應用材料 (AMAT) 2004 Q2 法說會逐字稿

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  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Applied Materials' second quarter fiscal 2004 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 would like to ask a question, you will need to press star then the number one on your telephone keypad.

  • As a reminder, this conference is being recorded today, May 18th, 2004.

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

  • Please go ahead, sir.

  • - Managing Director, IR

  • Good afternoon.

  • And welcome to Applied Materials' second quarter 2004 earnings conference call.

  • With me today are Mike Splinter, President, 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 second quarter were released on Business Wire shortly after 1:05 p.m.

  • Pacific daylight time.

  • You can obtain a copy of the news release on the Investor section of our website 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 of GAAP financial measures to non-GAAP financial measures are contained in today's earnings press release which is available 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 second quarter financial results followed by fiscal third 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?

  • - President, CEO

  • Thank you, Paul.

  • Good afternoon and thank you for joining us on the call today.

  • Applied Materials outstanding results for this second fiscal quarter reflect broad-based strength for our semiconductor equipment and services.

  • Our view, as you will hear in detail later, is that we will continue to grow in revenue and orders in our third quarter and we have what we believe is a strong growth formula to carry us into the future.

  • The semiconductor market continues to be healthy.

  • PCs and cell phones beat expectations during the first calendar quarter.

  • Stanford resources says LCD-TV demand is expected to grow approximately 120% year-over-year in 2004.

  • And corporate IT spending is strengthening.

  • According to SIA, the three-month moving average for semiconductor sales for the month of March increased 32% year-over-year.

  • That's the sixth month in a row that growth has been above 20%.

  • And the second month above 30%.

  • Among the main drivers, flash memory showed more than 70% growth year-over-year and DRAM showed more than 55%.

  • Growth in semiconductor volume has led the strong financial results across our customer base.

  • Increasing profits have translated into confidence to invest in capacity.

  • Worldwide there are 30 300 millimeter fabs in various stages of being equipped.

  • In 2005 we expect 16 of those projects to continue adding equipment with another 19 shells scheduled to come on line.

  • The 300 millimeter transition is leading to improved productivity in new factories, and as this next generation of technology comes on line, there are increased process steps and dieSize changes driving the need for further investment.

  • Our view is that the equipment share of our customers' capital dollars is increasing, from the mid-50s to more than 70% in this transition.

  • Fab utilization rates continue to run near 100%.

  • Our customers are proceeding with investments in capacity expansion for 200 millimeter fabs, as well as new technology for 300 millimeter, copper, and sub-100 nanometers.

  • China continues to expand primarily with 200 millimeter factories and .18 and .25 micron technologies as growth continues, and we see it continuing strong for the next several quarters.

  • This year we expect to deliver more than $1 billion dollars worth of products and services to China, making this a major segment of our business and a significant growth region.

  • One where we believe we are particularly well positioned.

  • As reported in today's news, Japan's GDP grew at a faster than expected rate in the first quarter, and the mood and confidence in the semiconductor sector reflect that.

  • Japanese customers benefit from growth in the consumer segment and are investing in increased fab capacity.

  • Primarily 300 millimeters.

  • It's positioning the Japanese semiconductor industry to take full advantage of this transition.

  • Our opportunities for growth are significant.

  • While spending has followed more rational patterns than in past upturns, the semiconductor industry is still underinvesting relative to historical industry norms.

  • We see plenty of opportunity ahead beyond industry growth.

  • Our potential is powered by three growth engines.

  • First, continuing to increase market share in our existing core products.

  • Next, developing the value proposition and capability of our new product offerings.

  • Finally, expanding our service business to offer more to our customers.

  • Our recent announcement of an agreement with Brooks Automation is just one example of our thrust in this arena.

  • We are extending our service capability beyond our own equipment to further solidify our relationships with our customers and add greater value throughout their fabs.

  • Delivering the best technology and products is critical to our customers as they begin their 65-nanometer R&D, and in our more advanced customers, 45 nanometers.

  • Manufacturing transistors and constructing copper interconnects at that scale remain extremely challenging, and Applied Materials is working in collaboration with our customers to provide the solutions that deliver these results.

  • We continue to see strong market acceptance of our core silicon systems.

  • This quarter, we shipped our 750th producer CVD system, a significant milestone.

  • Black Diamond Low k was awarded Semiconductor International's 2003 Editor's Choice award for best product.

  • In our reflection, LK CMP is installed at every 300 millimeter copper fab worldwide.

  • We're also seeing positive momentum for our new offerings, as they gain acceptance in the marketplace.

  • Enabler etch and slim cell are doing well.

  • Our SEM vision G-2 fib scored wins at six new fabs, and our CD-SEM reached record sales.

  • For flat panels, Applied Materials leads in advance Gen 7 systems for PECVD.

  • We are the first company to have production machines ready.

  • We are expanding our line with a noncontact tester, and we will continue to explore ways to further take advantage of this growing market.

  • Once again, our quarterly results show Applied Materials is clearly focused on setting itself apart as a broad supplier of products and services.

  • Our earnings and cash flow generation are superb.

  • We are delivering technical leadership across a broad product line.

