應用材料 (AMAT) 2004 Q4 法說會逐字稿

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  • Operator

  • Good afternoon ladies and gentlemen.

  • Thank you for standing by.

  • Welcome to the Applied Materials fourth 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. (OPERATOR INSTRUCTIONS).

  • As a reminder, this conference is being recorded today, November 17, 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.

  • Paul Bowman - Managing Director of Investor Relations

  • Thank you, Miles.

  • Good afternoon and welcome to Applied Materials' fourth quarter and fiscal year 2004 earnings conference call.

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

  • Nancy Handel, Group Vice President and Chief Financial Officer; and Joe Sweeney, Group Vice President, Legal Affairs, Intellectual Property and Corporate Secretary.

  • Financial results for our fourth quarter and fiscal year were released on Business Wire shortly after 105 PM Pacific Time.

  • You can obtain a copy of the news release on the Investor section of our web site 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 call.

  • 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 Web site.

  • Today's call will begin with an update on the business by Mike Splinter, followed by Nancy Handel, who will provide an analysis of fourth quarter and fiscal year financial results, followed by first quarter 2005 financial targets.

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

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

  • Mike.

  • Mike Splinter - President and CEO

  • Thanks Paul.

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

  • Applied Materials delivered solid financial performance in the past quarter and ended fiscal 2004 with overall outstanding results.

  • We grew revenues 79 percent year-over-year, making this our best year (technical difficulty) since 2001 (ph) and one of the top 5 growth years since we went public in 1972.

  • Our employees are focused and delivering excellent results.

  • Applied Materials grew faster than the industry with order growth of 108 percent, outpacing the others and further setting ourselves apart as the clear industry leader.

  • We gained market share in key technology areas and broadened our portfolio through new service agreement and new products for both semiconductors and flat-panel displays.

  • We have good traction in growth areas in the technologies and regions where the most opportunities exist.

  • Our products are well positioned for the 65-nm node and other advanced applications.

  • And we are delivering solutions that make a significant impact on our customers' business.

  • We delivered 10 new breakthrough products this year.

  • And this achievement reflects strong, focused internal investment to translate our proven product and process expertise into cost-effective innovative solutions for our customers.

  • Services are becoming more important as our customers look to get the maximum value from their fab operations.

  • With our installed base and new capabilities for value added service, Applied has a significant strategic growth opportunity.

  • And we certainly plan to capitalize on it.

  • We recently marked the 25th anniversary of Applied Materials Japan, where we gained additional share and advanced our leadership position in that market as Japan's semiconductor industry continues to retool and make strategic investments.

  • In China, we celebrated the 20th anniversary of our operations.

  • Applied Materials was the first equipment company to establish a presence in China way back in 1984.

  • And our long-standing commitment has been a key part of our success as China has established its place among the major chip-making regions of the world.

  • Recognizing early the tremendous potential for our industry in China, Applied Materials established our leadership through key relationships and by building a strong sales and service network to support our customers' rapid growth.

  • Through this year, we continued to make progress on streamlining our operations and delivering efficiencies throughout our business.

  • Our cycle time improved 22 percent, and the efficiency of our factory was demonstrated as we grew.

  • We have plans in place to continue to reduce operational cycle time and further reduce material cost through re-use and commonality.

  • Applied Materials is operating well, with the right capabilities, the right market position to set us up for further growth as opportunities emerge.

  • As we look to the first quarter of 2005, we'll start off lower than Q4.

  • The semiconductor and flat-panel display industries are becoming increasingly more cautious on capital investments and working to improve the productivity ahead of new investments.

  • Inventory levels have increased for some semiconductor products.

  • And our customers are responding quickly to reduce inventory and manage their factory utilization quite tightly.

  • For 2005, the industry consensus is for semiconductor revenues to be flat or slightly up, with capital spending expected to the flat to down 10 percent or so.

  • We will learn more in January as year-end sales and inventories are assessed, and when many of our customers announce their CapEx plans for next year.

  • However, investment for 300 mm is forecasted to remain strong, with approximately 45 projects adding equipment through 2005.

  • This past quarter, about 84 percent of our orders were for 300 mm.

  • There is no doubt Applied has more 300 mm installed chambers than the rest of the industry combined.

  • And this leadership position offers opportunities for future revenue streams in service and technology upgrades.

  • Our customers are investing in advance (ph) (technical difficulty) technology, where factory utilization rates remain high and capacity is limited. 110 and 90 nm reduction buys (ph) continue and 65 nm are indeed -- is gaining momentum.

  • DRAM investment in 2004 continued strong.

  • And we expect these customers to continue to invest in capacity and new generation technology throughout '05.

  • Following a strong year, order levels in China are expected to be (technical difficulty) lower (ph) as customers assimilate their investments.

  • In flat-panel displays, manufactures are focused on the upcoming LCD TV market expansion.

  • With 8 gen-6 and gen-7 factories coming online over the next 6 to 12 months, the focus has shifted to cost and yield in these new factories.

  • This effort is aimed at driving LCD TVs to lower price points and greater unit volumes.

  • We believe customers recognize the importance of working with a technology leader such as AKT in partnership to enable the most advanced technology at the lowest possible manufacturing cost.

