應用材料 (AMAT) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Applied Materials third 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 have a question, you will need to press star, and the number 1, on your telephone keypad.

As a reminder, this conference is being recorded today, Tuesday, August 17, 2004.

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

Sir, you may go ahead.

Good afternoon, and welcome to Applied Materials third 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 Sweeny, Group Vice President, Legal Affairs, Intellectual Property and Corporate Secretary.

Financial results for our fiscal third quarter were released on business wire shortly after 1:05 P.M.

Pacific 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 subject to known and unknown risks and uncertainties that could 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 form 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.

Reconciliations of GAAP financial measures to non-GAAP financial measures are contained in our earnings press release issued today, which is 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 third quarter financial results, followed by fiscal fourth quarter 2004 financial targets.

We plan to limit our call to 1 hour.

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

With that, I would like to turn the call over to Mike Splinter.

Mike?

Thanks, Paul.

Good afternoon, and thank you all for joining us on the call.

The results we announced today demonstrate that Applied Materials is continuing to grow, while delivering excellent profitability and productivity.

This is our fourth quarter of back-to-back revenue growth, and I'd like to thank our customers, employees, suppliers, and other partners for working with us to achieve our goals and continue growing.

The Company is performing extremely well.

Our global employee team has been working hard to increase efficiency, and once again we achieved record productivity.

In Austin, our manufacturing organization, with support from our suppliers, reduced factory cycle time while continuing to deliver high quality products to our customers, virtually 100% on time.

We've been successful at growing our market position, delivering new products, and entering new markets.

Our focus is on building a stronger Applied Materials, as we further extend our product offerings and capabilities.

And those efforts are delivering differentiated results.

The question on many of your minds is where does the industry go from here?

Well, from our perspective and the discussions I've had with customers, I'm confident in looking forward to continued growth in the second half of '04, and expect further growth in 2005, given the expected continued global economic expansion.

According to SIA in the second calendar quarter, semiconductor IC revenue grew -- growth is up 41% year-over-year, and 10% quarter-to-quarter.

This represents the ninth consecutive month that growth has been above 20%, and fifth months that it has been above 30%.

It is also the highest year-to-year growth since September, 2000.

I believe the industry is on track for traditional seasonality as we enter the back-to-school and holiday seasons, with chip powered electronics taking up more of a customer's spending dollars.

Consumer confidence regarding growth prospects remains solid.

Our customers are telling me that they plan to continue to move forward on their strategic investment plans, as they begin ramping 90-nanometers and 300-millimeter production, and retool the industry for 65-nanometer processing, where we are strongly positioned at all of the major development sites.

Greater than 50% of our business this past quarter, was for 90-nanometer and below.

This cross-over point is a milestone for the semiconductor industry, and signals that the new era of nanotechnology has begun.

This gives me confidence that Applied Materials can continue to grow and keep delivering superior financial results.

Regionally looking at Asia, we see growing markets and increasing opportunity.

Japan has made a strong contribution to market growth over the past year, and we expect they will continue to increase investments.

Leading founderies have shown especially strong results, with significant spending this year and planned for next.

Looking ahead, our business environment and market remains fundamentally sound.

Leading economies are positioned for expansion going forward.

Demand for electronics and semiconductors is healthy, and flat panel demand continues as lower prices bring exciting new products into the range of more consumers.

Let's now address our growth strategy.

Applied Materials strategy is on track, and we've targeted to grow faster than the rest of the industry.

We have 3 engines of growth driving us and providing the momentum to achieve that goal.

One, we are increasing market share in all of our existing core products.

Two, we are building position in our new product and service offerings.

And three, we're entering new markets to offer more to our customers.

With a clear plan in place, we are executing to our strategy and delivering the results.

Our product line-up is well-positioned.

Our systems revenue is growing faster than the market, and we are gaining market share across those product lines.

As we showed at SEMICON West, we have set ourselves apart with the industry's largest portfolio of 65-nanometer chip manufacturing systems, offering an extensive range of transistor, interconnect, and inspection solutions for next generation devices.

And during the quarter we launched a number of break-through systems to grow our technology portfolio and extend our leadership position.