  • We are capitalizing on our global infrastructure and our close customer relationships.

  • Our employees are the best trained, most capable, and most committed.

  • All of this sets Applied Materials apart as a company with a strong future, with the best technology, the best global position, and best managed business.

  • We expect Applied Materials' leadership momentum to continue and for us to outpace the industry.

  • With that, I want to thank you, and now I'll turn the call over to our CFO, Joe Bronson to discuss our financial results.

  • Joe?

  • - CFO, EVP - Corporate Services

  • Good afternoon.

  • We'll now cover financial performance for the second quarter ended May 2nd, and our outlook for the third fiscal quarter of '04.

  • This quarter's outstanding performance reflects the hard work of our employees around the world.

  • Orders of $2.2 billion exceeded 2 billion for the first time in three years, over 32% higher than the first quarter, and 128% higher than last year's second quarter.

  • Revenue for the second quarter was 2 billion, 30% higher than the first quarter and 82% higher than the second quarter of fiscal '03.

  • Operating income for the second quarter was 26% of revenue at 515 million, compared to 6% for fiscal -- Q1 '04, and a 10% loss from operations for Q2 of fiscal '03.

  • Net income increased to 373 million, or 22 cents per share, compared to 82 million, or 5 cents per share in the first quarter of '04, and a net loss of 62 million, or 4 cents loss per share for the second fiscal quarter of '03.

  • Gross margin for the quarter was 46.5%, compared to 43.5% in the first quarter, and 33.7% for the second quarter of '03.

  • Ongoing earnings per share for the second quarter of '04 was 22 cents per share, same as the reported earnings per share, compared to 12 cents for the first quarter of '04, and 3 cents for second quarter of fiscal '03.

  • Ongoing operating income for the second quarter was 26% of revenue, same as reported, compared to 17% for the first quarter, and 3% for the same period last year.

  • Ongoing results for prior periods, excluded charges associated with the Company's realignment activities.

  • Order strength in the second fiscal quarter of 2004 reflected broad-based capital investment by customers for 300 millimeter technology from both DRAM and logic manufacturers.

  • As well as, capacity expansion in 200 millimeter to meet rising demand for semiconductors.

  • Continued strength in Japan and China combined with steady improvements from Taiwan and Southeast Asia drove the order growth.

  • Orders by major geographic area were as follows: Southeast Asia and China, 22%.

  • Taiwan, 21%.

  • North America, 19%.

  • Japan, 17%.

  • Korea, 13%.

  • Europe, 8%.

  • Positive momentum in the chip business is expected to continue with additional fab investments anticipated in the second half of 2004 and beyond.

  • We expect capital spending for equipment will grow by approximately 40% this year.

  • DRAM orders represented 25% of total system orders versus 26% in the first quarter of '04.

  • Foundry orders were 44% of total system orders, 35% in the first quarter. 300 millimeter orders represented approximately 51% of total system orders received in the second quarter.

  • Compared to 45% in the first quarter.

  • During the second quarter six orders were in excess of 100 million, versus two in the first quarter.

  • Two orders were between 50 and 100 million versus four for the first quarter.

  • And 20 orders were between 10 and 50 million, versus 13 for the first quarter.

  • Backlog for the quarter was 2.8 billion, compared to 2.63 billion for the first quarter, and 2.76 billion for the prior year's second quarter.

  • Backlog adjustments were insignificant.

  • We're pleased with the Company's performance in the second fiscal quarter of 2004 as we continued to benefit from the cost savings achieved by the 2003 realignment plan.

  • Operating margin of 26% achieved expectations as the cost savings from the realignment plan reduced fix costs by approximately 100 million in the quarter.

  • Our employees have made outstanding productivity gains by focusing on cycle-time reduction, supplier management and quality improvement.

  • For example, in Austin, Texas, system unit production in the current quarter approximated the second fiscal quarter of the year 2000 with 2000 fewer employees.

  • On a company-wide basis, revenue per employee has doubled year-over-year to over $600,000 per employee.

  • This ramp has been managed well by suppliers who contributed to our ability to manufacture and deliver equipment to customers in a timely manner with improved quality.

  • Over 50% of the quarter-over-quarter revenue increase was reflected in gross margin, and over 30% dropped to net income on an ongoing basis.

  • Other highlights for the quarter were as follows: System product margins are achieving planned model performance and driving profit improvement in the Company.

  • Flat-panel bookings for fiscal 2004 are very strong, and the new series of Gen 7 products is gaining market acceptance.

  • Service revenue reached a record level and margins continued to improve from the prior quarter.

  • Etch revenue increased at a rate of two times the industry, which may be the best-kept secret in the semiconductor capital equipment industry.

  • Process diagnostics and control business achieved its best results in the past three years.

  • Front-end products achieved record performance with significant strategic wins.

  • Back-end products, including copper barrier seed and Low k dielectrics and other CVD applications achieved record results and extended their market leadership.

  • Endura2 which we announced on February 17th, 2004, is achieving strong customer acceptance with over 25 units shipped since its release.

  • CMP performance was outstanding and slim cell electroplating continued to make market penetration progress in the quarter.

