應用材料 (AMAT) 2005 Q1 法說會逐字稿

Welcome to the Applied Materials first quarter fiscal 2005 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.

Please limit your questions to one per firm.

As a reminder this conference is being recorded today, February 15, 2005.

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

Please go ahead, sir.

Thank you, Derek.

Good afternoon, and welcome to Applied Materials first quarter 2005 earnings conference call.

With me today are Mike Splinter, President and CEO;

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

Financial results for our first quarter were released on Business Wire shortly after 1:05 p.m.

PST.

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, including those relating to the semiconductor industry outlook, customers' expected equipment spending, the Company's market position, technology innovations, cost controls, operational efficiency, growth opportunities, strategic objectives, expected shipments from backlog, intended stock repurchases, profitability, delivery of greater shareholder value, financial targets for Q2 '05, and expected bookings.

Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Information concerning these risk factors is contained in today's earnings Press Release, and in the Company's filings with the Securities and Exchange Commission, including it's Form 10-K for fiscal 2004, and it's most recent Forms 10-Q and 8-K.

Forward-looking statements are based on information as of February 15, 2005, and the Company assumes no obligation to update any such statement.

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 Nancy Handel who will provide an analysis of first quarter financial results, followed by second quarter 2005 financial targets.

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?

Thank you, Paul.

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

I would like to begin by commenting on our results for the quarter, give an outlook on industry fundamentals, and then review Applied Materials priorities, highlighting some achievements that demonstrate we are making good progress on accomplishing our strategic objectives for the Company.

First of all, our Team delivered solid results when viewed against the backdrop of a challenging semiconductor industry environment.

We are satisfied with the results of the quarter, particularly in revenue and EPS.

We worked hard and executed well on the fundamentals.

We are gaining moment with the new product introductions and penetrations in key strategic collaborations, while receiving recognition from our top customers, and at the same time controlling costs and addressing our margins.

After rapid growth in the first half of 2004, semiconductor market momentum slowed in the fourth quarter with worldwide revenue estimated to have grown 15 percent year-over-year versus peak growth of 41 percent achieved in the second quarter.

As growth slowed and semiconductor demand chip companies moved quickly to reduce wafer starts and work off excess inventories.

This reduction of fab utilization was felt across-the-board, but particularly in the foundry space, and in older technologies, while 300mm advanced note factories continue to be highly utilized.

We estimate that foundry utilization dropped in the fourth quarter into the low 80 percent range, down from the high 90s in the previous quarter.

While foundry wafer demand is lower the outlook is improving.

Customers have indicated that they expect utilization to trough some time in the first half of the calendar year.

The memory market, including DRAM and flash, continued to see strong growth in revenues and bit demand.

For 2004 nan-flash demand tripled in bit terms, and is expected to more than double again this year.

Our customers remain confident about the health of the market, and are prudently managing their investments to meet demand.

On November's call, we said that after January, we would have a better feel for the year when our customers announced their CapEx plans.

We certainly are encouraged by recent public announcements on capital spending for the year ahead.

With these announcements, industry consensus on CapEx for '05 shifted upward to roughly flat for the year.

Therefore, we expect increasing equipment momentum in the second half of the calendar year.

Applied Materials is well-positioned in this environment.

Our customers have indicated that a larger share of their 300mm CapEx dollars will be spent on equipment.

First, we are tracking 40, 300mm projects that are scheduled to add capacity this year.

Second, the increasing complexity of wafer processing, including more process steps, more layers, and increased die size is raising the equipment intensity.

To put this in perspective on an equivalent wafer basis, a 65nm wafer will require an estimated 60 percent more equipment dollars than 130nm wafer.

Considering these 2 factors, we expect equipment spending will grow faster than capital spending for the foreseeable future.

In addition to receiving benefits from equipment spending, we expect to grow our share of the market.

To this end, Applied is providing breakthroughs, pushing the boundaries of process technology and delivering systems that enable leading-edge transistors and interconnects.

Innovation like this helps make more powerful devices affordable, increasing the potential application for semiconductors, and also the number of people around the world who can buy them.

With this in mind, we have confidence in the long-term expansion of the semiconductor industry.

AKT, our flat panel equipment business, is solid.

Our factory continues to be full, and we are booked out for the next several quarters.

We are beginning to see orders for next generation, that's Gen 8 equipment, and are expanding our product line.

This continues to be a good and growing business with increasing applications for flat panel displays and TVs and monitors.

This past quarter, we kept our eye on cost and achieved target profits demonstrating our ability to generate solid earnings, even during a weaker period.

We are going to continue tight cost controls and are taking steps like selected "shutdown days" to maintain a focus on our overall efficiency.

Our talent mobility program also allows us to move valuable employees to areas of higher productivity and new investment, while reducing workforce redundancies.

Overall, we are comfortable with the size of our workforce.

We are targeting improvements in efficiency through platform commonality in our major product lines.