As part of our growth efforts, we acquired Torex and the FlexStar line of products, which is attracting a lot of interest.

FlexStar strengthens our existing front-end applications to provide customers with the broadest range of processing solutions for advanced transistor manufacturing.

For flat panel displays, our strong market share position was supplemented with the introduction and shipment of a new system for pixel array testing on seventh generation substrates, which delivers new yield capabilities that are expected to increase customer profitability.

Consistent with our strategy, we believe that we can grow substantially by looking beyond our existing markets.

Yesterday, we announced an agreement to acquire the operating subsidiaries of Metron Technology, another significant step in the expansion of our service solutions.

Metron's wide range of outsourcing solutions compliments our previous announcements with Brooks, Praxair, and Phoenix Silicon.

With each of these deals, we are growing our market potential and service, and broadening our capabilities beyond Applied Tools to further meet the needs of our customers around the world.

We're listening closely to those customers, we're listening to their needs and are more committed than ever to providing innovative solutions that are both cost effective and increase their fab productivity.

These efforts are paying off, and we're delivering excellent operational and financial performance across all aspects of our Company.

I am pleased with our performance and confident about our future.

And I believe we are in a great position to extend Applied Materials leadership.

Thank you very much.

And now, I'll turn over the call to our CFO, Joe Bronson, to discuss our financial results.

Joe?

Thanks, Mike.

Good afternoon.

We'll now cover our financial performance for the third fiscal quarter ended August 1st, and our outlook for the fourth fiscal quarter of 2004.

Orders of 2.5 billion were 11% higher than the second quarter of '04, and 134% higher than the third quarter of 2003.

Revenue for the third quarter was 2.2 billion, 11% higher than the second quarter of '04, and 104% higher than the third quarter of '03.

Operating income for the third quarter was 27% of revenue, at 614 million, compared to 26% for the second quarter of '04, and an 8% loss from operations for the third quarter of '03.

Net income increased to 441 million, or 26 cents a share, compared to 373 million or 22 cents per share for the second quarter of '04, and net loss of 37 million or 2 cents per share for the third quarter of '03.

Gross margin for the quarter was 47.4%, compared to 46.5% in the second quarter of '04, and 31.7% for the third quarter of '03.

Ongoing earnings-per-share for the third quarter of '04 was 26 cents a share, same as the reported EPS, compared to 22 cents for the second quarter of '04, and 5 cents for the third quarter of '03.

Ongoing results for the prior-year period excluded charges associated with the Company's realignment activities.

Order momentum in the quarter reflected broad based capital investment by customers for 300-millimeter technology, for both DRAM and logic manufacturers.

As well as capacity expansion in 200-millimeter to meet growing semiconductor demand.

Increased activity from Taiwan, combined with continued strength in Japan and broad-based orders from the other regions, drove our growth.

In addition, demand for flat panel display equipment also showed strong growth in the quarter.

Service and spares momentum continued across all product lines, including refurbished tools, service agreements, and new fab-wide business from the recently completed arrangement with Brooks Automation.

Orders by major geographic areas were as follows: Taiwan, 28%, North America 19%, Japan 17%, Southeast Asia and China 15%, Korea 12%, Europe 9%.

An increased level of capital investment in the chip business is expected to continue, with additional fab investments anticipated in the second half of calendar 2004 and beyond, for the 300-millimeter build out.

Implementation of new process technologies at 65-nanometer will be an increasingly important area for development in 2005.

Applications growth is expected to continue to be positive in areas such as flash memory, DRAM, and logic.

DRAM orders represented 32% of total systems orders, compared to 25% in second quarter of '04.

Foundry orders were 31% of total system orders, compared to 44% in the second quarter of '04. 300-millimeter orders represented approximately 66% of total system orders received in the third quarter, compared to 51% in the second quarter of '04.

During the third quarter of '04, 3 orders were in excess of a hundred million, versus 6 for the second quarter of '04. 8 orders were between 50 and a hundred million, compared to 2 in the second quarter of '04, and 19 orders were between 10 and 50 million, compared to 20 for the second quarter of '04.

Backlog for the quarter was 2.99 billion, compared to 2.8 billion for the second quarter, and 2.53 billion for the prior year third quarter.