  • Cash, equivalents and short-term investments increased by 209 million from the prior quarter to 5.91 billion, approaching the $6 billion mark at the end of the second quarter of '04.

  • The increase in cash for the quarter primarily reflects continued achievement and improved profitability and working capital management.

  • Accounts receivable increased by 324 million, up 30% from the prior quarter due to higher sales volume with net collections of 1.69 billion and DSO, days sales outstanding, at 63 days as compared to 68 days in the first quarter and 61 days in the second quarter of fiscal '03.

  • Inventory increased by 111 million or 11% from the prior quarter in support of the higher business volume.

  • Capital expenditures in the second quarter totaled 37 million compared to 76 million for the first quarter and 35 million for the second quarter of fiscal '03.

  • Depreciation and amortization was 91 million, about the same as the first quarter and 7 million lower than the second quarter of fiscal '03.

  • The Company repurchased approximately 3.54 million shares of common stock at an average price of 21.20 per share for $75 million.

  • For the outlook, we believe that business is poised for continuing excellent performance going forward.

  • Customers are just beginning to harvest more than three years of technology development and are now investing in production of 300 millimeter copper and nanometer linewidth products.

  • This investment is still incomplete and leading companies have already begun 65 nanometer and 45 nanometer development was applied.

  • Under investment in the past three years has created pent-up demand which is now driving 200-millimeter capacity buys and conversion of 150-millimeter fabs to more economical 200-millimeter plants.

  • Customer profitability is improving, which will encourage increased capital spending and extend visibility into 2005.

  • China, a burgeoning new market for chip equipment is developing applications in both new and old technologies.

  • China capital expenditures is estimated to be 2.6 billion in 2004, and over 10 billion by 2010.

  • We expect robust flat-panel business will drive technology demand, potentially in many markets and applications.

  • These factors are contributing to a positive investment climate.

  • So our targets for the third fiscal quarter are as follows: Orders will be up 5 to 10% from Q2 levels.

  • Revenue will be up approximately 5% from Q2 levels.

  • And earnings per share is forecasted to be 23 to 25 cents, or 20% after tax.

  • Our business is strong, as we see evidence of continuing demand and improved visibility for new investments in the upcoming quarters.

  • - Managing Director, IR

  • Thank you, Joe, and thank you, Mike.

  • We'll 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.

  • Thank you, sir.

  • At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

  • We'll pause for just a moment to compile our Q&A roster.

  • Your first question comes from Jay Deahna with J.P. Morgan.

  • Thank you.

  • Good afternoon, and very nice quarter.

  • Do you see as a number of these 300 millimeter programs kick in that you talked about that are going on this year and coming on next year, that the sequential growth rate in orders can reaccelerate in either the October or subsequent quarters?

  • - President, CEO

  • Well, hi, Jay.

  • We think that there's a couple of things going on.

  • Customers are building these factories to fill demand that they believe is coming on later this year and into next year.

  • So in order to fill those, they are going to spend increased amount of money on capital.

  • Now, the other thing, and I mentioned this in my prepared remarks, is that we're seeing the relative ratio of facility to equipment change during this period with the equipment level being the lion's share of that overall investment as making the facilities gets a bit cheaper and they're larger, to get better economy of scale.

  • And then when you think about this next generation of technology getting a little more complex, volume going up, we see an environment of continued investment.

  • So from that perspective, similar to previous cycles where the sequential growth rate and bookings tend to ebb and flow as the cycle went forward, would it be reasonable to expect that at some time in the next quarter or two that the sequential growth rate in your bookings could be greater than 5 or 10%?

  • - President, CEO

  • Well, we certainly think so.

  • Okay.

  • Great.

  • Thanks.

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

  • Hi.

  • Just wanted to ask a little bit about the incremental operating leverage which was very strong during the quarter.

  • As you look forward, do you think there's opportunity for more of that?

  • In other words, as you look at the productivity efficiencies across the Company, the improvements that have been made in terms of cycle times and things like that, do you think that's something that you can continue as you continue to see the increased business ahead that you're anticipating?

  • - CFO, EVP - Corporate Services

  • Yeah, I believe there's significant opportunity for continued operating leverage as revenue goes up.

  • We've done a pretty good job over the past three years.

  • There's always things to do, and we're taking, I think, significant advantage of our Austin operation during this time frame, which has become a very significant player in being able to manufacture in volume.

  • So we believe that there's margin expansion potential available to us.

  • The other situation as we also grow, the service business, there's even more leverage there as we add different types of product offerings to the existing regional infrastructure with our field engineering work force.

  • So even that would add, even though it would not add what I would call the gross margins like we have in the systems business, it still adds quite a bit, in terms of profit potential and leverage.

  • So in the past you've been able to get very good operating margins on your service business.

  • Is there any reason to think that wouldn't be true as you expand out the range of services that you could offer?

  • - CFO, EVP - Corporate Services

  • That's exactly what we believe.

  • We believe we will get very good operating leverage off those revenues as they continue to improve.

  • Great.

  • Thank you.

  • Your next question comes from Raj Seth with SG Cowen.

  • Hi, thank you.