Continuing to reduce the -- to make cost reduction, while further enhancements in cycle time.

The entire Company is focused on being fast and flexible with shorter cycle times and improved operational efficiency, and our customers have recognized this with awards for these efforts.

Through 2005, we will continue our quality programs and metrics, with the aim of another 2X improvement in our quality.

Winning products gain market share and we continue to make progress in adding to our market leadership.

In Q1, we completed the acquisition of Metron Technology to strategically expand our service product capabilities and offer more value to our customers.

We also acquired the gas abatement systems business from ATMI, this is called EcoSys.

As part of our Metron unit EcoSys extends our expertise in providing environmental solutions, a growing priority for customers around the world.

Our technology strength was augmented this past quarter with the announcement of a new entry in our SEMVision G2 family.

The industry's fastest and most powerful defect review systems.

We announced breakthrough technology for PVD copper barrier/seed, extending our thin films PVD leadership to 45nm.

Our new ALTA 4700 mask -- laser mask writer is aimed at 65nm critical layer manufacturing, and we are collaborating with DuPont Photomasks to use the ALTA 4700 for both 90nm and 65nm mask fabrication.

Breakthroughs are required in transistor technology as the industry surges forward and finds innovative ways to continue Moore's law.

Strain Engineering is an important technology for our customers, as it provides the transistor performance enhancements required for at least the next two generations of device scaling.

Applied Materials is at the forefront of strain-related equipment solutions.

The adoption of strain engineering has created a growth opportunity for our Epi and Thin Films Deposition products.

We also are seeing strong momentum with our Quantum X single-wafer high current implanter.

Since its release last July, Quantum X has received orders from 8 customers, with multiple follow-on shipments, and is in volume production with 8 tools shipped to 1 customer.

We recently announced the technology partnership with IMEC to include application for Quantum X on 45nm transistor development.

Applied Materials partnership programs around the world are strong.

Beyond IMEC and the partnership I mentioned with DuPont, we are collaborating with AmberWave to deliver 300mm strain silicon models.

We are also working with ASML to add a state-of-the-art litho tool in the Maydan Technology Center, offering us the first look at the issues our customers will face at smaller nodes.

And we are utilizing our metrology and inspection capabilities to aid customers on their most advanced [tip] development initiatives, such as design for manufacturability.

All these accomplishments help us achieve our top strategic objective, which is to shape Applied Materials to be fast and flexible, and deliver advanced products that meet our customers' needs.

With major improvements in efficiency demonstrated during this last year, our ongoing efforts will be aimed at reducing systems material costs, and continuing the drive to shorten our design and manufacturing times.

We have strong Management from technology to operations.

I recently made some changes that I believe strengthen our Team, our top managers, our industry leaders, and together they guide the excellent work our employees are performing during customer satisfaction and deliver results.

From top to bottom, our employees understand the value of growing the Company and extending our leading position.

On a more personal note, I was very proud to see this through the past quarter on top of their hard work Applied employees were able to rally for those less fortunate, running one of the largest food drives in America, and then responding generously in the wake of the Tsunami.

It's a sign of their drive in the face of a challenge, and I believe it speaks to the kind of partner we can be as a Company and, of course, the commitment we bring to work every day.

Thank you very much, and now I'll turn the call over our Chief Financial Officer, Nancy Handel.

Nancy?

Thank you, Mike.

And good afternoon to everyone.

I will now cover Applied's financial performance for the first quarter, areas of focus for 2005, the Company's financial goals and challenges for the next quarter, and finally, our outlook for the second fiscal quarter of 2005.

Orders of 1.7 billion were 36 percent lower than the fourth quarter of 2004, which is 1 percent lower than our target, and about flat with the first quarter of 2004.

Revenue for the first quarter was 1.8 billion, 19 percent lower than Q4 of 2004, reflecting the slightly stronger performance than our target, and 14 percent higher than Q1 of 2004.

Operating income for the first quarter was 21 percent of revenue at 382 million, compared to 24 percent for Q4, 2004, and 6 percent for Q1, 2004.

Net income was 289 million, or $0.17 per share, compared to 455 million, or $0.27 per share for Q4, 2004, and net income of 82 million, or $0.05 per share for Q1, 2004.

Gross margin for the quarter was 44.4 percent, compared to 46.6 percent in Q4 of 2004, and 43.5 percent for Q1, 2004.

Ongoing EPS for Q1 of 2005 was $0.17 per share, compared to $0.27 for Q4 of 2004, and $0.12 per share for Q1 of 2004.

Ongoing results for the first fiscal quarter of 2005 and the fourth fiscal quarter of 2004 were the same as the reported EPS.

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

Orders by major geographic areas were as follows -- Taiwan, 31 percent;

North America, 20 percent;

Europe, 17 percent;

Korea, 15 percent;

Japan, 9 percent; and Southeast Asia and China, 8 percent.

