應用材料 (AMAT) 2005 Q2 法說會逐字稿

Welcome to the Applied Material's second quarter fiscal year 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.

At that time, if you have a question, you will need to press star and the number one on your telephone keypad.

As a reminder, this conference is being recorded today, May 17, 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 second 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, Intellectual Property, and Corporate Secretary.

Financial results for our second quarter were released on Business Wire shortly after 1:05 P.M.

Pacific time.

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

Today's earnings call contains forward-looking statements including those related to the semiconductor industry outlook, the near-term business conditions, customers investment in advanced technology, Applied Materials strategic position, technology innovations, product capabilities, market share momentum, growth opportunities, future shipments, integration of acquired businesses, cash deployment strategy, balance sheet strength, cost controls and operational efficiencies, delivery of stockholder value and third fiscal quarter financial results.

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 its Form 10K for fiscal 2004 and its most recent forms 10Q and 8K.

Forward-looking statements are based on information as of May 17, 2005, and the Company assumes no obligation to update any such statement.

Today's call will begin with an update on the business by Mike Splinter, followed by Nancy Handel, who will provide an analysis of the second quarter financial results, followed by third quarter 2005 financial targets.

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

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

Mike?

Thanks, Paul.

Good afternoon and thanks to everybody for joining our call.

My comments today will cover our current prospective on the industry as well as Applied Materials' recent progress and strategic focus.

During Q2, in a market where conditions were at best mixed, Applied Materials performed well, meeting our financial targets and generating strong cash flow.

Nancy will review all the specific details, but let me say that we are pleased to have growth and revenue, net income and earnings per share.

These results reflect focused effort by our team and continued confidence in Applied Materials on the part of our customers.

Based on my discussions with customers and observations of the industry, I see the semiconductor market beginning to display some positive signs.

That's despite the current uneven capital investment environment.

According to FIA, the chip industry demonstrated unexpected strength with first calendar quarter sales up more than 13% year-over-year.

Consumer spending on electronics was stronger than historical patterns.

IDMs reported first calendar quarter sales above expectations and some made positive comments on demand.

Memory companies continue their investment in DRAM and flash memories.

Flash demand is particularly strong and exceeds current capacity.

Forecast shows strong growth for flash memory this year, over 150% in bid terms.

DRAM capital investment is very healthy, although not as strong as the peak in the fall of 2004.

Customers continue to invest in 300mm technology to stay cost competitive and their new designs for DDR2 and the 512 megabyte and 1 gigabyte chips have larger die sizes and therefore consume increased silicon area and require the latest technology.

Another positive trend is that foundries are starting to see order growth with wafer starts beginning to increase and projections that utilization levels will reach high 80s to low 90% in the second half of the calendar year.

Foundry utilization, while beginning to rise, may not be ramping fast enough to trigger the capital investment implied in CapEx budgets announced for '05.

Fabless 90-nanometer product design and verification is proving to be more difficult than the industry expected and, therefore, has delayed fab ramps and as a result we expect system orders and deliveries to foundries to be at a low point during the next three months.

Overall, I believe the semiconductor industry will continue to see positive growth in 2005 due to improvement in wireless handset demand, strengthening PC demand, and continued strength in consumer electronics as well as movement to the next generations of technology.

According to independent market researchers Gardner Data Quest and VLSI Research, Applied Materials significantly grew market share from calendar 2003 to 2004, with gains larger than any of the other top ten companies.

And across the board gains in segments from CMP, CVD and PVD to EPE(ph), etch and metrology, these gains are the result of the confidence our customers have in our technical solutions and the enhanced productivity our systems offer.

We are very proud of Applied Materials' technology leadership and the market share that it has gained over the last year.

From a technology perspective, the 65-nanometer node is under development, with many customers nearing completion of equipment selection.

At this node, the industry is experiencing the cost of complexity as manufacturing becomes increasingly complex with more specialized equipment and technology needed to continue to make progress and deliver higher yields.

Along with new technology, the increasing die sizes, together with more layers, more process steps and more wafer passes, all contribute to a rise in equipment intensity at 65-nanometers.