  • Mike, you touched on this a little bit, but I'm wondering if you can talk about how you think about capital intensity of this industry moving forward.

  • There seems to be bipolar views here, especially given the 300 millimeter shift.

  • However you measure it, dollars per unit, dollars per square millimeter, however you think about it, do you think that it has or will or promises to change significantly or not?

  • - President, CEO

  • Raj, I think you go back and look at the way the 150 to 200 millimeter transition took place.

  • In fact, we think that this cycle is much like that cycle back in '92 coming up out of a different difficult time.

  • But as we look forward, we think that process -- there's no abatement in process complexity.

  • In fact, to put new materials into semiconductor chips, to create more new kinds of transistors is a proposition that takes more process steps to be able to do.

  • Those increased process steps translate to process complexity.

  • Increased dieSize continues as more features go on the chips to provide functionality for end users, and then volume growth is the other factor, although that doesn't affect capital cost per die.

  • It does affect investment level.

  • So we see, as in every transition, at first you get a dip, or an increase efficiency, or a dip in capital cost per die, and then over time, as the technologies transition and dieSize increase, you see an increased capital cost per die.

  • We went through a big part of that initial 300 millimeter transition during the three-year downturn, so I think now we're seeing it come back to much closer to the 200-millimeter levels of the late 90s.

  • Thank you.

  • Joe, can you comment a bit on pricing and lead times?

  • Thanks.

  • - CFO, EVP - Corporate Services

  • Pricing environment has been pretty stable.

  • Right in accordance with our expectations.

  • Lead times for us has been an advantage because we can ship faster than the competitors, so in some cases we've picked up business where we're not the production tool of record but we were able to deliver, so that worked out.

  • That continues to play in our favor.

  • So that's how I would relate those two comments.

  • Thank you.

  • Your next question comes from Jim Covello with Goldman Sachs.

  • Good afternoon.

  • Thanks so much.

  • Joe, question for you on the targets you had laid out during the downturn.

  • You hit the operating margin target almost exactly.

  • You had said about 2 billion in revenue you'd be at 25% operating margins.

  • You're 2 billion in revenue, just slightly above that.

  • You also had said at the analyst meeting that you'd make up whatever gross margin shortfall in the operating line which is exactly what you did.

  • Could you provide us with some new targets going forward at certain revenue levels, what operating margins or gross margins you might be able to hit?

  • - CFO, EVP - Corporate Services

  • What we're going to do, Jim, is essentially -- we're not going to do that now.

  • We are in the process of preparing that because at the time that we showed those targets, the service business was only about 11 to 12% of the total business, and today the service business is a much higher percentage of the business.

  • And while that affects the gross margin number, it does not affect the operating income number, and that's why we've been able to deliver the operating income numbers that we had modeled.

  • So what we'll do is take a look at what our projections are in terms of with all the new service offerings and things that we're planning, how we're going to model the business, I don't think we'll have much change on the bottom line, but there will be a mix between what we might talk about in terms of gross margin and operating margin, although the operating margin will be pretty much the same.

  • I think there's actually more possibility for upside at higher revenue levels like the prior peak, because we've harvested the productivity gains over the last three years, and we think, therefore, if revenue achieved -- gets up to that prior peek of 2.9 billion we'd be able to do more on the operating margin side.

  • Terrific, thanks.

  • If I could get a quick follow-up in.

  • Mike, you had made the comment during your prepared remarks that you believe the semiconductor industry is underspending relative to the industry norms.

  • Can you help us understand how you're characterizing the industry norms?

  • Thanks very much.

  • - President, CEO

  • We think the industry norm is in the 23% of revenue range.

  • We think current capital spending is over the horizon, through the downturn and into the current time below that.

  • Thanks so much.

  • Your next question comes from John Pitzer with CSFB.

  • Good afternoon, guys.

  • Congratulations.

  • Can you talk a little bit about how the mix might shift in the July quarter between 200 and 300, and then again how that mix might shift the first half of the calendar year versus the second half of the calendar year?

  • Then, Mike, can you also help us understand how big of an opportunity 65-nanometer technology buys might be in the second half of the year as far as where is it in percentage of orders today and where might it go by sort of the second half of the calendar year?

  • Thank you.

  • - CFO, EVP - Corporate Services

  • First, I think in the quarter that we're in, I think we will still have a pretty good mix of 200-millimeter demand, because essentially what's happening is that chip demand for those factories is pretty high, high rates of utilization.

  • So we expect to see that in the near term.

  • In the latter part of the year, we expect 300 millimeter to be a greater percentage of the business as more production capacity in these projects that we talked about, as those orders start to come and those shipments start to come, we expect 300 millimeter to be a greater percentage.

  • Joe, to quantify that, is 60/40 a decent target for the back half of the year?

  • - CFO, EVP - Corporate Services

  • Well, it's hard to say.

  • I mean it's certainly 50/50, if not a little bit more than that, but this also leads to the possibility that 200 millimeter continues into the fourth quarter which would provide more upside, but I think 300 millimeter will predominate in the fourth quarter.

  • And then, Mike, the 65-nanometer opportunity, is that as the guys start to make the tech buys?