Company's performance in the third fiscal quarter was excellent.

As we continue to benefit from the cost savings achieved by 2003 realignment plan, operating margin of 27% achieved our recently published financial model.

We continue to improve operating leverage through factory cycle time reduction, which generated significant improvement in productivity.

Efficiencies have been achieved, and service has reduced installation cycle time, has improved field service productivity by 15% this year.

The ability to increase field service productivity affords us the opportunity to support more products and services.

Over 55% of the quarter-over-quarter revenue increase was reflected in gross margin, and approximately 31% dropped through to net income.

Some other highlights for the quarter.

System product margins achieved target performance at this revenue level.

CVD continued significant market share momentum with additional wins as the clear leader in low k films.

We increased our market share position in copper barrier/seed Endura PVD back-end applications, with additional selections at major customers.

We captured additional 200-millimeter and 300-millimeter aluminum market share at major Asian accounts.

Our etch enabler product made further penetration in the 90-nanometer and 65-nanometer node, gaining market share.

Based on technology leadership, we're seeing strong demand for our Reflexion LK CMP platform.

Front-end products had another quarter of record performance, and began successfully integrating Torex.

The recently announced Quantum X Implant, Ecmp, High Aspect Ratio CVD, and Endura 2 products are achieving strong customer acceptance.

Flat panel bookings achieved a new record this quarter, and first shipments of Generation 7 CVD systems and the tester were on target in the quarter.

Service revenue achieved new record levels and margins continue to improve.

We also began realizing revenue on our new business arrangement with Brooks.

Cash equivalents and short-term investments rose 689 million from the prior quarter, to 6.6 billion, which resulted from increased revenue as well as our continuing focus on increasing working capital efficiency through the up-turn.

Inventory continued to be well managed, up slightly in support of flat panel and wafer fabrication equipment demand.

DSO performance continued to improve to 62 days for the third quarter, compared to 63 days last quarter.

During the third fiscal quarter of 2004, Applied did not repurchase any shares of its common stock in light of some potential transactions under consideration.

We intend to resume stock repurchase activity under our $3 billion buy-back authorization in the coming quarter, in a range of 3 to $500 million.

We believe the business will continue to grow and is poised for improvement through 2005.

Customers are investing in production of 300-millimeter copper and 65-nanometer and below.

This investment is still in process, and leading companies have already begun 65-nanometer and 45-nanometer development with Applied.

Our customers are investing in manufacturing capacity, in line with expected demand.

We expect supply and demand to remain balanced in the near term, and utilization rates to remain high.

In our view capital spending will be up approximately 45% year-over-year for 2004.

At the current time we see growth in capital spending for 2005, as 300-millimeter leading edge capacity is expected to continue to be implemented, with increasing levels of demand for advanced chips.

Next year, we expect 300-millimeter leading edge equipment investment to be around 20 billion, a growth of more than 55% over 2004, which is forecasted to add capacity in the high single-digits for the installed base.

This is estimated by Gardner.

This increase will drive industry growth and equipment sales next year, while maintaining high overall industry capacity utilization.

For the fiscal fourth quarter, our targets are orders will be up 5% from Q3 levels.

Our revenue will be up to 5% from Q3 levels, and earnings-per-share will be in the range of 24 to 26 cents, which is 20% after-tax.

So those conclude my remarks.

I'm going to turn it back to Paul for the Q&A.

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 1 per firm.

Operator, you can begin with the first question.

Yes, sir.

At this time I would like to remind everyone, if you would like to ask a question, please press star, then the number 1, on your telephone keypad.

Our first question comes from the line of Jay Deahna with J.P. Morgan.

Thank you.

Good afternoon,.

Joe, I didn't quite catch the revenue part of your guidance.

You said up to 5%.

Does that mean between zero and 5%, or 5%?

Zero and 5%.

And then Mike, if I could, --

Jay, we're just going to have one question, and give everybody a chance.

Your next question, sir, comes from the line of Timothy Arcuri with Smith Barney.

Hi, guys.

If you look at the last 3 quarters in terms of orders, it's been bigger in the U.S., and it's been kind of, almost as large as Taiwan cumulatively, the last 3 quarters.