Anticipating the complexity of next generation designs, we launched the Applied OPC Check product this past quarter.

We're the only system in the industry that performs automated qualification of optical proximity correction based chip designs.

When used in conjunction with the Applied VeritySEM metrology system, the OPC Check tool cuts mass verification time by as much as 90%, solving critical product startup issues for our customers.

In our front-end business, we continue to see positive momentum, with our quantum X implanter gaining several new customers over the quarter.

We also made significant progress on customer acceptance of our strained silicon and selective EPE technologies.

Applied Centura Gate Stack has been broadly accepted by logic foundry and DRAM customers at 90-nanometers.

During Q2, we were pleased to announce that PSMC qualified our gate stack system for its 65-nanometer transistor processes.

Yesterday, we launched the Vantage RadOx for oxidation.

This is a market historically dominated by Bass Furnaces.

But as technology scales, the requirements for quality and reliability become much more stringent.

Our new system delivers the highest quality oxide films on a small footprint, high productivity platform.

A growth opportunity here in the rapidly growing flash market for us.

For the interconnect, Applied continues to demonstrate outstanding technology.

We are working with customers to continue to earn the leading position by helping them reach new levels of productivity in the fab and achieve improved electrical performance in the devices they make.

This quarter we shift our 1000th producer CVD system.

This is the gold standard for CVD, used to deposit virtually every kind of dielectric film in our industry.

Our ECMP system is the next generation capability for CMP and is gaining momentum across the industry as it extends our leadership in the copper CMP arena.

Our portfolio of metrology and inspection products grew this quarter.

Bookings for our PDC group were up sharply and in Q2 we are pleased with our growth prospects.

Our service business is a key element of our overall growth strategy as most of you know.

We laid out an ambitious agenda for service and we are happy with our progress this past quarter.

The Metron Technology integration is on track.

Meanwhile, our 300mm wafer reclaim output quadrupled.

We introduced our fab 300MES product for assembly and test and which dramatically enhances the die traceability from wafer start to customer.

As you know, environmental solutions are important in our industry.

In Q2 Applied co-hosted the Environmental Symposium at SEMICON China.

We also received a large order for our EcoSys emission abatement tools and we now recommend EcoSys on all of our process systems.

With demand for environmental solutions on the rise, Applied Materials will lead the way to greening our industry.

Flat panel demand is very strong.

In fact, our flat panel display equipment business had its third consecutive record quarter of sales.

In one short year, the electron beam tester we make has reached significant share.

This market has great potential as flat panels are finding a home in more and more applications around the world.

Among the highlights of the past quarter, Applied was named the recipient of Intel's Preferred Quality Supplier Award for outstanding performance.

This honor reflects well on our global quality initiatives.

We also received the Top Supplier Award from Texas Instruments for delivering superior value and service.

Our operations in China and Israel each garnered government recognition for excellence in quality.

We are building a Company for long-term growth by enabling future generations of technology and the improvement of our customer's factories' productivity across all the markets we serve.

We are focussed on delivering technically differentiated systems and services at ever improving quality levels to achieve this goal.

The industry recently celebrated the 40th anniversary of Moore's Law and Applied Materials stands out as the key Company that has enabled this amazing progression of technology.

We will continue to release new products and deliver innovative technology that improves functionality and helps to lower manufacturing costs.

And with the semiconductor market set to grow in order to meet worldwide demand, we believe Applied Materials is well positioned to participate in that growth.

Thank you very much.

And now I will turn the call over to 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 second fiscal quarter, the Company's financial goals and challenges, and finally our outlook for the third fiscal quarter of 2005.

Orders of 1.6 billion were in line with our target, 7% lower than the first quarter of 2005 and 30% lower than the second quarter of 2004.

Revenue for the second quarter was also in line with our target at 1.9 billion, 5% higher than Q1 of '05 and 8% lower than Q2 of 2004.

Operating income for the second quarter was 22% of revenue at 412 million, compared to 21% for Q1 of 2005 and 26% for Q2 of '04.