  • - President, CEO

  • John, the early tech buys are pretty small volumes, a relatively small part of our overall revenue.

  • I think we'll see 65-nanometer ramp into large-scale production at our leading customers next year, and then it will become a much larger part of our overall revenue.

  • So most of what's happening now is we're working with our customers and ensuring that we're in a positive position for the ramp.

  • Great.

  • Thanks, guys.

  • Your next question comes from Ali Irani with CIBC World Markets.

  • Good afternoon.

  • Congratulations on great numbers.

  • I'm wondering how much timing here is a factor in the pace of growth in the middle of the year.

  • You talked about the preparation for the new 300 millimeter fabs, getting ready for equipment later this year, and there has been a lot of effect from also the lithography tool bottlenecks, I'm wondering what you're hearing from your customers in terms of that bottleneck easing and what you're hearing from customers in terms of potential for pull-ins if the seasonal ramp ends up being stronger than expected through the summer.

  • Thank you.

  • - President, CEO

  • First, on lithography, this is a situation that really is a customer-by-customer situation.

  • Those customers that got in line early and planned for the lead times are in good shape, and ramping as scheduled, others are not.

  • I don't think we can really quantify an impact.

  • We do know that volume is increasing, so over a relatively short period of time we think they'll catch up with demand.

  • We gave you our best estimates on what we think is going to happen, so I don't know that we have any other guess about pull-ins, but I would say this, that our organization really is set, and Joe alluded to the strength of our manufacturing unit and our supply chain.

  • I think we really have worked this well.

  • So if there are pull-ins, or are increased needs, we're ready to supply those.

  • We're in very good shape there.

  • Great.

  • Thank you very much.

  • One follow-up for Joe.

  • Any reason why operating margins at the peak of this cycle wouldn't be meaningfully higher than the last cycle?

  • - CFO, EVP - Corporate Services

  • It's going to be dependent on where revenues peak out.

  • We're about, what, somewhere around 80% of the prior peak.

  • As they continue to peak we should surpass those operating income targets.

  • Great.

  • Thank you very much.

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

  • Two questions.

  • First, on the flat-panel side of the business that you commented on, the strength there, is that business growing in line with the semi business at this point in time or above or below, and do you see that business continuing to grow as you go forward, or could it be a bit more lumpy?

  • - CFO, EVP - Corporate Services

  • The flat-panel business is growing at a faster rate than the semi equipment business at the current time.

  • We're booking well into 2005 right now.

  • These are longer lead time-type products.

  • These are not like the semi-cap equipment.

  • The lead times on these products are a lot longer, and, therefore, the time to get started up a factory is longer at the current time.

  • So the demand is quite strong.

  • We see it pretty strong through '05.

  • Great.

  • The second question on revenue outlook for July quarter of 5% growth, given the strong order growth rate and the likelihood for the 5 to 10% order growth rate in the next quarter, the slower revenue growth rate, is that a function of revenue recognition, or is it just when customers want to take delivery?

  • Can you give us a little color on that, Joe?

  • - CFO, EVP - Corporate Services

  • That's exactly a function of revenue recognition mix.

  • Our Japan business is very strong.

  • All revenue there is on a deferred basis to sign off all the flat-panel business is the same way.

  • So it really has more to say about the revenue recognition mix of the product rather than customers delaying or us booking business that is out there, in terms of delivery.

  • Very good.

  • Thank you.

  • Your next question comes from Michael O'Brien with Bear Stearns.

  • Yes, hi, good afternoon.

  • Could you just go into, again, the 200 millimeter business, I think you said in October maybe that slows as a percentage.

  • Does that give you any risk to October being a paused quarter or a digestion quarter in terms of order rates before reacceleration in the January quarter?

  • - President, CEO

  • I'm not sure what those words mean anyway.

  • I think we're forecasting order growth on a fairly large base.

  • Now, the 200 to 300 mix, I think it's just a matter of when those 300 millimeter -- additional 300-millimeter factories come on, how fast people are bringing them on line.

  • And right now we're pretty confident about how that's going to come together.

  • You're pretty confident that you can continue to see order growth quarter to quarter through the rest of the calendar year?

  • - President, CEO

  • Well, we're not making a forecast on the fourth quarter, but as I said in my earlier remarks, we're pretty positive about our growth opportunities.

  • - CFO, EVP - Corporate Services

  • The other thing I would add, there's actually also some six-inch to eight-inch conversions that will also occur between now and the end of the year in the Asian sector, so that will also help as well.

  • Okay.

  • Thank you.

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

  • On the flat-panel business, I was wondering if it's still less than 10% of the revenue or order mix at this point.

  • - CFO, EVP - Corporate Services

  • It's a little bit less, as a matter of fact.

  • Okay.

  • And then I was also just curious, another short question, have you guys adjusted the way you grant options or less aggressive given the expense issues that are facing the industry at this point?

  • - President, CEO

  • At the current -- the last option issue that we had was late last year.

  • We haven't issued new options this year.

  • We're studying this situation, haven't quite decided what exactly we're going to do yet, but we're looking at it very closely, Mark.

  • Okay.