Can you give us what the percentage of is of foundries that is currently sitting in backlog?

I'm not sure how to answer that.

Our backlog for foundry orders in China would be roughly, on the basis of 3 to 4 months.

But Joe, if you just kind of broadly take foundries, of your backlog, what percentage of it is foundry?

I really don't have that off the top of my head.

Tim, I think we ought to get back to you.

Yeah, if we can answer before the end of the call.

Yeah, I don't have a huge intelligence on the details of the backlog, other than in the bigger pieces of it.

I would think it's a significant piece, though , you could actually say that, right?

Yeah, oh, absolutely.

Okay.

I mean, particularly what was booked this quarter is pretty significant, we quoted Taiwan at you know, 29% of orders.

You know, very little of that has shipped, and China and Malaysia are not in there, so it's got to be a pretty significant number.

Okay.

Thanks.

Your next question comes from the line of Jim Covello with Goldman Sachs.

Good afternoon, thanks so much.

Your competitors seem a little less bullish on the market than you do.

Some have recently cited some push outs or cancellations.

Do you see that at all, impact the guidance at all?

Thanks a lot.

Really nothing significant at this point, Jim.

We're out talking to customers.

We listen to those calls, too so -- but nothing really significant at this point.

Your next question comes from the line of John Pitzer with CSFB.

Can you talk a little bit about what's happening to the margin profile in the October quarter, flat to up revenue, but sort of flat to down EPS.

Can you help us understand that?

Yeah, I think when you get to the guidance, when you get to the zero to 5%, it's a question of what the mix of that's going to be, and there's a lot of, perhaps puts and takes.

So what we basically -- if you look at 5%, 5% is a 100 million bucks.

We think it's a fairly similar margin structure, we're just not sure of how the mix will come out.

If it turns out to be more on the order of spares and service, it could have an impact on the margins, but basically what we want to leave you with is we still intend to make 20% after tax.

Your next question comes from the line of Ali Irani with CIBC World Markets.

Good afternoon, thank you.

Can you share with us a little bit qualitatively where you see the strongest order trends in the upcoming quarter by end-market segment?

Thank you.

I think we'll see continued strength in the -- where it's been coming from.

Which is in the Asian segment, and also in the 300-millimeter build-out.

Still good strength from Japan.

And some definitely from Taiwan, as well.

Joe, do you see the momentum in these orders being partially driven by the lower yields at these new fabs, so digestion phase of that capacity?

I think most of the momentum is really for the 300-millimeter build-out.

That's really the major, the major issue that the customers are trying to get to.

Thank you.

Your next question comes from the line of Shekhar Pramanick with Schwab Soundview.

Good afternoon.

Quick question on the LCD panel side.

I know had good quarter in terms of orders, but, you know, the market noise is very noisy, some panel prices are going down.

There's some talk about starting less panels.

Do you see any change in terms of the manufacturers, the tone in terms of going forward with the project?

I really don't, and I think the big manufacturers still are very confident about moving ahead and moving to the next generation of flat panel size.

I think that's pretty important, that this market is large and elastic, and perhaps they have to adjust pricing to absorb the capacity, but moving to the next generation, lowers costs and helps them in that regard, as they move ahead.

Joe, you were going to add?

No, I would have answer it pretty -- the same way.

The only thing that I want to leave you with is that, our business is all from a revenue standpoint very -- it's all deferred and so, based on the order patterns, I mean we're pretty much booked out for '05, in pretty good shape that way, and we also have a significant amount of customer deposits.

So the business is pretty secure, and I would agree with Mike's comments that the Gen 7 build-out continues.

If I can speak in on the same vein, in terms of semiconductor manufacture, I'm sure on the foundry side, you must receive some nervousness.

Do you see any other segments showing any nervousness?

Shekhar, we're going to honor our request of one question per analyst, so we're going to move on to the next question please.

Your next question comes from the line of Patrick Ho with Moors and Cabot.

Thanks a lot.

Can you give a little more color on what you need to do on the service side to continue to improve margins.

Where do you need to do the most work to get those margins up to your target goals?

We've been doing fairly well.

We had a tough year in the second half of '03 last year, with a lot -- as we put in the new computer system and we had inventory adjustments to make.