Net income was 305 million or $0.18 per share in Q2, compared to 289 million or $0.17 per share for Q1 of 2005 and net income of 373 million or $0.22 per share for Q2 of 2004.

Gross margin for the quarter was 44.0% compared to 44.4% in Q1 of '05 and 46.5% for Q2 of '04.

Orders by major geographic areas were as follows -- Japan 33%;

North America 18;

Taiwan 18;

Korea 13;

Europe 9; and southeast Asia and China 9%.

System orders grew during the second quarter as Japanese customers made strategic investments, primarily for equipping 300mm DRAM and flash fabs.

As expected, service orders were significantly lower as fiscal Q1 traditionally contains annual service contract renewals.

Flat panel demand was up slightly as investment in Gen 7 and above fabs in Korea and Japan continues.

DRAM orders represented 41% of total systems orders and foundry orders were 19%.

Logic, flash and other comprised the remaining 40% of total systems orders for the quarter. 300mm represented approximately 78% of total systems orders received in Q2, and 78% were orders for sub 100-nanometer project.

During Q2, two orders were in excess of 100 million.

Six orders were between 50 to 100 million and eight orders were between 10 million and 50 million.

Backlog for the quarter was 2.85 billion, compared to 3.21 billion for the first quarter of 2005.

Backlog adjustments totalled 49 million, consisting primarily of cancellations.

Greater than 75% of the system's backlog is scheduled for shipment by the end of the fiscal year and approximately 85% of the total systems backlog is at 300mm.

The Company's financial performance during the second fiscal quarter of 2005 met our expectations.

During the quarter, our system's revenue was down slightly from the prior quarter level.

Our service and flat panel revenue continued to show growth.

The integration of Metron, which contributed to the service revenue increase, is proceeding on plan and, as expected, had an impact on current quarter profitability.

As previously announced, we expect to have Metron fully integrated by the end of the fiscal year, gradually realizing increased synergies from this strategic acquisition and positioning service for increased growth and profitability.

The flat panel business had another record quarter of sales.

Gross margin of 44% was slightly lower than the previous quarter, primarily due to a higher mix of service and flat panel sales.

Systems gross margins remained consistent with prior quarter's performance.

And total operating expenses decreased slightly, reflecting the Company's focus on controlling spending.

Overall gross margin was impacted by the integration of Metron and, consequently, our operating margin at 22% and net margin at 16% were slightly off from our target.

The effective tax rate for the second fiscal quarter was 31.1% compared to 29.5% for the preceding quarter.

The higher tax rate is attributable to the government's phase out of benefits related to extra territorial income and geographical composition of our worldwide earnings.

We anticipate the tax rate for the year will be approximately 31%.

The Company continued to deliver a return on invested capital above 30%.

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

Our free cash flow generation for the quarter was 431 million.

We define free cash flow as cash provided by operating activities less capital expenditures.

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

Cash equivalents and short-term investments increased slightly to 6.41 billion.

During the second fiscal quarter of 2005, cash generation continued to be strong.

The Company repurchased 500 million of its common stock during the quarter and over the last three fiscal quarters we have repurchased a total of 79 million shares with a cash outlay of $1.3 billion.

In Q3, we again planned to repurchase shares in the range of 300 to $500 million.

As you know, at our annual stockholder meeting in March, the Company announced a quarterly dividend of $0.03 per share, payable on June 8th to stockholders of record on May 18.

Accounts receivable decreased this quarter by 145 million, due primarily to improved shipment linearity and collections benefits.

Inventory decreased by approximately 119 million or 10%, reflecting ongoing focused inventory management and increased turns.

Depreciation and amortization totalled 75 million, which was 5 million lower than in Q1.

And headcount at the end of the quarter was 12,774 regular employees.

For the second fiscal half of 2005, the Company's continuing financial focus is on maximizing profitability and cash flow generation.

We are continuing to drive material cost reductions through increased use of common platform architectures and common parts and other company-wide performance initiatives, such as cycle time reduction.