  • Within this environment, Applied Materials is well positioned to deliver on our growth strategy.

  • We plan to continue to outgrow the industry by delivering superior technological solutions and services to our customers, and by boosting productivity internally.

  • Solid performance within our Company allows us to work and grow while investing in our strengths and delivering the capabilities our customers need for advanced technology and cost effective operations.

  • Our employee team around the world is focused on our priorities and customers' requirements.

  • We have sized (technical difficulty) our operations (ph) and headcount to be effective and generate returns in this environment.

  • Our technology portfolio is designed to meet the future needs of the industry.

  • Our financial resources and strategies remain solid, and provide a basis for continued market leadership.

  • Overall, 2004 was an excellent year for Applied Materials, a growth year with a solid finish.

  • As I look forward, I am confident in our ability to execute our strategies (ph), (technical difficulty) continue to gain share and produce strong financial results, no matter what the market brings.

  • Thank you very much.

  • Now I will turn the call over to our CFO, Nancy Handel.

  • Nancy.

  • Nancy Handel - Group VP and Chief Financial Officer

  • Thank you Mike.

  • Good afternoon to everyone.

  • What I would like to do now is to cover our financial performance for the fourth quarter and fiscal year ended October 31, 2004, followed by our outlook for the first fiscal quarter of 2005.

  • Orders of 2.6 billion were 7 percent higher than the third quarter of 2004 and 105 percent higher than the fourth quarter of 2003.

  • Revenue for the fourth quarter was 2.2 billion, 1 percent lower than Q3 of 2004 and 80 percent higher than the fourth quarter of '03.

  • Operating income for the fourth quarter was 24 percent of revenue at 538 million, compared to 27 percent for Q3 of 2004 and zero percent for the fourth quarter of 2003.

  • Net income increased to 455 million or 27 cents per share, compared to 441 million or 26 cents per share for Q3 of 2004 and net income of 15 million or 1 cent per share for Q4 of 2003.

  • Gross margin for the quarter was 46.6 percent, compared to 47.4 percent in Q3 of '04 and 40.5 percent for Q4 of '03.

  • Ongoing earnings per share for the fourth quarter of '04 were 27 cents per share, compared to 26 cents for Q3 of '04 and 6 cents for the fourth quarter of '03.

  • Ongoing results for the third and fourth fiscal quarters of 2004 were the same as they (ph) reported earnings per share.

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

  • Fourth quarter results included $27 million for a net litigation settlement, as well as a $62 million favorable tax rate adjustment due primarily to changes in export tax benefits and the global effective (ph) (technical difficulty) tax rate with respect to foreign operations.

  • The net impact of these 2 items improved earnings per share by 2 cents per share.

  • Fiscal 2004 was an outstanding year for the Company.

  • Our employees performed well on many fronts.

  • We advanced our technological leadership with the addition of 10 new products, gained market share in a number of our core products, and improved our efficiency, with revenue per employee increasing 108 percent year-over-year to reach $661,000 per employee.

  • Fiscal 2004 net sales of 8.01 billion were up 79 percent from fiscal 2003 net sales of 4.48 billion.

  • Our net income margin improved to 17 percent for the year.

  • And cash generated from operations was 1.71 billion.

  • Net income per fiscal 2004 was 1.35 billion or 78 cents per share, up from a 149 million net loss for or 9 cents per share of loss for fiscal 2003.

  • Ongoing income for fiscal 2004, which includes the impact of the Q1 restructuring charges of 167 million, was 1.47 billion or 85 cents per share, up from 223 million or 13 cents per share for fiscal '03.

  • New orders of 8.98 billion were received in fiscal 2004, up 108 percent from 4.32 billion for fiscal 2003.

  • Order momentum in the quarter reflected ongoing capital investment by both the DRAM and logic customers retooling for 300 mm advanced manufacturing.

  • Orders by geographic region were as follows -- Taiwan, 25 percent;

  • Japan, 20 percent;

  • North America, 17 percent;

  • Korea, 16 percent;

  • Southeast Asia and China, 11 percent; and Europe, 11 percent.

  • DRAM orders represented in 23 percent of total system orders.

  • Boundary orders were 26 percent of total system orders. 300 mm orders represented approximately 84 percent of total system orders received in Q4 of 2004.

  • During Q4 of '04, 5 orders were in excess of $100 million. 7 orders were between $50 and $100 million.

  • And 16 orders were between 10 million and 50 million.

  • Backlog for the quarter was 3.37 billion, compared to 2.99 billion for the third quarter and 2.5 billion for the prior year fourth quarter.

  • Backlog adjustments totaled 44 million, consisting primarily of some order cancellations.

  • Based on our regular review of backlog, we remain confident of its continued quality.

  • The Company's performance in the fourth (technical difficulty) quarter (ph) '04 met our published target, completing a solid year for Applied Materials.

  • Operating targets set in beginning of the year were met and in most cases exceeded.

  • And the resulting variable compensation accruals affected both gross margin and operating expenses.

  • Fourth quarter gross margin of 46.6 percent was lower than the prior quarter, primarily due to changes in product mix.