We've been making steady progress on margins in this business, quarter after quarter after quarter.

This quarter was actually the best.

And we're getting close to where we need to be.

In order to continue to improve, we need more revenue.

We need more input into the system.

And that's what our group is focused on, getting more business, more spares business for our tools that we have out there, and I think as you can see, that some of the other deals that we're doing in the service phase take significant advantage of our global distribution capability.

And the more we're able to put through that system, the higher margins we're going to get.

Your next question comes from the line of Mark Fitzgerald of Banc of America Securities.

Thank you.

On your outlook for the second half of '04, and your capital spending for '05, are those your numbers, or are those Gardner numbers.

And if they're your numbers, can you help us understand your thinking on what's driving '05?

The numbers that we quote, are essentially a compendium from our own analysis and analysis from industry sources.

Your next question comes from the line of Robert Maire with Needham & Company.

Yes, could you give us a little more detail on the acquisition of Metron's operations, and what that means as compared to purchasing the whole company, and what specifically your interest is there.

I know they also do some manufacturing for end-of-life products of other people.

Could you give us a little more detail perhaps?

Maybe I can start, and Joe can finish with how we're handling the company.

But first of all, we are essentially buying the entire company, so I don't want you to be confused about that.

But they have a pretty broad array of products, from gas and fluid handling materials, logistics, parts management, repair and refurbishment.

This is what you're mentioning, Robert, about they have a refurbishment business for legacy tools.

When you look at their business, their business primarily in the U.S. and Europe, the synergies between this and our own service business, from a product line standpoint, are very large, so our global infrastructure should help broaden out the sale of these products around the globe, as well as utilizing the capability of Metron sales and service oriented culture, to sell more of Applied Material service products around the globe.

So we think from a revenue generation and product penetration, that it's very, very strong.

I'll let Joe comment about the synergy and integration.

Well, I think first and foremost, we're going to be acquiring people that know how to sell service, who are primarily focused on selling service every day.

Obviously, we sell systems and service, so it's -- and we've derived our service business from our systems business.

So having people focused on the service end of selling is a very positive thing.

With respect to -- we think their margin structure can use some improvement, and we'll basically be able to do that from the synergies that are created from the transactions, being able to take advantage of our facilities and where they're located, and get more mass around the things that they do.

We think that's -- will add to our capability and theirs.

Your next question comes from the line of Michael O'Brien with Bear Stearns.

Yes, hi, good afternoon.

Just tell me with regard to the last few weeks, you said there hasn't been any significant push outs or cancellations.

So has the aging of your backlog changed very much, even if it hasn't been, you know, -- you haven't seen any cancellations.

Have you seen any delivery requests move meaningfully?

Not meaningfully.

Our backlog in process tools is designed to be pretty short.

We talked about our cycle time advantages, so our process tool backlog still tends to be in the 4 month, sort of 4.2, 4.3 month area.

That has not changed in the period.

I think the growth in our backlog is mostly the AKT significant business that was booked in the quarter, which has a much longer cycle in terms of fulfillment.

Your next question comes from the line of Stuart Muter with RBC Capital Markets.

Thank you.

Good afternoon.

Question for Mike.

When you've been talking to your customers, what are they saying about their inventory levels?

Are they concerned about that ,or do they think these inventory levels that we're hearing about, will get worked down fairly quickly?

I think inventory is very apparent to every one of those companies that has inventory, not all of them, as you know, do.

And I think that once it's visible, people take appropriate steps to relieve it.

So I'm not at all concerned, you know, if we look back to 2000, a lot of companies had real problems with inventory.

I don't think anybody's about to let that happen again, and they'll stay focused on it and manage it appropriately.

So I think bringing the attention to it is good, and it'll even its way out over the upcoming months.

Your next question comes from the line of Raj Seth with SG Cowen.

Thank you very much.

Mike, in the past you've commented on how the industry has been more careful this cycle, adding capacity rationally.

You talked about, at the beginning of the call, that you expected utilization to remain high.

I'm curious if you have a sense for, as a proxy for demand, what unit growth rate in 2005 your customers are building to, what are the expectations out there, from your customers in terms of unit growth?