We will continue integrating recent acquisitions to realize growth opportunities and strategic synergies.

And we will maintain our focused efforts on optimizing overall Company spending.

Our balance sheet remains strong and with our outstanding free cash flow generation, we are positioned to deliver stockholder value through continued share repurchase and a quarterly dividend.

In the near-term, business conditions are expected to remain mixed.

For the third fiscal quarter, targets are as follows -- Orders down 5% to 10% from Q2 levels;

Revenue down 10% to 15% from Q2 levels; and earnings per share in the range of $0.12 to $0.14.

We continue to closely monitor customer requirements and are poised to take advantage of all opportunities.

Thank you.

And this completes my remarks and now I will turn the microphone back to Paul.

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 would like to limit our responses to one question per firm.

Derek, please begin with the first question.

[OPERATOR INSTRUCTIONS] Our first question comes from John Pitzer with CSFB.

Good afternoon, guys.

Just one quick question.

Nancy, when you look at the revenue guidance for the fiscal third quarter, can you help us understand what's going on with the mix between service, semi-equipment, and flat panel and how that might impact gross margins in the quarter?

Thank you.

The outlook for the revenue in the coming quarter, the guidance we gave is that the flat panel business and the service business are holding up well.

The mix of business will result in the fact that gross margins will be affected somewhat.

Service and flat panel business, as a higher percentage, will have an impact and then gross margins for the systems business are actually consistent with the prior quarter.

So overall, I think that you can see that the Company is focused on maintaining its operating and net margin to bring it towards the model, but this mix of business will have some near-term impact.

Can you give a range, Nancy, on where gross margins might come in for July?

Thank you.

It really depends on where the mix comes in the product portfolio, that's why we provide our guidance at the operating margin level.

Next question, operator.

Your next question comes from Jay Deahna with JP Morgan.

Good afternoon.

At our conference today Lamb indicated that orders had a positive bias to the guidance of flat for the June quarter and Kalay(ph) reiterated their guidance of flat orders for the June quarter yesterday.

In your guiding down 5 to 10%, I'm just kind of curious what the difference is and it looks like maybe you got the big Toshiba order in the last quarter, so maybe that has some impact?

Thank you.

Well, certainly our what we -- what orders were able to be placed during the last 30 days would have an impact on that.

As we are looking at it, Jay, here is pretty much how we see it.

Japan had a very good quarter for us last -- during Q2, so orders will be off a little bit in Japan quarter over quarter.

DRAMs will continue their kind of trend from last year when they hit the peak in Q3, still a strong business but off a little bit in orders.

But I think the big thing that we were really expecting to have happen during this quarter was we thought foundries would come back by this time and they have not.

They are at a historical low point for orders and revenue.

Do you see this as your trial quarter for orders for the year, the July quarter?

And do you think the industry will spend to their CapEx guidance for the year?

We believe that with the positive signs in the industry that there should be the bottom point of our orders.

And we think that utilization is starting to move up at most factories around the world and especially starting to move up at the foundries.

So, yes, we expect this to be the bottom.

Thank you.

Your next question comes from Bill Lu with Piper Jaffray.

Good afternoon.

You look at the order guidance of down 5 to down 10%, is that mostly result of foundries or are you seeing weakness somewhere else?

As I just said, Bill, we are seeing -- it's a mix of things.

We had a strong Q2 with Japan, so that's down a little bit.

DRAM is down a little bit.

But foundry is down and not projected to return in the next three months.

So that's -- and also our flat panel has been extremely strong and orders are off a little bit there from the peak.

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

Thank you.

Good afternoon.

Question on the cancellations, is there any trend there in terms of was it IDMs or foundries or DRAMs?

That cancellation number was really in line with what we've experienced in the prior quarters and there is nothing particularly note worthy about it.

Okay.

Thank you.

Your next question comes from Jim Covello with Goldman Sachs.

Thanks very much.

Question for Mike.

Mike, you commented that it -- because of some issues it looks like the foundries may not be able to spend to their CapEx budget.