  • Operating expenses rose 9.8 percent in the quarter due to the previously aforementioned compensation accruals, the impact of litigation settlements, and (technical difficulty) charitable contribution to the Applied Materials Foundation.

  • Cash generation and overall asset management continued to be very well executed.

  • Other highlights for the quarter include the following.

  • Our Front End Products Group received a Best Product award from TSMC for our Rapid Thermal Annealing system.

  • And the recently announced Applied Quantum X ion implanter continues to show very strong customer acceptance.

  • Our newly formed Thin Films Group, which includes all of our deposition and CMP products for CVD, PVD, ECP and CMP continued their strong market momentum in the quarter.

  • We had significant wins at key customers with our copper barrier/seed Endura PVD application, and also won a Best Product award for our PVD system from TSMC.

  • Our Applied SlimCell ECP system continued to gain market share year-over-year and we received an initial order from a major Japanese customer.

  • Black Diamond, our low k product, continues its market leading position.

  • And our Reflexion copper CMP system won strategic positions at several new customer sites.

  • During (ph) (technical difficulty) 2004, our etch products grew faster than the overall etch market, with dielectric etch a major contributor to this success.

  • Our positive side (ph) (indiscernible) (technical difficulty) and control products achieved record new orders and revenues.

  • In services, our margins continued to improve for the fourth fiscal quarter.

  • And our flat-panel display group achieved a significant milestone, shipping its 400th system during the quarter to culminate a record-setting year.

  • Now I would like talk a little bit about the balance sheet.

  • Cash equivalents and short-term investments decreased 18 million to 5. -- excuse me, 6.58 billion.

  • During the fourth fiscal quarter of 2004, Applied repurchased 31 million shares of its common stock, spending a total of 500 million and reflecting an average price of $16.13 per share.

  • We intend to execute our share repurchase program in the range of $300 to $500 million in the first quarter again.

  • Inventory continued to be well-managed, down slightly from the third quarter.

  • Our DSO at 69 days for the fourth quarter compared to 62 days for the last quarter.

  • And our headcount at the end of the quarter was 12,191 regular employees.

  • We increased our sales this year by 79 percent year-over-year, while headcount increased only 1 percent for the corresponding period.

  • Capital expenditures for the quarter were 40 million.

  • And depreciation and amortization totaled 88 million.

  • Now I would like to address the outlook for the coming quarter.

  • In the near-term (ph) (technical difficulty) we are entering a period of lower capital investment as customers focus on reducing chip inventories.

  • In order to achieve our target financial model (ph), we continued to align our cost structure with current market conditions by reducing our variable expenses and continuing to lower the cost of products sold.

  • Our fiscal 2005 first quarter target are as follows.

  • We expect orders to be down approximately 35 percent from the fourth quarter level.

  • For our revenue outlook on target (technical difficulty) anticipate (ph) revenue been down 20 to 23 percent from fourth quarter levels, or approximately 1.76 billion to 1.7 billion expected.

  • Our earnings per share target is 15 to 16 cents (ph). (technical difficulty) That concludes my remarks.

  • So I will turn the call back over to Paul.

  • Paul Bowman - Managing Director of Investor Relations

  • Thank you Nancy.

  • We'll now begin our question-and-answer session.

  • We would like to entertain questions from as many callers as possible. (technical difficulty) As such, we will limit our responses to 1 question per firm.

  • Miles, would you please began with the first question?

  • Operator

  • (OPERATOR INSTRUCTIONS). (technical difficulty) William Lu, Piper Jaffray.

  • William Lu - Analyst

  • Can you just talk about your order guidance?

  • It seems like (technical difficulty) (indiscernible) it's a little bit worse than your competitors.

  • Why is that?

  • Paul Bowman - Managing Director of Investor Relations

  • Hi Bill.

  • I think you have to look at context of both our fourth quarter orders and our first quarter orders.

  • Fourth quarter came in a bit better than we thought it would.

  • And obviously, our first quarter we're projecting down 35 percent.

  • I think that if we were making this projection 30 days ago, it would have been quite different.

  • And we are in a fairly dynamic market right now.

  • If you look inside of that, it is primarily 200 mms that have dropped off.

  • And you can see that from our order book in the fourth quarter, already moving to 84 percent.

  • We think that will even move higher in the first quarter.

  • William Lu - Analyst

  • On the same subject, with bookings this quarter up 2.6 billion, why would revenues drop so much next quarter, even with a little bit of cancellations?

  • Paul Bowman - Managing Director of Investor Relations

  • Well, there are a number things that are happening here.

  • Of course, some of it is flat-panel and shipping to locations where we only take revenue on signoff.

  • But also the situation on 200 mm is fairly dramatic -- move from quarter over quarter on revenue.

  • William Lu - Analyst

  • Thanks a lot.

  • Paul Bowman - Managing Director of Investor Relations

  • And I would just like to -- well, we let you get away with that, Bill --one question please.

  • Operator

  • Jay Deahna, J.P. Morgan.

  • Jay Deahna - Analyst

  • Have you seen any push outs or cancellations of expected orders or expected shipments since the end of September?