In the quarter, we saw a certain order pushouts from Japan, some softness throughout Asia, as well as lower flat panel orders after strong investment in 2004.

This reduced system demand was offset by annual service contract renewals from many customers.

DRAM orders represented 33 percent of total systems orders and foundry orders were 16 percent.

Logic, flash, and other made up the remaining 51 percent of total systems orders for the quarter. 300mm orders represented approximately 82 percent of total systems orders received in Q1 and 82 percent of the orders were also for sub-100nm product.

During Q1, 2005, 3 orders were in excess of 100 million, 3 orders were between 50 million and 100 million, and 10 orders were between 10 million and 50 million.

Backlog for the quarter was 3.21 billion, compared to 3.37 billion for the fourth fiscal quarter of 2004.

Backlog adjustments totaled 58 million, consisting primarily of cancellations.

Greater than 75 percent of the systems backlog is scheduled for shipment in the next 2 quarters, and approximately 85 percent of total systems backlog is for 300mm product.

We are pleased with the Company's financial performance during the first quarter of 2005, as revenue and EPS exceeded our targets.

As most of you are aware, we have provided a financial model for operating and net margins at various levels of quarterly revenue.

I would like to update you on our progress against these goals, as well as on other key financial metrics that we use to measure our business.

Our operating margin at 21 percent and our net margin at 16 percent met our model as the Company reduced cost in response to lower business levels.

Year-over-year we delivered 225 million of additional revenue, while holding ongoing operating expenses at approximately the same level, and while maintaining industry-leading R&D investment.

Gross margin of 44.4 percent was within our expected range, but lower than the previous quarter due to a combination of product mix and lower factory absorption.

The Company performed well, delivering a return on invested capital above 30 percent.

We define "return on invested capital" as operating profit after tax calculated on an annualized basis, divided by the average invested capital less cash, cash equivalents, and short-term investments.

Our balance sheet continues to be strong positioned as a strategic asset to enable the Company's growth.

Cash, cash equivalents, and short-term investments decreased 180 million to 6.4 billion during the quarter.

During the first fiscal quarter of 2005, the Company repurchased $300 million in common stock during the quarter.

Cash generation and cash balances are sufficient to support an increased level of stock repurchase, and as in the past 2 quarters, we again plan to repurchase shares in a range of 300 to $500 million in Q2.

Accounts receivable increased by 71 million, due to a change in the regional mix of the business, and a higher level of shipments that occurred during the last months of the quarter.

Inventory increased modestly as a result of the Metron acquisition, and flat panel display inventory increased to support higher billed volumes.

Volume manufacturing terms remain strong at over [6] turns.

Headcount at the end of the quarter was 12,899 regular employees, an increase of approximately 700 from the prior quarter, primarily as a result of the acquisitions.

Amortization and depreciation totaled 79 million, which was 9 million lower than in Q4.

For fiscal 2005, the Company's financial focus is to support our growth objectives by maximizing profitability, utilizing our strong balance sheet, and successfully integrating recent acquisitions, such as Metron and EcoSys.

We will continue to improve our operational efficiency by investing in system upgrades and other cycle time reduction programs.

We are confident we will be -- continue to improve our profitability through material cost reductions, increased use of common platform architectures, and parts and other means of improving operational performance, such as our companywide cycle time reduction initiatives.

Our focus is on delivering increased customer value while executing our financial goals.

We will continue our strong asset management focus, and focus on increasing profitability of our new service offerings.

We believe that our outstanding free cash flow generation, coupled with our ongoing stock repurchase program will enable Applied to deliver even greater value to our stockholders.

Our second fiscal quarter targets are as follows -- Orders are expected to be flat to down 10 percent from Q1 levels, revenues are targeted to be flat to slightly up from Q1 levels, and we project our EPS to be in the area of 16 to $0.17.

In the near-term we believe that customers will continue to invest based on their production and technology requirements.

We are providing a target range that at the top-end is contingent upon a few large orders that we expect we'll book this quarter and next.

This completes my remarks, and I say thank you, and I turn the call back to Paul Bowman.

Thank you, Nancy.

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

We would like to entertain questions from as many callers as possible, as such, we will limit our responses to one question per firm.

If you have a follow-up or second question I would ask you to get back into the queue.

Derek, please begin with the first question.

[OPERATOR INSTRUCTIONS].

Your first question comes from Timothy Arcuri with Smith Barney.

Hi, great quarter.

Mike and Nancy, can you give us some idea, as you look at the model, this downturn it has been, holding up much better than it ever has before, due to a combination of better cycle times and also better SG&A.

How much more can you drive this from here, and, should we -- what should we think of the model going forward, and kind of what specifics are you going to do to kind of drive it from here?

Well, we're very pleased with the financial performance of the Company at these revenue levels.

We have, as you know, our work, ongoing now to integrate our Metron new acquisition, so that will put a little bit of pressure on some of our financial performance in the very near-term.

But we expect that we should be able to focus on achieving our target levels of profitability going forward.