  • Thank you.

  • Your next question comes from Suresh Balaraman with ThinkEquity Partners.

  • Good afternoon, guys.

  • Can you give us a sense of how 130 nanometer logic transition is progressing?

  • It appears that much of the sub 130 nanometers and 300 millimeters so far in the past two, three-quarters have been mostly DRAM.

  • I was wondering if that's the right way to read it, and give us your thoughts on how that's going to go in the future.

  • Thanks.

  • - President, CEO

  • Well, some of the semiconductor makers had some more difficulty with 130-nanometer transition from 180 nanometers.

  • It was a difficult transition.

  • I think everybody's through that now, yielding quite well, and in high-volume production, volume is going up, and so now going to 90 nanometer, or 110 nanometer the DRAM guys started, but certainly major logic players are already on and have been already on 90 nanometer in high volume.

  • I think this is more driven by customer demand than customer need for the advanced technology, than anything else.

  • Can you give us more color on the 51% of [inaudible] that's 300 millimeter, how much of that was DRAM?

  • - President, CEO

  • I don't think we have the number there.

  • - CFO, EVP - Corporate Services

  • I don't think we have the number here.

  • Probably pretty much the same, maybe a little higher percentage, than the total.

  • We said 25% of the total, but we can get it back to you with that, but it's probably a little bit more than 25.

  • Mike, as a follow-up to earlier comments, is there a possibility that there will be a down-tick in orders in the October quarter?

  • - President, CEO

  • [ LAUGHTER ] Suresh, it's, as I said, we're not forecasting the fourth quarter right now.

  • We'll forecast what's going to happen in the fourth quarter in August.

  • Okay.

  • Great.

  • Thanks, guys.

  • Your next question comes from Glen Yeung with Citigroup.

  • This is actually Pat Mianamandra for Glen Yeung.

  • I was curious on the service side if there are any other fab solutions.

  • You've gotten the works where Applied would be servicing non-Applied tools, and if there are certain tool segments or geographic regions where you feel this type of program would gain the most traction.

  • - President, CEO

  • We don't have any other things that we're announcing today, but I think that you can assume the agreement that we made with Brooks is a first step in a direction, and we don't think that there's necessarily a geographic preference to our service, or our new service offerings in the future.

  • I think it really is about whether we help improve the productivity and effectiveness of our customers' factories.

  • That's really the key to the service sale, and that's really what we're concentrating on.

  • Okay, thank you.

  • Your next question comes from Shekhar Pramanick with Schwab SoundView.

  • Hi, good afternoon.

  • I just wanted to understand the pricing has improved clearly relative to, say, the fall of last year, and are we already seeing the full impact of that flowing through the margins, or are we going to be getting that kicker starting with upcoming quarter?

  • Thanks.

  • - President, CEO

  • I think the pricing environment, as I said previous, in answer to another question, has been pretty stable.

  • I think we'll get some margin improvement from pricing, but more importantly we'll get more margin improvement from productivity, and a lot of our customer contracts, situations are fixed for a period of time.

  • Most of that is in the numbers.

  • Thank you, Joe.

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

  • Thank you.

  • Joe, Mike, of the 200 millimeter business that you're doing in the quarter, are the conversions from 150 to 200 or 200 millimeter expansion?

  • Can you tell us how much of that is refurbished equipment that's going out there, or as another percentage or some other qualitative measurement?

  • - President, CEO

  • The refurbishment business is a growing space, but it's still insignificant in terms of the total company.

  • In fact, that business is reflected in our service business.

  • So this particular quarter they had quite a few more units than they had in the previous quarter, but we're not talking what I would call large numbers.

  • From a percentage increase it was a big percentage increase, but the business is reasonably robust in this area, but it tends to be lumpy in a sense, but it's forecasted to be reasonably good, and we're looking for ways to continue to grow it throughout the cycles.

  • Okay.

  • Joe, how about, are you tracking the number of Gen 7 plants out there, flat panel?

  • - President, CEO

  • Oh, we sure are.

  • Can you tell us what the number is?

  • - President, CEO

  • I really don't have the data right in front of me.

  • It's quite a few over the next two or three years for the TV segment.

  • It's at least 20.

  • We could get back to the preciseness of that.

  • But I don't have that in front of me.

  • Thanks very much.

  • Your next question comes from Robert Maire Needham & Company.

  • Congrats again on the numbers.

  • In comparing your previous peak at 2.9 billion to -- and your profitability at that point, do you have sort of a target range in mind in terms of revenues where your bottom line will exceed the previous cycle?

  • And I'm assuming that given your desire to have a higher turns business and ship product at a better rate in the current cycle, that we probably see more revenue shipped faster and perhaps achieve that goal of matching previous peaks a little bit sooner, in terms of not having as much backlog at the peak.

  • - CFO, EVP - Corporate Services

  • We've really never managed the business on the basis of backlog, because as you're fully aware, long backlogs in this business lead to cancellations and stretchouts, so the best thing to do is get your order, improve your cycle time, and ship the order.

  • Then if the business is still there you get more of it.

  • That's the way we've managed the equipment side of the business.