  • Paul Bowman - Managing Director of Investor Relations

  • Well, I think when we made our projection back in August, we thought we would ship a few more 200 mm tools in this quarter, but really no big push outs (ph) (technical difficulty) or cancellations.

  • We are pretty confident about our backlog.

  • Nancy, do you want to give some statistics on the backlog?

  • Nancy Handel - Group VP and Chief Financial Officer

  • The backlog, as I mentioned in my comments, is reviewed on a continuous basis for its shippability (ph) in the next 12 months.

  • The backlog today consists of a fair piece of revenue associated with AKT and Japan and some of our new products out there, where revenue is on signoff.

  • So that's a big piece of the backlog.

  • And then we really expect about more than two-thirds of our backlog to be realized into revenue in the first half of the year between Q1 in Q2.

  • So the revenue outlook, and the backlog that we have recorded associated with it, looks strong.

  • Jay Deahna - Analyst

  • Thank you.

  • Operator

  • Steve O'Rourke, Deutsche Bank.

  • Steve O'Rourke - Analyst

  • Mike, you mentioned in prepared remarks that 2005 -- at least some of the estimates out there are flat to down 10 percent in capital spending.

  • I'm assuming those are (technical difficulty) third (ph) party estimates.

  • How are you looking at 2005?

  • And if the guidance for fiscal Q1 is down 35 percent in orders, consistent with something that could be a down 10 percent year, that would (technical difficulty) imply (ph) a pretty strong back half of '05.

  • Mike Splinter - President and CEO

  • Well, (technical difficulty) that is what we're thinking at the current time, Steve.

  • People are cautious in the front end here.

  • But as they work through the inventory issues, we'll (ph) get back to investing.

  • And in fact, there has (sic) been some encouraging signs in this last week on the end-user front from Dell and HP on enterprise spending.

  • And then the number of people announced new fabs this week, including Spansion and Tricenti and Power Chip (ph).

  • And Elpida also announced during the quarter.

  • Operator

  • John Pitzer, CSFB.

  • John Pitzer - Analyst

  • The question I (technical difficulty) have got on the bookings guidance.

  • If you look at bookings, there are 3 main components -- front panel, wafer fab equipment and then service.

  • And typically, if I remember correctly, January is a seasonally strong quarter for service orders.

  • Is that still the way to look at things?

  • And can you comment -- is flat-panel down significantly more than wafer fab on a percentage basis within the 35 percent down guidance?

  • Thank you.

  • Nancy Handel - Group VP and Chief Financial Officer

  • Flat panel is certainly down some within that guidance.

  • And your assessment of the service business is consistent with prior -- that service normally has an up quarter and the first period of the year.

  • John Pitzer - Analyst

  • And that is what you're expecting, Nancy?

  • Nancy Handel - Group VP and Chief Financial Officer

  • Yes.

  • Operator

  • Suresh Balaraman, ThinkEquity Partners.

  • Suresh Balaraman - Analyst

  • I know you guys to talk about more than 1 quarter out in terms of guidance.

  • But given that the early (technical difficulty) sharp downdraft in January quarter, any sense if this (ph) (technical difficulty) quarter will continue to seek a further downdraft, again in light of your comments on that -- you said the whole year could be down only 10 percent?

  • Thanks.

  • Mike Splinter - President and CEO

  • Well, we are not going to give guidance for the next quarter out.

  • But we like the strength of our backlog.

  • And I think I will probably leave it that for my comments about a quarter ahead.

  • Operator

  • Stuart Muter, RBC Capital.

  • Stuart Muter - Analyst

  • Question for Mike -- what are your customers telling you about their inventory levels?

  • And has that view really changed much over the last few months?

  • Mike Splinter - President and CEO

  • Well, I think people have got gotten awfully serious about it in the last month.

  • You can certainly see from some of the major foundries, their utilization projections.

  • And when the projections drop below 90, we know people get very cautious about their investments.

  • So I think all those things are in line with historic occurrences.

  • On inventory in particular, everybody we talk to is taking it seriously.

  • They are managing their manufacturing lines to reduce the inventory and make sure that it sells through.

  • Everybody that I talk to is really looking for the next 4 weeks to see how the Christmas selling season goes, particularly in the consumer oriented products, and how that ends up after the first of the year.

  • So I think we are in a 4 to 6 week period here where there will be a lot of reassessment of what the industry is going to look like next year.

  • Operator

  • James Covello, Goldman Sachs.

  • James Covello - Analyst

  • Question, Nancy, for you on the expense side -- you mentioned variable expenses coming down and implied, I think, cost of goods sold coming down.

  • Can you help us understand what margin flowthrough might look like, certain revenue levels declines, how we could think about that from a margin perspective and operating expense perspective?

  • Thank you.

  • Nancy Handel - Group VP and Chief Financial Officer

  • From the perspective of the bottom-line, it is our view that we have our cost structure in alignment with achieving the kind of model performance that we have conveyed to the investment community.

  • The margin feels a little bit of pressure as we get this product mix change where we have in the Q1 environment -- obviously some expenses associated with factory absorption because there will be less throughput through the factory.