So do you think, Nancy, that there's more kind of low-hanging fruit that you can get at, or is it more, you have to kind of dig into the meat of it now going forward?

I think that we're pleased with the way the Company is performing at these levels.

We want to make sure that we go after additional cost reduction initiatives -- our material cost; our common platform initiatives; reducing our cycle time.

We've got everybody here focused on reducing discretionary spending.

We are constantly looking at our temporaries and our contract labor reductions, and as you know we used "shutdown" in the prior quarter, and would not expect some shutdown savings in this quarter.

So we're using all of those tools such that we can keep our cost in-line with the model and continue to invest in R&D.

I figure that kind of saves --?

All right.

Tim, I do want to give as many callers a chance to ask questions.

And so Derek, I would like to move on to the next question.

Thanks, Tim.

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

Yes, good afternoon, and congratulations on the strength of your results.

There's a lot of nervousness in the industry about the sustainability of memory orders and DRAM orders.

Given your insight and your breadth of customers in that segment, can you provide us with some outlook during the next couple of months and how you see that evolving?

Thank you.

Ali, this area we get a lot of questions on, and my look and discussion with various customers kind of goes like this -- Right now, DRAM prices are continuing to hold up.

There's no inventory that I see in this space really anywhere.

Not only that if we couple DRAM with flash, the flash market has been going extremely well.

And, then, you just look at the process technology from our -- and look at it from our standpoint.

The transition to DDR2 is going to increase die size some.

It's going to push to the next generation of the technology, where there is more -- the processes are more complex.

They take more steps.

They take more equipment.

So I think the market seems to be holding up.

We still think that DRAM is going to be in strong demand from PCs from consumer products and the like.

And flash memory is going to continue to grow, and those are very, very positive for us.

Would it be fair, Mike, to say that you see your memory customers ordering more on a steady basis than in lumps as they used to in the past?

Well, certainly in this last 15 months or so, they've been really quite steady in continuing their investment.

Thank you.

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

Yes, hi.

Maybe you could just give a little more color on the outlook for foundries?

Whether you see, with the positive announcements from TSMC, if you see some order momentum there?

And also with the memory split there's been a lot of, those that are a bit for bearish and cautious on the outlook.

The DRAM/Flash split, and people worrying about it being above 50 percent, I see you just split out the DRAM.

Could you split out flash and could you say whether you are worried about that being above 50 percent?

Okay.

So first on -- Michael, you cleverly asked 2 questions in 1.

So on foundries, first of all, we're starting to see some signs of good news.

I think it's still too early to say that it's industrywide.

But I think we expect, and our customers have said, that they expect that their utilization to bottom out in this next few months.

But I think the other factor that's going on in the foundry business for us is that they have to move to 300mm and they have to move to the next generation of technology.

And so those investments are continuing and we expect that if business shows much sign -- some signs of improvement, that they would accelerate.

On the memory question, we generally don't break out -- I think that we've said that our memory booking was 33 percent, and we don't, today, think that it's -- our booking is not over 50 percent memory.

Although, it's very close to that.

I think you said that that was just the DRAM piece if I heard you right.

That DRAM is 33.

Memory booking is not as quite at 50 percent for us.

Okay.

Thank you.

Your next question comes from Jay Deahna with J.P. Morgan.

Hi, good afternoon.

Yes, you made a comment in your opening remarks that you see a second half demand improvement.

Was that fiscal or calendar?

And does that imply that you have to see bookings trend up in July in order for that to happen?

I tried to be specific on this and say calendar quarter, Jay.

And, yes, we would have to see bookings upturn either at the end of the second quarter or beginning of third quarter to realize that.

Okay.

Thank you.

Your next question comes from John Pitzer with CSFB.

Yes, guys, good afternoon.

Congratulations.

I would like to try to sneak in 2 quick questions.

First, flat to up revenue for April, flat to down EPS.

Nancy, if you could just help us understand what's going on with the margin structure?

And, then, you said there was a couple of swing orders between the high-end and the low-end of the order range, do you care to share either geography or device-type of those orders?

Thanks.

Well, with respect to the guidance and the model performance, we think that the EPS numbers that we've given are the range of what we would expect.

This will -- Q2 will be the quarter where we bring in Metron and we have some lightly higher contribution from our service area.

And so we think we've accommodated that in our business outlook.

While we continue to have a really focused effort in terms of cost management inside the Company, I think that's -- should be achievable, and then to provide in-line with our guidance and our model.

With the other comment was on the --.

The swing orders.

-- swing orders.

So, no, we're not going to -- there's several different geographies that could participate in that.

So I wouldn't want to pin that down on any one particular region at this point.

What about device-type, Nancy?

Is it memory or is it non-memory?

I don't think that I would say the same about that.

There's a couple of different orders in different areas that could make a difference here in our outlook for the second quarter.

Great.

Thanks, guy.

All right.

Thanks.