  • As I said, the flat-panel business is a different situation because the lead times are much longer, the machines are huge, and the plants that they're going into also have a whole range of this type of equipment.

  • The backlog also contains 12 months of the service backlog.

  • So we really don't use the backlog as a meaningful revenue indicator, but in terms of, we do intend -- the whole purpose of the realignment plan was to achieve these peak kinds of numbers, or peak percentages at lower rates of revenue so then if the revenue exceeded those peaks, we should exceed the prior peak's performance.

  • That's the whole idea behind our logic, and we're pretty much on that plan.

  • Is there any kind of goal range that you're looking at now to exceed your earnings at your previous 2.9 billion revenue range?

  • Would that be in Q3, Q4, or --.

  • - CFO, EVP - Corporate Services

  • Like I said in answer to another question, we're really in the process of looking at that, because it's highly dependent on the mix of that business.

  • We're going to look at that and will probably try to come out with a standard document that we've used with all of you for the last two or three years.

  • Okay.

  • Great.

  • Thanks.

  • Your next question is from Patrick Ho with Moors & Cabot.

  • Thanks a lot.

  • Congratulations, guys.

  • Can you characterize the booking strength in North America?

  • Looked like it was up quite a bit on absolute dollars basis.

  • What type of customer drove this?

  • Was it DRAM?

  • Logic?

  • - CFO, EVP - Corporate Services

  • I would say it's pretty broadly based.

  • Both types of customers.

  • Okay.

  • And going forward in the July quarter can you just give an idea of what type of mix of orders will be in terms of geography?

  • Will it be similar on a percentage basis?

  • - CFO, EVP - Corporate Services

  • It's too difficult to forecast because the timing of a large order can skew the data completely, so we really never forecast things like that.

  • We always build the bottoms up customer by customer.

  • Okay.

  • Great.

  • Thanks a lot.

  • Your next question is from Jerry Fleming with WR Hambrecht.

  • Yes, could you, Joe, give us an idea on how much your operating expenses will be growing next quarter to support that 5% revenue growth?

  • - CFO, EVP - Corporate Services

  • They won't be growing very much.

  • We've gotten a lot of leverage from this realignment planned savings, so a lot of growth in our operating expenses actually has to do with variable compensation, because the compensation plans that are in place generate requirements to fund those variable comp plans.

  • So pretty much it's that cost, as well as some R&D programs that we will launch or increases in existing R&D programs to meet the customer requirements and also our product development road maps, but we really don't need to expand the infrastructure of the Company to meet these revenue requirements.

  • One other question, and that is, what percentage of your sales are at 90 nanometers and below, and what percentage at 130?

  • - President, CEO

  • Almost all are below 130 today.

  • And about 30%100 nanometers or below.

  • Thank you.

  • Your next question is from Avinash Kant with Adams, Harkness, and Hill.

  • Good afternoon, Mike and Joe.

  • You talked about etch revenues, and if I understood it right I think they doubled during the quarter.

  • Could you give some highlight in terms of any particular segment or etch that you saw stronger growth in?

  • Also, was it purely because of overall demand improving or you were also gaining share in that area?

  • - CFO, EVP - Corporate Services

  • Let me be clear about what we said.

  • We said that etch grew two times the industry.

  • That means it grew two times the entire growth of the etch business.

  • So if the etch business grew by 45%, we're up 90% or more.

  • And all of this is product for both the dielectric and conductor segments of the business.

  • Thank you so much.

  • Your next question is from Stewart Muter with RBC Capital Markets.

  • Thank you.

  • Good afternoon.

  • A question in terms of developing the opportunities in the services market.

  • Are you guys looking at services that go beyond equipment?

  • - President, CEO

  • Yes, but I'm not sure that that's an answer to your question.

  • We're looking at all different kinds of services our customers might need in their semiconductor operations.

  • If your question is implying beyond that, the answer would be no.

  • Okay.

  • But in terms of beyond the fab -- well, I guess my question is, is there a broadening tier of services that we should expect to see over the next few quarters?

  • - President, CEO

  • Yes, you'll see more service products from us over the upcoming quarters.

  • Great.

  • Thank you.

  • Your next question is from Mark Bachman with Pacific Crest Securities.

  • Yes, hi, gentlemen.

  • Throughout your prepared remarks you mentioned several products that were either doing well or doing record sales.

  • Specifically, can you quantify your comments on both the CD-SEM and the slim cell copper electroplating tools maybe on customer count, such as customer to date, or new customers in Q2?

  • And, really what does the term "record sales" mean in dollar terms?

  • - President, CEO

  • We don't break out sales by product, but the CD-SEM is a broadly accepted product, and so it's in many, many operations.

  • I think your other question was on slim cell.

  • We're in seven of the top-ten operations around the world.

  • The product's being evaluated, it's getting great acceptance, so we're still very bullish on that product.

  • Okay.

  • And then finally, you had mentioned that you expect to deliver $1 billion in tools to China this fiscal year.

  • Can you tell me where you're at through the first two quarters of this year?

  • - President, CEO

  • I don't think we'll break that out, either.

  • - CFO, EVP - Corporate Services

  • We don't break it out, but we're pretty much on track to do it pretty easily.