  • We, in the future coming quarter, we are just (ph) (technical difficulty) looking at it from mix variation, obviously, as we see a greater percentage of AGS (ph) and AKT and the relative position in the quarter's revenues.

  • Margin will feel a little bit of pressure in Q1.

  • But relative to our operating or below the line expenses, we are comfortable that as we look at some of the variable labor costs and compensation costs that come out in the Q1 environment, that our senses in the BLE area are really in line with the cost consciousness that we created during the time of our realignment plan.

  • So we have got the structure in place to deliver the model performance.

  • Operator

  • Timothy Arcuri, Salomon Smith Barney.

  • Timothy Arcuri - Analyst

  • Can you give us some idea of what the orders might look like from a geographical perspective in January?

  • And particularly, there is a fairly (ph) (technical difficulty) DRAM order out there in Korea.

  • And many of your competitors have not included that in their guidance.

  • And so I'm wondering if you can give us an idea of what is going to happen to orders from a geographical perspective?

  • Mike Splinter - President and CEO

  • Timothy, we are not going to get that specific on our orders for the next quarter.

  • Obviously, with the big -- there is the big change here.

  • So every region is going to be down some amount during the next quarter.

  • We would expect that China and Japan will be down a little more than most.

  • Operator

  • Ali Irani, CIBC World Markets.

  • Ali Irani - Analyst

  • Yes.

  • Looking again at your bookings guidance, could you try to give us an idea by market segment -- given how low DRAM bookings were sequentially, whether again DRAM will be an up quarter for you next quarter? (technical difficulty)

  • Mike Splinter - President and CEO

  • Well, we are not breaking that out either, Ali.

  • But there is -- as I mentioned in my prepared remarks, we think DRAM is going to continue to the strong and invest (ph).

  • The DRAM market still is one market where we do not see inventory.

  • And prices have been pretty good.

  • And bit use is expanding, and if you believe HP and Dell's results on enterprise spending, they used a lot of DRAM there.

  • So I think that could -- the DRAM investment that is projected could certainly continue.

  • Ali Irani - Analyst

  • Mike, just as a clarification to that question, if you look at your guidance for service bookings being up, flat-panel obviously suffering from conditions in that segment, and DRAM being flat to up, let's say, assumption-wise -- it would suggest that your logic and foundry customers are really drying up.

  • Wouldn't that set up for some kind of rebound in the following quarter in April?

  • Mike Splinter - President and CEO

  • That's why we think our -- that's one of the reasons that we are thinking that our order book is strong and that second half should still be reasonable and strong.

  • Operator

  • Mark Fitzgerald, Banc of America.

  • Mark Fitzgerald - Analyst

  • Nancy, I was curious in terms of this aggressive buyback of stock, how you come down in terms of building shareholder value through that versus paying out a dividend (ph) (technical difficulty) giving the cash to the shareholders.

  • Nancy Handel - Group VP and Chief Financial Officer

  • We as we have mentioned before in the call, we look at evaluating a dividend strategy on a fairly routine basis.

  • But we currently have no plan (ph) (technical difficulty) in that area.

  • We think it is a reasonable way to -- an efficient way, actually, to offset some of the dilution from the options programs as well as return value to the shareholders through this buyback strategy (ph) (technical difficulty).

  • The share repurchase that we executed in the fourth quarter was our largest run I think -- I won't say site in history, but perhaps that is even the metric.

  • And we would like to continue it along those lines for the near-term.

  • Mike Splinter - President and CEO

  • If you will remember, Mark, at our last shareholder meeting we got approved to buyback 3 billion (technical difficulty) of shares.

  • And so we started executing on that plan last quarter.

  • Operator

  • Brett Hodess, Merrill Lynch.

  • Brett Hodess - Analyst

  • Mike, I was wondering if you could talk about the breath of customers at 90 nm.

  • And as you start to see the 65 nm R&D buys come through, do you expect that you'll have the same breath of customers?

  • I know it is early for 65, but -- or do you think that they'll (technical difficulty) in (ph) fact be winnowing out as you move toward 65?

  • Mike Splinter - President and CEO

  • The breath of customers between 110 (ph) (technical difficulty) -- you'll allow me I think to include 110 and 90 nm kind of together there, because most of the memory guys are buying at 110 and the logic guys are at 90.

  • And the technologies are fairly comparable.

  • But there is a very broad array of customers buying production quantities in that range at 300 mm.

  • Almost every one of these 300 mm fabs is in that range.

  • So that is where they really get the advantage, by moving to an advanced technology in 300 mm.

  • I really don't expect a (technical difficulty) 65 nm.

  • I think everybody is positioning one way or another to get (technical difficulty) access to the technology, either by developing it themselves or making an alliance with someone who has the technology.

  • So I don't see any winnowing out here of people who are going to continue to chase down Moore's Law.

  • I think a few years ago we did see some winnowing as people in some communications markets, analog markets realized they didn't need to be on the front end.

  • But that has already passed us.

  • Operator

  • Patrick Ho, Moors & Cabot.

  • Patrick Ho - Analyst

  • Mike, I just one to get back to one of your comments about -- when you said that if you gave guidance 30 days ago it would be a lot different than you are giving today.