Your next question comes from Jim Covello with Goldman Sachs.

Good afternoon.

Thanks so much.

Quick question.

Your calendar year '04 orders were up 80 percent year-over-year, along with some of your competitors, and CapEx for the industry was up about 50 percent or so.

So doesn't that imply that a lot of the orders for '05 CapEx were placed in '04?

And how do we get comfortable with then, with the comments that bookings have to go up just because CapEx is up -- or flat in '05?

Thank you.

Well, you're right, our revenues were also up by 80 percent in '04, Jim.

The point on the second half --.

Like the revenues were up about -- calendar year were up about 65 percent.

I'm talking about calendar year.

Okay.

So the point is that to see continued growth, and with lead times as we're currently projecting, we think that to really see a ramp up in the second half of our Q3 and Q4, and then keep it going into our Q1, that we would have to see a change in our current rate of order bill.

We don't think our current rate at roughly 1.7 would support what we would like to achieve in our fourth quarter.

I hear what you're saying there.

But the question was sort of if a lot of the orders last year were placed last year for this year's CapEx, a lot of folks in the industry are sort of using the customer's flat CapEx budgets as the reason why bookings momentum has to increase in the second half.

And if a lot of these orders were placed last year, doesn't that mean we have to rely then on '06 CapEx being higher to support continued booking momentum in the second half?

Well, I suspect we would.

But the way I've been thinking about this is if we look back to '04, and the spending that happened in '04 -- now I guess we can't be totally certain on the spending that happened in '04.

But we look at the spending in our -- in '04, and we look at it more -- we generally look at it from our fiscal standpoint.

If we're looking at it from that standpoint, we think that there has to be an increase in run rate in the second half of the year.

I haven't done the total analysis of how much is being spent in these first few months.

But looking at announcements from our competitors and our own, I don't think it's at the same rate that was being spent back in Q3 and our Q4.

Okay.

Thanks very much.

Your next question comes from Bill Lu with Piper Jaffray.

Yes, hi there, good afternoon.

Just a couple of questions.

Mike and Nancy, you both talked about platform commonality in your prepared remarks.

Can you just talk a little more about that?

Are you actually going to re-engineer some of your systems through this downturn?

What exactly did you mean by that?

Well, what we are doing is we're moving our current platforms to have many, many more common parts.

For instance, today we make a producer Thin Films Deposition System and a producer Etch System.

A few years ago they had 20 percent common parts, now they have 80 percent common parts.

So we're going everyone of our existing platforms and ensuring that we have maximum commonality across all our product lines.

We've recently completed a gas panel redesign, so that we could use this on many, many different machines.

It's a huge cost reduction for us, increases our buying power.

It's just a couple of examples of the kind of things that we're doing now.

We have many, many projects along these lines.

All right.

Thanks.

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

Hi, Mike, could you give us some idea what's going on with Japan here in these pushouts, if this is a trend building?

And any indications what CapEx budgets are looking like coming out of the Japanese here at the year-end?

Clearly, from our order numbers, Japan is down dramatically from where they were mid-last year, raging kind of from 15 to 25 percent of our orders.

So I think we'll see a little more clearly in the next -- after they announce at the end of -- or in April what their year-end results are.

But it's very mixed, Mark.

We see some players that are still very aggressive, and others that are pulling back.

But the think we have to remember is pretty much all the players are now in the 300mm game, so they can expand their capacity and expand it at the leading edge with leading technology.

So I think we're going to -- assuming that their business stays -- gets stronger this year, I think we'll see an increased investment over the year.

Next question, Derek.

Your next question comes from Brett Hodess with Merrill Lynch.

Given the increasing service component with Metron and EcoSys and what not coming in, would you expect that these are going to get to the size where there is more stable revenue pattern over the cycle will start to slow your peak revenue growth versus pure equipment companies?

And do you think that it will get to the size where it, therefore, mutes the downturn a little bit?

And if you could give us some idea of what timing you think that those types of changes may occur in?

Yes, I'll offer a comment on that.

I mean, we're -- as you know, we've talked a great deal about expanding our service business, and the initiatives that we have in that area to provide more services and take a little bit greater share of our customers' operating expense dollar.

We think that, it will take some time for us to work through our complete strategy.

I think it's, in the multiple year kind of range.

But in the near-term, what we are doing is bringing in the Metron activity.

We'll take a couple of -- some time then to get their spending and to get the synergies and cost reductions and the efficiencies that we're looking for with bringing Metron inside our organization.

But overall we think that the service business provides significant growth opportunity for us and it's going to contribute to our profitability at an equivalent level with the other ones.

The other divisions that we have.

Thank you.

Your next question comes from Raj Seth with SG Cowen.

Hi, thank you.

Mike, as we begin hopefully to head up word again in terms of orders, can you comment on which of your major product segments are growing faster than your corporate average, or you expect to, and which are growing slower?

Well, this is a bit difficult.