I don't know that I can quote an exact number.

I don't really have IDC in my head, or something like that.

But I'm still thinking that, you know, we're in the double digits so, you know, probably low but in double-digit territory.

Your next question comes from the line of Suresh Balaraman with ThinkEquity Partners.

One of your peers mentioned that the yield for 90-nanometer logic is still around 10%.

I remember a couple of years back, when we saw some strong 130-nanometer orders and they kind of faded away as yield [inaudible] improved.

And you said like 50% of your orders are below 90-nanometers.

Can you give us more color on -- are these primarily from [inaudible] customers, or are logic guys starting to join the bandwagon?

Really moving -- it's really a movement across the board.

I think to me, this is really a signal of the transition now that the 130 build-out, the major 130 build-out, has moved to 90-nanometers, and I don't think we're going to see anything, any move back from that.

It's 90-nanometers from here on out. 90-nanometers, 300-millimeter, that's the combination.

Your next question comes from the line of Nikolay Tishchenko with Fulcrum Partners.

Good afternoon.

One question.

What is the share of system sales in the reported quarter, and what do you expect for the next one?

System sales are in the 70, in the high 60s, because you have to add AKT.

I'm not including AKT in that.

That is less than 10%, and our service is over 20.

Your next question comes from the line of Tim Schultz-Millander with Morgan Stanley.

Hi there, guys, congratulations on the quarter.

Just one question.

On the third quarter bookings and on your fourth quarter bookings guidance, is there any influence from some of the acquisitions from Metron getting folded in, or Torex, or any of those, and if it's meaningful, can you split it out for us?

Thanks,.

It's really not significant.

In either quarters, we wouldn't be able to count the Metron until the deal closes.

The deal's going to take anywhere from probably 30 to 60 days to close, so there's nothing there in the third quarter, maybe some in the fourth.

But, it's not making a significant contribution to your fourth quarter?

No.

Okay.

Your next question comes from the line of Bill Lu from Piper Jaffray.

Hi there, good afternoon.

Quick question.

Mike, you had said that 50% of the sales was goes to come from 90 and below, I think it was in the fiscal third quarter.

Of the logic customers that you're seeing out there for 90 and below, are most of them using copper now?

Are you seeing [inaudible] copper adoption?

Yes.

Logic -- logic manufacturers pretty much are transitioned to copper.

Still a number of DRAM manufacturers are not, but even many of them are moving to copper.

But for any complex logic, switch to copper.

Your next question comes from the line of Kevin Vassily with Susquehanna.

Yeah, hi.

Question on flat panel.

Can you talk about what the average delivery lead times are right now for you in that space?

Thanks.

Yeah, delivery.

Well, it depends on who -- where it's going.

But I would say pretty much 6 months.

Your next question comes from the line of Theodore O'Neill with Wells Fargo Securities.

Thank you.

Returning back to Metron for a moment.

Their refurbishing business was successful because they could be agnostic, and I was wondering if their customers are going to be comfortable with you servicing or rebuilding old [inaudible] tools.

And if you're comfortable with that, is it part of the strategy here to try to convert those customers over to refurbish Applied Materials tools?

I think we'll listen to the customers on this one, and we'll provide them with the products that they want.

But anyway, I think customers will be comfortable with that, and there should be no reason that they're not.

Your next question comes from the line of Gerry Fleming with WR Hambrecht and Company.

Your presentation added to my [inaudible.] You gave a business model that showed at 2.5 billion you'd have operating margins of 29%.

You seem to be lagging that a little bit, and any reason?

And what happens to that target with Metron factored in?

Yeah, Jerry, I don't think -- that 29% was at 2.5 billion, that model.

And I would stand by that model at the current time.

If we hit that kind of revenue number, we would make the numbers in the model.

Metron does not degrade our model in my view, because when we realize the synergies from the transaction, and integrate them into the Company, we think they'll be -- they'll perform the same as any one of our service businesses are capable of performing.

Of course, it'll take a little while to get there, but I don't think it'll degrade or give us any excuse not to meet this model.

Your next question comes from the line of Cristina Osmena with Jefferies & Company.