But if I look at their spending in Q1 in terms of CapEx versus their full year plan, they spent almost 40% of their full year CapEx budgets in Q1 alone.

Given that they are so far ahead of plan on spending for the year, how do you think about the fact that they may not wind up spending their full year budgets?

That's not intuitive.

I just think their spending for the next 90 days is going to be quite low and then it has to pick up relatively rapidly to be able to hit the targets.

I'm lumping all the -- maybe you are lumping all of them in at 35 to 40% in the first quarter of the year.

But I think their spending in the next few months is going to be quite low.

Thank you.

Your next question comes from Robert Maire with Needham.

Any particular, in terms of the momentum of spending in either DRAM or flash, do you expect continued spending from the DRAM guys even though DRAM has been a little bit weaker?

And also, what have you seen in terms of capacity moving away from DRAM or being converted into flash capacity and what are your expectations for flash spending.

We think the flash market is going to continue to be very strong.

We see most of the memory players continue to invest.

We see many of them moving capacity -- the players who are in flash are moving capacity to flash to try and meet demand.

I think that they are keeping most of their 300mm investments on DRAM to move to the next generation of technology and drive the cost of those products down, but many of their older 200mm fabs are rapidly moving to flash.

We don't break out specific flash spending so I don't have a good picture on that, Robert.

But it sounds as if you expect spending on memory to be roughly in line with what companies have announced their spend levels will be in -- .

Yes, I do.

There is nobody really pushing out in the DRAM area at this point.

And in terms of forward momentum on that do you expect that to ramp up a little bit in the second half or stay relatively constant through the remainder of the year?

I think we think it's going to be relatively constant and it's been strong.

I think we're going to see it remain that way.

Okay, great.

Thank you.

Your next question comes from Suresh Balaraman from ThinkEquity.

What kind of headcount levels should we be modeling for the July quarter?

I think the headcount levels should stay consistent with where we are in the current quarter.

Your next question comes from Timothy Arcuri with Smith Barney.

I have a question on OpEx and particularly on R&D.

If you compare your current trajectory during this downturn, if you compare that relative to the level of your R&D investment during the post 2000 downturn and you look kind of at a similar level of revenue, you're spending about 25% less in R&D today than you were back then.

Can you go into some reasons maybe why that is?

Are you being more efficient, are there some programs coming to an end now?

Or should we expect R&D to start to tick back up.

Thanks.

I think there's a couple of components to that answer.

One is that if you look at overall OpEx, we were pleased with the cost reduction and we've really stayed focused on cost savings in all areas across the Company.

R&D, in particular, this quarter had a slight benefit from a sales tax refund that was for R&D materials that was applied against that line item.

But we're really proud of the progress that we've made in R&D efficiency and that real improvements in terms of the productivity of our spending dollar in that area.

The OpEx picture this quarter is also includes the addition of Metron, which was really built into the marketing and selling and somewhat in G&A.

So there is several elements to the spending this time.

But I think you can look back on the R&D and really attribute the improvement there to a greater efficiency in our dollar.

So you think that the improvement is permanent rather than one time?

Yes,Tim.

And this is an area we want to continue to focus on.

We want to get the maximum amount for our R&D dollar and try to have the most engineering -- engineers working on our new products and spend less on infrastructure and materials, if possible.

Thanks.

Your next question comes from Patrick Ho with Legg Mason.

Thanks a lot.

Just a quick clarification and then the question.

Did you say the tax rate was going to be 31% and the question is, can you just discuss the pricing environment right now?

I will answer the tax rate question.

The tax rate at 31% is really our go forward rate now and it reflects the changes in some of the government regulations that we've now had to take into account.

So that's what you should be putting in your model.

So, pricing environment has been pretty stable over the last year.

I think that's reflected in Nancy's comment about gross margins on systems holding up and staying flat quarter over quarter.

We believe that this is really a question of technological differentiation of products and that's still what customers buy products on.

Your next question comes from Brett Hodess with Merrill Lynch.

My question is regarding the operating expenses, also.