I'm not sure whether I'll tell you which ones are growing slower, but I will tell you which ones are growing faster.

We are -- our Inspection and Measurement Divisions are certainly growing faster, and had a great year.

AKT is growing faster, actually had a record quarter.

Our Etch business is growing faster than the average.

And I lump our kind of front-end products group, they're growing, and I expect them to grow faster than the average.

I wouldn't say they're growing faster than the average at this point, but they are making market share gains, and they are making penetrations.

And their work, their technical work on strain engineering, shallow junctions, all the things that it takes to make the next generation transistors really are now catching hold with the customers.

So in the areas where we have huge market share, and I think you know where those are, those are growing -- those dominate the Company's revenue, and grow pretty much at our Company average.

Sure.

That etch performance you talked about, is that the etch market growing faster than the rest of the business or is that predicated on share gains?

Well, we believe that both happened during the last 12 months, both the market grew faster than other markets, and we grew faster than the market.

Thank you.

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

Thanks, good afternoon.

A question for Mike.

In terms of the order book for April, could you talk qualitatively about which regions may be strong, and which may be weak?

Well, you know we don't give specific numbers.

But it really is more about accounts, and, we realigned the Company to focus on accounts rather than regions.

And I think that we expect memory to continue to move along quite at -- quite a brisk pace.

We expect foundries to start to come back maybe around the end of the quarter.

And the leading IDMs are pushing to 65nm.

So a few of those leading IDMs we expect a little more activity there.

Excellent.

Thank you.

Your next question comes from Suresh Balaraman with ThinkEquity.

Just a follow-up on the Japan question.

With the orders that are pushed out, pushed out under the April quarters?

And also can you give us your thoughts on if there are any particular product segments that are outlayered in the pushout?

Thanks.

I don't think we said anything about pushouts, so -- oh, you said Nan.

Well, you can answer the question then.

Yes, in the remarks.

So the orders are -- you know, I don't know that I would say they're ready to be booked in the second quarter.

I mean, they'll show up when customers decide to make that commitment.

So -- and then for a particular -- I'm sorry, the second piece of your question was?

Whether any particular product groups that were outlayered in terms of the pushouts?

No.

It's kind of a general customer booking kind of environment.

Great.

Thanks.

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

Hi, good evening.

You mentioned in your prepared remarks key strategic collaboration, is this just with technology or does it fit your service offering development?

And in your growth strategy for service do consumables fit in the meeting?

Steve, we're losing you.

We can barely hear what you're saying.

Is that better?

Yes, that's better.

You mentioned key strategic collaborations in your prepared remarks.

Is this just with technology or does it fit into the service offering, as well, and with respect to your growth strategy for service, do consumables fit in, in a big way?

So the answer is, yes.

We announced earlier last year a number of collaborations in the service area beyond the, kind of technology-oriented ones.

We do think especially with the acquisition of Metron that there are a number of consumables that Metron already sells.

We would expect to continue to grow that business.

Next question, Operator.

Your next question comes from Robert Maire with Needham.

Yes, given what you're describing in terms of orders and a stronger second half and all that, it seems as if you're describing 2005 somewhat as a mirror image of 2004.

I don't want to put words in your mouth, but I'm looking if that's what you're looking for.

And given that it also seems to suggest that perhaps right now where we are might be the worst of it, or the bottom of it, or, somewhere in the calendar first quarter might be the bottom of business.

Could you give us your sense of, timing of the curve, or the cycle, if you will?

Well, I think our buoyancy compensators are just above the bottom.

We're in or around there.

I believe that.

Exactly when we're going to see an inflexion point here, I'm really not sure, and I'm not, at this point, ready to make a conjecture.

Its' -- from our viewpoint, and from our projection of our second quarter, it's not in our second quarter.

So I would leave it at that, Robert.

Okay.

Very good.

Thank you.

Your next question comes from Mehdi Hosseini with FBR.

Yes, this is -- this question is for Mike.

Earlier you mentioned about your customers must spend on 300mm; if you could elaborate?

And considering the fact that there is still excess capacity at 200mm utilization rates are at depressed levels at those notes, what if your customers, especially foundries, were to drop prices for those technology notes?

And to the extent that it would make some of the chip companies more compelled to stick with the 200mm?

And to that extent if you could elaborate why you said your customers must spend on 300mm?

If you could just reconcile the 2 different thesis?

Well, most of the 200mm factories are on older generation technology, for one.

I think that's critical.

And lowering the price won't necessarily -- the market is only elastic to some degree.

I would think -- one of the things that surprised me during this last year is how quickly products have been moved to 90nm and 100nm.

Those factories are still relatively full.

And the reason I say surprised, is that in the 130nm note it didn't happen as fast or at least as fast as we are perceiving that has happened.

To me this is an indication that companies truly are getting the competitive advantage out of moving the 300mm where the tools are better designed, they're more productive, and they're getting the cost benefit of the shrinks.