Hi, Mike, I'm sure you might be familiar with the fact that they have said that there's a high degree of equipment reuse at the 90-nanometer node, given that it's already the second generation of 300-millimeter.

Do you see that playing out with your customers, and what's your opinion on that, and how that plays out across the industry?

And also if you could just give us a housekeeping freebie question, depreciation CapEx and head count?

Cristina, the reuse question.

You know, the thing that we try to focus on, is where do you add, what capacity needs to be added, and that's really the important factor for our business.

Reuse is important for many of our customers, because they can reutilize some equipment, but they can only reutilize it if they're taking capacity offline.

And current time with utilization as high as it is, it really doesn't enter in as much of a factor.

Kristina, we're going to stick to one question at a time, and I can get back to you offline with the second part of your question.

Next question, operator.

Your next question as follow-up from the line of Ali Irani with CIBC World Markets.

Good afternoon, again.

I'm wondering how much the limitation in capacity at your AKT facilities is driving the linearity of the orders, or would you expect also a pause from those customers as they digest the first phase of their gen 6 and gen 7 investments in terms of sequential bookings?

Thank you.

That's a hard one to answer.

They're always -- these customers, particularly the ones that are going into gen 7, they want to be placed ahead of the queue all the time, particularly the large Korean customers.

So I wouldn't say that we're constrained, as much as it's a question of the timing and maybe some of the supply chain activities, but there's no business being lost of any kind because of it.

Your next question comes from the line of Timothy Arcuri with Smith Barney.

As a follow-up to something that Mike said early on.

Mike, you said the second half would be higher than the first half.

You booked about $4.68 billion in the first calendar half of the year.

By that comment, am I to assume that you're inherently saying that bookings will be higher than that in the second half of the calendar year?

I guess you could assume that, yes.

I mean, we're in the -- we're, going into our fourth fiscal quarter, and we've made our projection on bookings.

Our third fiscal quarter is already behind us, at $2.5 billion.

So I think the answer's yes,.

Your next question comes from the line of Manish Goyal with Neuberger Berman.

Hi, question about -- let's for a second assume that if your shipments are to decline sometime in January, what kind of reverse leverage do you expect?

Do you think the margins will decline commensurately or do you think that initial margin decline could be much higher?

What do you want us to decline in revenue to?

To be serious for a second, what we did in the model, is we modeled 1.6 billion to be 10% after tax.

So, you know, you have to interpolate, the reverse of the leverage.

Obviously, the big factor is the service business in our view probably will not go down.

So it would change a little bit of the margin structure.

You'd have to interpolate between that level of 1.6 billion and the 2 billion that we have in the model.

Your next question comes from the line of Edward White with Lehman Brothers.

I was wondering if you could talk about the lumpiness of orders you're likely to see in the fourth quarter.

If you get the 300-millimeter business you were talking about, do you think the composition of big orders would change from what you've been seeing in recent quarters?

I don't think so, Ed.

I think it will be a very similar situation, that we're still tracking the large number of 300-millimeter projects and, you know, expect a number of them to be booked in the fourth quarter, probably pretty commensurate with the third quarter, with some puts and takes.

But the business is still more about the 300-millimeter build-out.

Your next question comes from the line of Byron Walker with UBS.

Good afternoon.

I was interested in your comment when you said there was nothing significant at this point in reference to push-outs.

Were there more push-outs in the reported quarter, than in the previous quarter?

If it was, it was very insignificant.

The backlog adjustments were pretty minor, and they were fairly minor last quarter.

We actually did an internal de-booking of 1 unit, that was pretty significant, which was our judgment.

So, I would say no.

We're talking --

Pretty similar.

Okay.

Absolute, not net of pull-ins.

Right.

Thank you.

Your next question comes from the line of Ben Pang with Prudential Financial Securities.

I have 1 question.

You mentioned that your cycle time was improving.

Would that change your visibility into your customers business?

Thanks.

Our cycle time has been improving really for quite some time.

I think it's been on a downward trend for 8 quarters now, and really is significant.

I think it's counter-intuitive in that, you think with a longer cycle time you get better visibility, but it causes all kinds of bad behavior in the order book.