  • Is that a reflection of what has happened in the last 30 days that has given this bookings guidance?

  • Or is there some lumpiness in the type of orders or the magnitude or the size of orders over the next quarter or to?

  • Mike Splinter - President and CEO

  • I think it is a pretty much across the board cautiousness that has increased in last 30 days.

  • It wasn't that there wasn't any 30 days ago, but I think it has certainly increased during this period.

  • Operator

  • Michael O'Brien, Bear Stearns.

  • Michael O'Brien - Analyst

  • Just an idea on the 35 percent down or so -- 1.7 billion of orders, do you have an idea of what you consider to be your maintenance orders?

  • And how much more does the industry have to deteriorate for that to drop further?

  • Or are we pretty close to what you consider (technical difficulty) we would get maintenance level orders?

  • Mike Splinter - President and CEO

  • Maintenance -- by maintenance level orders, you mean what?

  • Michael O'Brien - Analyst

  • Based on the orders that are just to sustain the fabs that are already out there, and to sustain the R&D programs that are (technical difficulty)

  • Mike Splinter - President and CEO

  • It's hard to judge that.

  • But I think -- with still quite a number of 300 mm fabs going on, I don't think that we are on -- at some level of just maintaining the existing installed base.

  • If -- the implication would be that would be service and some small number of new tools.

  • People are still investing.

  • They haven't slowed down the 300 mm investment quarter-over-quarter, it just hasn't picked up quarter-over-quarter.

  • Michael O'Brien - Analyst

  • And what will make it -- make them get worried and slow it down?

  • Mike Splinter - President and CEO

  • Well, I -- having run a lot of fabs, most of these 45 are in process.

  • They have equipment in them.

  • They need to run them and get them to maximum capacity.

  • They are making multi-billion dollar investments here.

  • They need to get them utilized.

  • So I think from an economic standpoint of our customers, they need to finish off the fabs and get them running.

  • Operator

  • Tim Schulz-Milander (ph), Morgan Stanley.

  • Tim Schulz-Milander - Analyst

  • Just one question.

  • Again, just talking about your cost base -- you talked about how you felt it was well aligned.

  • What kind of revenue level would you say that you would take another perhaps more serious or closer look at adjusting that cost base?

  • Should we think of this sort of $1.5 billion quarterly run rate of revenues as being the lower ebb (ph) (technical difficulty) underneath which you would make those adjustments?

  • Thank you.

  • Nancy Handel - Group VP and Chief Financial Officer

  • I think that we still have a fair amount of variable elements to our cost structure in the current environment.

  • So we have got a few tools (technical difficulty) available (ph) to us to continue to try and reduce the kind of spending that we have seen in the Company.

  • After addressing variable compensation, we have also got some of our investments and our spending levels, which people have been very conscientious around.

  • I think that at the Company here over the last year, I mean the painful exercise (technical difficulty) we went through (ph) in '03 has given everybody an acute sensitivity around managing cost in all in environments.

  • So we developed our model of financial performance with this in mind.

  • So I think there are (technical difficulty) things for us to do before any other alternatives would need to be considered.

  • Operator

  • Robert Maire, Needham & Company.

  • Robert Maire - Analyst

  • Again, back to the order guidance -- I'm sorry to beat a dead horse here.

  • But with 35 percent downward guidance, and (technical difficulty) was 16 percent of orders, and you also just made a statement that 300 mm was steady.

  • How are we dropping by 35 percent with 200 mm?

  • Even if 200 mm went to zero, that would suggest that we are going to see some sluggishness in 300 mm in the near-term.

  • Mike Splinter - President and CEO

  • Yes, there's -- in orders, there are some down on 300 mm as well in certain cases.

  • And we didn't comment how much flat-panel was down.

  • So you can --

  • Robert Maire - Analyst

  • Are we talking about 300 mm being down on the order of 15 to 20 percent?

  • Mike Splinter - President and CEO

  • We're not commenting.

  • Operator

  • Ben Pang, Prudential Equity Group.

  • Ben Pang - Analyst

  • In terms of the gross margin, you mentioned the products mix issue.

  • Is that also within the flat-panel WFE (ph) kind of break?

  • Or is it within the 300 mm products?

  • Can you give a little more color on that?

  • Thanks a lot.

  • Nancy Handel - Group VP and Chief Financial Officer

  • I will offer a few (technical difficulty) remarks (ph) on that.

  • The mix in the coming quarter is (technical difficulty) related to the relative movement more toward AGS and AKT versus systems business affecting the gross margin in the near-term outlook.

  • There is a little bit of a difference on the 200, 300 mm product mix that when 300 mm becomes such a huge percentage of our (technical difficulty) show up a little more noticeably.

  • But the margin is really related to between systems and the other businesses (technical difficulty).

  • Operator

  • Gerry Fleming, WR Hambrecht & Company.

  • Gerry Fleming - Analyst

  • Nancy, could you give us your tax rate guidance for the coming year?

  • Nancy Handel - Group VP and Chief Financial Officer

  • For planning purposes, we are still using 29.5 percent.

  • So that is what we would talk to you about.

  • There is a greater degree of variability that the certainly surfacing in terms of the tax rate consideration going forward.