And so for us as we keep moving down that -- those nodes, we think the capital intensity gets greater at every one of those nodes, and it's positive for us.

I guess what I'm trying to understand is, yes, I agree that product life cycle is getting shorter and shorter, to that extent maybe the lot size at Taiwan SEMI is getting smaller.

So if I'm Taiwan SEMI, am I seeing marginal improvement in my profitability by continuing to act passed the 90nm?

What if I just drop prices at a trailing edge, so that economic benefits by far exceed marginal improvement in performance of the device?

Well, I think you would have to ask Rick and Morris on their strategy.

But I think it's really about product life cycle and where the products are going, and what performance is required for their products.

I'm certain they want to keep their factories -- their older factories full.

I'm sure of that.

Thank you, Mehdi.

Next question, Operator.

Your next question comes from Kevin Vassily with Susquehanna.

Yes, hi.

Nancy, you mentioned that the Q2 target for stock buyback was somewhere between 300 and 500 million.

Last 2 quarters, you've touched both ends of that spectrum.

Any color on why the January quarter saw, such a big drop, from the $500 million-level that you guys did in the November quarter?

I don't think there's any, meaningful strategy behind it.

The first tends to have a fair amount of time in the front-end of it where we don't buy, and then we had the holiday periods where we weren't here to execute.

So our 300 in the first quarter we thought was a good strategy and we expect to be towards, I think, the heavier end of the range in this second quarter outlook.

Okay.

Thank you.

Your next question comes from Ben Pang with Prudential.

Hi.

This is a follow-on on somebody's question regarding the capital intensity and the cost efficiency.

You mentioned at one point that customers are moving to 90nm, et cetera, 300mm because of cost efficiencies, but then you're also saying that the capital or the wafer fab intensity gets higher for them.

So how does that give them better cost efficiency going forward?

Thanks a lot.

So on each node they get to squeeze about twice as many transistors in the same space, and typically they can shrink a product after all of the overhead is done by roughly 30 percent.

So they end up netting about a 30 percent cost reduction, going generation-to-generation, if yields are the same, if their operational efficiencies are the same.

But you also mentioned the die size was actually increasing?

Well, die size has always increased in this industry as more complexity goes on each chip.

I cited DDR2 as a good example in the DRAM space where there is more overhead to ensure the speed of the product.

And there's just more capability and more transistors, more features on many, many products.

Okay.

Thanks a lot.

Your next question comes from Gerry Fleming with WR Hambrecht.

Yes, Mike, the Trade Press reported recently that the Exim Bank had rejected a guarantee of a loan to SMEC for a three-quarter of a billion-dollar order of equipment from Applied.

I wonder if you could give us some color on the status of that order, the possibility of a guarantee?

And, then, also a little bit more on just whether -- how active is the Exim Bank been in supporting people in this industry as opposed to just Boeing?

Well, I don't think we can comment on what the Exim Bank is specifically doing, but I think Nancy will comment on our thoughts on this.

We, followed this very closely, and I mean we are disappointed that Exim Bank has, failed to act on our industry's customers' loan request so, high-tech exports are very vital to the U.S. economy.

The Exim Bank has been engaged with our industry historically in a very positive way, so we think that they should be able to relook at this.

We're hoping that they'll relook at this position going forward.

But from our personal outlook we don't expect this delay.

Hopefully that's what it is, to have any affect on our current quarter outlook.

It isn't related to advanced technology going to China under a quarter micron?

No.

Okay.

Thank you.

Your next question comes from Mark Bachman with Pacific Crest Securities.

Hi, Nancy.

I am going to try to squeeze in 2 very quick questions.

Historically, Q1 orders here are, aided by seasonally strong service bookings.

Did the service bookings that you recorded this quarter differ materially from historic percentages?

No.

Q1 does strong point for our service business.

So and this quarter was in alignment with the past.

Okay.

And just on your revenue guidance, can you give me an idea apples-to-apples, quarter-to-quarter here so I can compare, how much is your revenue guidance being aided by Metron and the ATMI deal?

I think there's some contribution from Metron, kind of in-line with what, they did in the past when they were their own independent company.

Obviously, also reflecting the -- where the business is in the cycle right now.

So that's where we are.

Could you kind of ballpark it just, quantify that on a dollar figure?

No, I don't -- we don't break out that way, so.

Thanks, Mark.

Thank you.

Your next question comes from Timm Schulze-Melander with Morgan Stanley.

Hi there.

Good afternoon, guys.

Nancy and Mike, just maybe 1 question with 2 parts.

The first is just on the service business, you talked about working to improve the margins there.

Could you maybe just give us a little bit of granularity, kind of where you would expect the benefits to come through?

Should we anticipate them as soon as the July quarter, or are they more sort of second half weighted, or maybe even into the next financial year?

And then secondly, I guess I have to ask the question, one of your peers obviously yesterday announced that they will be making dividend payments to shareholders on a go-forward basis.