I think shortening cycle time makes things very clean, because customers have to be committed to order it when they order it, and I think it's part of the reason we're not seeing cancellations or push-outs to any significant degree.

Your next question as follow up from the line of Patrick Ho from Moors & Cabot.

I want to get clarification.

Did you say the fourth quarter tax rate was going to be 20%, or is it still going to be 29%?

We didn't say anything, but it'll be the same. 29.5.

Your next question comes from the line of John Pitzer with CSFB.

Joe, just following up on your revenue guidance for October. 3 big bucket, service, flat panel, and wafer fab.

It sounds you're pretty confident in service growth sequentially, strong order quarter for flat panel in July, I'm assuming that grows sequentially.

Is it too much to assume that the wafer fab is going to be down sequentially in revenues in the October quarter, and if it is down, can you help reconcile that with your opening comments of continued growth?

No, we wouldn't say --, you know, you're dealing with a mix of business, and don't forget, revenue recognition is based on where the systems are going.

AKT is all deferred, so it's in the case of AKT, it's going to be what systems get signed off in the fourth quarter.

And also the same in terms of our mix of shipments to Japan.

So, I would stick by the same comment.

We really don't know exactly where the puts and takes might be.

That's why we -- it's a $100 million improvement.

So we're going to see where it's going to come from.

But it is fair to say that the service business should be up in the quarter, sequentially.

We will now --

We expect all of them to be up.

We will now go back to the line of Mark Fitzgerald with Banc of America Securities.

Just on the quarterly guidance, and then given your outlook for '05, does that mean you guys are subscribing to kind of things flattens out and then reaccelerates into ' 05, is that your level of confidence?

Well, we think that there's a large number of 300-millimeter factories that are going in, the capacity's going in at 90-nanometers.

People are not going to slow those down, so I think it's just a matter of how they're managing capacity to demand, and we see demand continuing to grow.

Your next question comes from the line of Gerry Fleming with WR Hambrecht and Company.

Joe, in spite of your cash increasing very substantially, your net interest income has declined fairly dramatically.

Where do you see that going from here, or is it all just a function of rates?

It's pretty much a function of rates, for the most part, no question about it.

And in '03, because of the way rates were moving, we took some capital gains on the portfolio, as well, that got reflected in the interest income line.

So it's totally a function of rates.

Your next question comes from the line of Timothy Arcuri with Smith Barney.

I just wanted to see whether you guys dug up that percentage of foundry that's in the backlog.

Sorry, we're still here.

Tim, I'll get back to you on that.

This is Paul.

Your next question comes from the line of Steve O'Rourke with Deutsche Banc.

Hi.

Good afternoon.

With the peak flattening out, are you where you want to be from an infrastructure perspective for the near term?

If infrastructure you mean buildings, systems, people, yes, we are.

So, no incremental cuts in the near term.

No, we've managed from really the start of last summer when we started to see an increase, we've really been very judicious about adding infrastructure, resources, and really managed through this extremely well.

The whole focus on cycle time generates significant productivity improvement, and as I mentioned in my comments, also that cycle time extends to the field, and being able to improve that productivity, you know, makes our system work so much better, because we're able to do so much more with the people we have.

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

Very well, sir.

Your final question comes from Tim Schultz-Millander with Morgan Stanley.

Just curious, where you guys are currently working closely with your customers and their 90-nanometer build-out?

Where have you been able to maybe enable a yield ramp that has been more significant than your customers anticipated?

I guess I'm referring back to Intel and their yield ramp, and I guess I just want to get a feeling as to where you might be seeing something similar across your client base.

Tim, we really try to work with every one of our customers.

I can't say anything specific about any of them, of course, but the yield ramp on 90-nanometers is extremely important to us and them, and so we have projects with a number of our top customers to make sure that we're able to do what we can to help them, and enable that ramp to happen very quickly.

Operator, that was our last question.

I'd like to make closing remarks.

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

The webcast of this call is available on our website, and will remain there until August 31st.

I'd like to thank you for your interest in Applied Materials, and this concludes our call.

Ladies and gentlemen, we do appreciate your participation in today's conference call.

This does conclude the Applied Materials third quarter fiscal 2004 earnings release conference call.

You may now all disconnect.