  • So you'll hear, I think, more conversations with us in the future about tax issues that might not have been historically the way the conversations went.

  • Operator

  • Cristina Osmena, Jefferies & Company.

  • Cristina Osmena - Analyst

  • With the mix of business shifting to 300 mm pretty dramatically (ph), (technical difficulty) are you satisfied with the level of 200 mm inventory that you have?

  • In other words, should we look for a write-down at some point in the near-term?

  • Nancy Handel - Group VP and Chief Financial Officer

  • No.

  • I think that one of the things, again, that was part of our learning over the past year, it's a very significant focus on inventory management.

  • And so -- we have looked in all the drawers and we know what has to have been dealt with.

  • And we have taken care that.

  • Operator

  • Mehdi Hosseini, FBR.

  • Mehdi Hosseini - Analyst

  • (technical difficulty) Color as what the booking in October quarter was by product versus services --?

  • Mike Splinter - President and CEO

  • I'm sorry Mehdi; we didn't catch your whole question there.

  • You broke up at the beginning.

  • Mehdi Hosseini - Analyst

  • Sure.

  • I was wondering if you could provide some color as to what the booking mix was in the October quarter by product versus services.

  • Nancy Handel - Group VP and Chief Financial Officer

  • That's not something that we generally talk about.

  • But it is in alignment with where it has been historically.

  • Mehdi Hosseini - Analyst

  • Which is what?

  • Nancy Handel - Group VP and Chief Financial Officer

  • Shoring up -- it has really been centered around the 20 percent area.

  • So it kind of fluctuates around that environment; sometimes slightly better, sometimes slightly less.

  • Operator

  • Kevin Vassily, Susquehanna Financial Group.

  • Kevin Vassily - Analyst

  • Question on the October quarter orders -- what part of that order book is scheduled for delivery more than 9 months out from today?

  • Thanks.

  • Mike Splinter - President and CEO

  • You said 70 in the next 6 months, so -- (multiple speakers)

  • Nancy Handel - Group VP and Chief Financial Officer

  • Right.

  • I said more than two-thirds and then (technical difficulty) actually upwards towards 70 percent.

  • So the piece of the backlog which is scheduled out really towards the 9-month to a year is pretty small.

  • Kevin Vassily - Analyst

  • Is that consistent with what you have seen in the last several quarters?

  • Does that represent any change?

  • Nancy Handel - Group VP and Chief Financial Officer

  • No.

  • It really doesn't represent any change.

  • Operator

  • Mark Bachman, Pacific Crest Securities.

  • Mark Bachman - Analyst

  • Hi Nancy.

  • I want to go back to the bookings guidance here.

  • Can you give me an idea of just where your product bookings would have been without the aid from the service bookings in the next quarter?

  • Nancy Handel - Group VP and Chief Financial Officer

  • Where the product bookings would have been?

  • Mark Bachman - Analyst

  • Yes.

  • Just on a stand-alone basis.

  • If we take out the service from there, I am guessing that your products would have been down much greater than 35 percent.

  • I'm trying to judge how significant your service bookings business is in January.

  • Nancy Handel - Group VP and Chief Financial Officer

  • The service business bookings are up a reasonable amount in the January time frame.

  • Mark Bachman - Analyst

  • Would it be fair to assume, then, that your product bookings would be off say 45 percent without the strength in (ph) services?

  • Nancy Handel - Group VP and Chief Financial Officer

  • You know, it's in -- it may be in that range.

  • Mark Bachman - Analyst

  • Higher or lower than that?

  • Nancy Handel - Group VP and Chief Financial Officer

  • I think you're pressing the issue here.

  • So the environment -- overall the mix (technical difficulty) is (ph) oriented towards it been down 35 percent.

  • Operator

  • John Pitzer, CSFB.

  • John Pitzer - Analyst

  • Question for Mike -- Mike, this might be an argument in semantics.

  • But to date, I guess the optimistic argument is that this is just an inventory crunch and not a supply problem.

  • What do you need to see in your business other than April orders being down sequentially for you guys to start to feel that this is more than just an inventory issue?

  • Mike Splinter - President and CEO

  • Well, we are taking this very seriously, John.

  • Obviously, we are trying to structure our business and run our business so that we can be -- produce excellent financial results and still do the R&D and new product development, no matter what happens in the market.

  • Now -- so we are projecting down a little over 20 percent in revenue, 35 percent in bookings.

  • So I want you to think about this in the following way.

  • We are acting like this is serious and could last a long time.

  • However, all the signs that we see are that people are still investing in 300 mm.

  • Sure -- if they stopped, if there is more weakness, if the economy doesn't hold, it could get worse.

  • But as Nancy was talking about, we are still working on our variable spending.

  • If it gets worse, we'll cut more variable spending.

  • And if it gets -- comes back in the first (ph) (technical difficulty) well that would be nice.

  • So I think internally to the Company, we want to keep managing the Company up and down like that and allow consistency with our employees on how we manage.

  • But suffice it to say we're taking the situation seriously.

  • Operator

  • Edward White, Lehman Brothers.

