ph) conference you mentioned you were working on getting I think a 20 percent reduction in prices from all of your suppliers.

  • I would just like to hear if that was successful and that was part of the realignment, and do you expect those prices to hold from your supplies as you ramp?

  • Joe Bronson - Executive VP & CFO

  • That is a very long-winded question.

  • At the time, we were looking certainly to get economies out of the supply chain and getting the cost focused.

  • Material cost has to do with a lot of it -- has to do with our ability to design as well as to share that capability with our suppliers.

  • So the important thing is not to extract a win/loss scenario for the supplier but to try to make the supplier as efficient as possible, and I think we have achieved that.

  • We definitely have a long way to go, both with our own design activities as well as our supply chain to get more efficient.

  • We have achieved actually our material costs targets on a number of products.

  • We just would like to see a little bit more of it.

  • I would say the main effort has been successful, but it is an effort, but it is an effort that is ongoing and you cannot stop doing it.

  • But further clarification, this has nothing to do with the realignment plan.

  • There were no extraordinary costs occurred in terms of managing the supply chain.

  • Stuart Muter - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Glen Yeung, Smith Barney.

  • Glen Yeung - Analyst

  • Just a follow-up.

  • You look at the orderbook and it grew so aggressively in the quarter, and then you look at backlog, which actually did not grow that aggressively, and it just leads us to believe that shipments were up.

  • I just want to make sure I am interpreting that the right way.

  • And then you see the guidance for revenues in the next quarter.

  • I wonder if you can give us any sense as to if SAB-101 acceptance times are shortening up, I am interpreting all this data the right way?

  • Mike Splinter - President & CEO

  • I think certainly the shipments are up and certainly past our expectations.

  • We don't have any excuses to make about SAB-101.

  • We run the business the way it is supposed to be run, and we do focus on cycle time in terms of getting installation signed off.

  • Of course, with shipments to Japan being higher, we have to get signoffs faster if we are going to meet our revenue targets and we re pretty focused on doing that.

  • That is just the way we run the business.

  • Glen Yeung - Analyst

  • Great.

  • Thanks.

  • Operator

  • Kevin Vassily, Susquehanna.

  • Kevin Vassily - Analyst

  • A quick question on the refurb business.

  • How much of the new orders in both the January quarter and the April quarter were for refurb tools?

  • Joe Bronson - Executive VP & CFO

  • We could not break that out for you because it is a part of a segment.

  • But it is not significant in terms of the total.

  • But it is a growing activity for us.

  • Kevin Vassily - Analyst

  • Does that fall into the service business numbers?

  • Joe Bronson - Executive VP & CFO

  • It falls in the service business numbers.

  • Kevin Vassily - Analyst

  • Secondly, on the service business, any chance you could give some color on the breakout between spare sales and service contracts in that business?

  • Joe Bronson - Executive VP & CFO

  • No.

  • We could not break that out.

  • Kevin Vassily - Analyst

  • All right.

  • Thanks.

  • Mike Splinter - President & CEO

  • Operator, we will take one last question, and then we will make our closing remarks.

  • Operator

  • Timothy Arcuri, Deutsche Bank.

  • Timothy Arcuri - Analyst

  • Hi.

  • Just a bookkeeping thing, Joe.

  • What was the headcount in the quarter?

  • Joe Bronson - Executive VP & CFO

  • A little over 12,000.

  • Mike Splinter - President & CEO

  • Operator, we would like to make our closing remarks now.

  • Operator

  • Please go ahead, sir.

  • Mike Splinter - President & CEO

  • We would like to thank everyone for listening to our first-quarter earnings announcement.

  • The webcast of this call is available on our Website and will remain there until March 3rd.

  • Applied Materials' annual meeting for stockholders will be held on Wednesday, March 24th, 2004 at the Santa Clara Convention Center.

  • For further information regarding this meeting, please refer to your proxy.

  • Also, to sign up for future electronic delivery of stockholder materials, please go to our Website.

  • Thank you again for your interest in Applied Materials, and this concludes our call.

  • Operator

  • That concludes today's Applied Materials Q1 FY '04 conference call.

  • You may now disconnect.