  • - President, CEO

  • Yeah.

  • Can you give me 50%, I mean, do we expect orders to increase in the back half of the year?

  • Do they have to decelerate in order to make your number?

  • I'm trying to figure out here what exactly is going on there.

  • - President, CEO

  • I think you should assume we're on a growth path.

  • Okay.

  • Thank you very much.

  • Your next question is from Kevin Vassily with Susquehanna Financial Group.

  • Yeah, hi.

  • A follow-on to the previous question on the etch business.

  • Over what period are you seeing this doubling of the overall etch market growth rate?

  • - CFO, EVP - Corporate Services

  • Year to date.

  • Oh, okay.

  • Year to date.

  • - President, CEO

  • Fiscal year.

  • - CFO, EVP - Corporate Services

  • Fiscal year to date.

  • Okay.

  • And then in terms of kind of the mix of revenue, 200 to 300 millimeter there, is it similar to the overall company?

  • - CFO, EVP - Corporate Services

  • Yes, it's similar to the rest of the company.

  • Okay.

  • And then just one quick question on the agreement you guys have reached with Brooks.

  • At what point will you start recognizing some revenue, or booking orders, for that matter, servicing Brooks tools?

  • - President, CEO

  • This quarter.

  • This quarter.

  • - President, CEO

  • Yep.

  • Okay.

  • Great.

  • Thank you.

  • Your next question is from Nikolay Tishchenko with Fulcrum Global Partners.

  • Thank you.

  • Good afternoon.

  • My question relates to 200-millimeter business.

  • Is there any difference in lead times between 200- and 300-millimeter orders, and how difficult for you is to reconfigure your output between 300-millimeter tools and 200-millimeter tools?

  • - CFO, EVP - Corporate Services

  • First, there's no difference in the lead times.

  • We certainly had to work pretty hard to get the 300-millimeter lead times to get to the 200-millimeter lead times but we've achieved that.

  • What was the second part?

  • I didn't catch the second part.

  • If you look at your orders for 200-millimeter and 300-millimeter tools, the share of 200-millimeter tools differs from one quarter to another.

  • How difficult for you to keep this lead times and reconfigure your output?

  • - CFO, EVP - Corporate Services

  • No difficulty at all.

  • The factory is configured in such a manner that it can deal with this pretty simply.

  • So if you're going to see, let's say, a sudden surge in demand for 200-millimeter tools in your October quarter it would not create a problem for the production?

  • - CFO, EVP - Corporate Services

  • We don't believe so.

  • As long as we can get the parts, and if we give the suppliers enough time to react, and, of course, I think they have also reduced their lead times.

  • If we give them sufficient time to react we should not have any problem.

  • It certainly will not be an internal factory problem.

  • Thank you very much.

  • Your next question is from Byron Walker with UBS.

  • Good afternoon.

  • Couple of questions.

  • Could you tell us the number of multisystem production sites you have for slim cell?

  • Are you in production setting at this point?

  • - CFO, EVP - Corporate Services

  • Mike just said we were penetrating seven of the leading ten customers.

  • But is this for production, Joe?

  • - CFO, EVP - Corporate Services

  • Well, the systems and cases are being evaluated, and some are being used for 65-nanometer and 90-nanometer, and there's one in production.

  • Then the Brooks service business, is there an order rate and/or backlog with that, or is that kind of as incurred, current quarter terms kind of thing?

  • - CFO, EVP - Corporate Services

  • Yeah, there's nothing that's coming across in terms of backlog, it's a business that starts essentially this quarter.

  • Okay.

  • Then when you talk about orders, when you gave guidance, does that business wind up in orders, or is it kind of as needed kind of business?

  • - CFO, EVP - Corporate Services

  • It winds up in orders, it will be just like spare part, you bill it and ship it.

  • But most of that is the same quarter kind of thing?

  • - CFO, EVP - Corporate Services

  • Yes.

  • Okay.

  • That's what I wanted.

  • Thanks.

  • - Managing Director, IR

  • Okay, operator.

  • We will take one last question, then we'll make our closing remarks.

  • Okay.

  • Thank you, sir.

  • Your final question is from Tim Summers with Stanford Financial Group.

  • Yes, thank you.

  • You mentioned that your service business was running at record levels, I believe.

  • Can you quantify what level that is?

  • Are we talking about about 25% of revenues right now?

  • - CFO, EVP - Corporate Services

  • It's a little bit less than that.

  • It's less than that.

  • Okay.

  • And you also mentioned you had six orders greater than 100 million, which is the highest number I can recall in a number of quarters.

  • Were there any orders greater than 200 million?

  • - CFO, EVP - Corporate Services

  • No.

  • Okay.

  • Great.

  • Thanks, Joe.

  • - CFO, EVP - Corporate Services

  • You bet.

  • - Managing Director, IR

  • Okay.

  • Thank you.

  • We'd like to thank everyone for listening to our second quarter earnings announcement.

  • The webcast of this call is available on our website and will remain there until June 1st.

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

  • Ladies and gentlemen, thank you for your participation.

  • At this time you may disconnect your lines.