Just want to get an update from you guys as to where you are on that, and what are some of the sort of key reasons that you would not do a share buyback going forward?

Thank you.

Yes, let's -- we'll deal with the first one, the looking at the AAGSR Service Group business.

The current environment is also affected by the mix within the service business, that the -- obviously, the fabulization rates have, drawn down some of the demand for parts.

Some of our use equipment business has also reflected some of that industry downturn.

So we've had a greater contribution within that business unit from the labor side of the business, which has a little bit different margin contribution.

So their mix, in terms of their growth margins is something that we -- is affected by the product mix that flows through there.

Their contribution at an operating margin level, though, is in-line with the rest of our organization.

So we expect them to continue to achieve in that manner, and it will take us a little bit of a time to get Metron integrated up to those levels of performance.

But it won't be all that long.

With respect to the dividend, this is one that we've gotten questions on regularly, and our comment back is that, as we've done in the past, and in very routinely, we evaluate our capital structure and our cash flow requirements.

And we are currently engaged in executing a very significant share repurchase program.

We spent over 800 million in the last couple of quarters to buy 48 million shares.

So we've got the cash deployed in that manner to return value to the shareholders.

But we'll take another look at it again and provide more update at our annual meeting coming up in March.

Thanks, Timm.

Thank you.

Your next question comes from Tim Summers with Stanford Financial Group.

Yes, thank you.

A financial question.

The marketing and sales expenses in the quarter fell fairly dramatically from the fourth quarter levels.

I'm wondering, were there any unusual items to account for the drop off, and where do you see expenses in marketing and sales going from here?

Thank you.

I think you can look at that in terms of just the overall investment in our BLE or below-the-line expenses.

But the first quarter reflects the fact that our variable compensation which was, accrued for with our -- year of performance in '04, that variable compensation now that it has accrued in Q1 reflects the new year and the new business environment.

So there's savings throughout the BLE structure associated with that.

There's also reinvestment in the R&D area to fund the initiatives that we have under way.

So those savings are showing up, are evidenced primarily in marketing, and selling, and G&A.

But there's cost reductions throughout the organization that we're targeting.

Thank you.

Your next question comes from Stephen Chin with UBS.

Great.

Thank you.

First a clarification.

Mike you made a comment about the flat panel display business being booked out for the year, can we interpret this to mean that flat panel display orders have troughed here in fiscal 1Q?

And if I could sneak a quick second question in.

In your prepared remarks I didn't hear an update on electroplating, I was wondering if you could give us an update on that?

Thanks.

Sure.

I didn't say anything about flat panel orders, actually.

I don't think they are the same kind of indicator for the business as in our equipment business, because we -- because there is such a long lead time for these pieces of equipment.

So right now we're booked out through the end of the fiscal year.

And we do expect as the companies start to move to the next generation, generation 7/8, that orders will return as those factories start to get planned and put in -- start being built.

On electroplating, we really like our SlimCell machine.

It's out at numerous customers now.

We've been taking share.

We think that this machine will really show it's capabilities as we move through 90 to 65nm.

It has excellent defect.

Excellent cost.

So we're still very bullish.

A very reliable product.

Because the customers -- in fact, I was visiting with a customer on Friday who just said they absolutely loved this machine and it's capability.

Thanks, Stephen.

Operator, we have time for one last question, and then we'll make our closing remarks.

Your final question comes from Timothy Arcuri with Smith Barney.

Hi, great.

I just wanted to follow-up on that first question on manufacturing cycle times.

I believe that your cycle time used to be across the Company about 20 weeks, about 2 or so years ago, and I believe now they're about 10 to 11 weeks.

How far can you push this?

So if you look out maybe 6 months, where do you thing cycle times will be, from that current 10 to 11 week range?

Well, Tim we try to look at -- by the way, you got the first question and the last question. [Laughter].

That was pretty darn good.

The way we have tried to look at this is from the time we essentially take the order or we, start the machine in our manufacturing line, until it gets released to a customer.

And we're really aiming at getting that time, manufacturing, plus install, plus checkout, handover to the customer down, our long-term goal is to get that under 90 days at the end of the year we think it will be under 120 days.

So roughly this gets split 50/50 right now, between our time inside our Company and out.

Okay.

You're saying it's 50 days inside and 50 days outside, and the goal is to get that 100 down to below 90?

Yes.

Great.

Thanks a lot.

Thank you.

Okay Operator, our closing remarks.

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

The Webcast of this call is available on our website and will remain there until March 1st.

Also, Applied Materials will hold it's annual meeting for stockholders and analysts on Wednesday, March 23rd, 2005, at the Santa Clara Convention Center.

We hope to see you there.

For further information regarding the stockholders meeting, please refer to the proxy.

As a reminder, if you would like to receive our fiscal 2005 filings electronically, you can sign up on our website.

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

That does conclude today's Applied Materials first quarter fiscal 2005 earnings release conference call.

You may now disconnect.