  • Edward White - Analyst

  • I was wondering if you could qualitatively talk a little bit more about the cancellation activity in the quarter, whether there is anything to read from that as to how customers (technical difficulty) approaching (ph) the environment and what you might expect going forward in terms of cancellation activity?

  • Nancy Handel - Group VP and Chief Financial Officer

  • I do not think there is anything (technical difficulty) to read into that number.

  • I mean, we have a reassessment in terms of our backlog.

  • We hear from customers in the ones and twos category for -- on a routine basis.

  • So there is nothing really to read into that number.

  • And I wouldn't anticipate it being a lot of future activity.

  • I mean, we reassess it all the time.

  • And we'll deal with any information we get from the customers.

  • But some of it has just to do with timing.

  • Operator

  • Timothy Arcuri, Salomon Smith Barney.

  • Timothy Arcuri - Analyst

  • Just kind of a point to clarify -- if in theory you booked an order from a memory maker that is building a logic fab in the October quarter, would that have been in DRAM bookings or in logic bookings?

  • Mike Splinter - President and CEO

  • It would be in logic bookings.

  • Operator

  • Raj Seth, SG Cowen.

  • Raj Seth - Analyst

  • Mike, I'm curious if (technical difficulty) orders at 300 mm are driven, in your view, at all by increasing yields on that (ph) (technical difficulty) platform (ph).

  • Is that a major -- does that have a major impact?

  • What are yields today?

  • Where do you think they would settle longer-term?

  • Mike Splinter - President and CEO

  • Well, yields (ph) (technical difficulty) have come up pretty well on the 110 and 90 nm.

  • But I think most of what is going on -- sure, yields have a play.

  • But I don't think there has been like an industry-wide delta in positive yields versus where people thought (ph) (technical difficulty) would (ph) be.

  • So I do not think it is playing a very big role here.

  • Raj Seth - Analyst

  • Given your outlook, any sense in this cycle where you think utilization on an industry-wide basis bottoms?

  • Mike Splinter - President and CEO

  • I really don't have a projection.

  • I really couldn't say.

  • Operator

  • Jay Deahna, J.P. Morgan.

  • Jay Deahna - Analyst

  • Mike, I'm looking at the average decline in bookings guidance for the fourth quarter.

  • And it is around 20 percent or so (multiple speakers) for your competitors and what not.

  • Yours is considerably lower.

  • Why is that?

  • Mike Splinter - President and CEO

  • I mentioned that earlier, Jay.

  • If you look at our orders for the fourth quarter, which were even above our guidance and certainly above expectations, I think when you (technical difficulty) was available in Q4 and we booked it in Q4.

  • And we don't view that there is going to be the same amount of business available over the next 3 months.

  • And there's (sic) lots of factors around that obviously.

  • But if our orders (technical difficulty) 200 mm -- 200 million lower in Q4 and 200 million higher in Q1, you can do the math.

  • The percentage would be big-time different.

  • So it is really timing.

  • Operator

  • Tim Schulz-Milander, Morgan Stanley.

  • Tim Schulz-Milander - Analyst

  • You -- just going back to the gross margin, I know you made some comments about on a go forward basis.

  • But can you just -- I am asking if (ph) (technical difficulty) can you squeeze some more granularity for the gross margin in the current quarter?

  • Just a product mix element -- what it was priced towards and therefore how that pushed the gross margin down a few basis points.

  • Nancy Handel - Group VP and Chief Financial Officer

  • The margin reflects the distribution, as we had the increasing percentage in this quarter also of moving the 300 mm product.

  • We had the growth of AGS in terms of their contribution to the organization.

  • So it really is subtleties around that, in addition to be accruals for variable compensation that come within the margin category.

  • So I think that's the essence of what has impacted it in the fourth quarter.

  • And then going forward, you take into account the mix change between the systems business and some of the other business elements.

  • Paul Bowman - Managing Director of Investor Relations

  • Operator, we'll take one last question.

  • And then we'll make our closing remarks.

  • Operator

  • Robert Maire, Needham & Company.

  • Robert Maire - Analyst

  • In your order guidance and with what you have seen over the last month or so, what percentage of the order guidance -- or maybe you came give us a sense as to what amount of the downward order guidance is, due to perhaps pricing pressure or more competitive pricing given, that the environment is weaker.

  • What sort of pricing have you seen over the last quarter or 30 days that would support that?

  • Mike Splinter - President and CEO

  • (technical difficulty) Pricing really hasn't been a factor at this point. (technical difficulty) are holding, so I don't think it is a real factor here.

  • Paul Bowman - Managing Director of Investor Relations

  • We would like to thank everyone for listing to our fourth quarter earnings announcement.

  • The Web cast of this call is available on our Web site and will remain there until December 1.

  • As a reminder, if you would like to receive our fiscal 2004 filings electronically, you can sign up on our Web site.

  • Thank you for your interest in Applied Materials.

  • And this concludes our call.

  • Operator

  • Thank you sir.

  • And thank you ladies and gentlemen for your participation in joining us today.

  • We do appreciate your joining this conference call which has now concluded -- the Applied Materials fourth quarter fiscal 2004 earnings release conference call.

  • You may now all disconnect.