If you look at the lower level of R&D and the little higher level of SG&A as a result of the Metron move, what would we expect to see once the acquisitions are integrated in those lines?

Will we expect to see the SG&A to come back down and to levels where it was at?

Or is it going to have some other components in it?

I think the operating expense outlook for the coming quarter is in line with current kind of spending levels that you'd see.

We, as we integrate Metron, and we'll see some improved efficiencies there.

But, we also have in our outlook some employment compensation kind of changes in terms of performance and those kind of things going forward.

I would guide our operating expenses in line with our current quarter's kind of spending.

Thank you.

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

Good afternoon.

Given the lack of visibility to the magnitude of a pickup from this July trough, at what point would you look at cutting some of the fixed costs or just bringing the breakeven level even lower than you have already?

And I'm hoping, Nancy, you can also give us some color on the service mix and where it is as a percentage of revenues and where it could go.

Thanks.

The outlook for spending in terms of the Company is continuously focused on improving financial performance and reviewing the investment we have in overhead and fixed assets.

That spending efficiency is something that's been our priority in terms of delivering model performance for the past and continues to be a priority for the future.

We've talked before about our cost reduction initiatives.

We talked about those extensively at the annual meeting with the material cost and the common parts, the focus on discretionary spending and different sourcing activity.

So, we've become very focussed on the cost reduction and infrastructure reduction and evaluation in that area.

If you look at the mix of business, we had the service business, as we talked about again in the annual meeting, with sort of in the mid-20 kind of range.

It is become a greater percentage of our overall business in the environment that we are in today and we would expect it to stay in that same area.

Thank you.

Your next question comes from Edward White with Lehman Brothers.

Thanks.

With regard to your service strategies, especially with the new initiatives, can you talk about whether you are achieving success in leveraging some of those services through your fab presence worldwide?

Yes, we are.

Since we have people in both sales and service and virtually every fab around the world, it really helps us not at infrastructure to deliver more and more products.

Products like wafer reclaim, that I talked about during my prepared remarks.

Products like EcoSys, where we can now recommend that abatement product on every one of our tools.

These are great leverage points, if you will, for us to grow those markets.

Secondly, in which technology node would you expect transistor formation to really become substantially larger?

Do you think that's happening at 65-nanometers or is it more of a 45-nanometer phenomenon.

It's really already happening.

And so in each generation we will see more and more changes around the transistor.

We can see our DBN technology being adopted very, very widely.

I think it will become ubiquitous in the industry over the next technology node.

You will see strained silicon first be adopted by some of the top players in the industry.

But again, will move out to all the players in the industry over the next following generation.

All strain engineering, then you'll see higher K gates and then you'll see metal gates as we move through a progression of the next two or three nodes.

So the answer to your question, it's already going on.

It's evolutionary now and each node will see more and more changes to enhance the ability of our customers to be able to tradeoff performance and power.

Great.

Thank you.

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

Thank you.

Nancy, when you look at the balance sheet you look like you are running it very, very conservatively with this huge cash forward and the very modest dividend payment here at this point.

So I'm really curious, it kind of begs the question, what do you really need in terms of cash to run the Company given the kind of volatility that's historically been typical of the industry.

Well, we've talked before about our cash strategy and our cash balance outlook.

The Company, as you know, we keep a cash portfolio that we think is in line with continuing to have a A-rated credit in terms of the -- from the rating agencies.

We keep some cash available for implementation of strategic M&A activity on a as-needed basis.

And then we also keep cash available and want to return it, not keep it available but redeploy it for a returning value to our shareholders, which is why we have had now for the past three quarters, we spent $1.3 billion in terms of share repurchase and we initiated the dividend.

We think that the cash balances position to continue to create shareholder value.

Next question, Derek.

Your next question comes from Stephen Chin with UBS.

Thank you.

Does the flat panel business represent 10% of sales yet?

And how would you describe your flat panel order growth expectations quarter over quarter for July?

Thank you.

The answer is it's just about 10% of our overall business.

Of course, as we said, this was a record quarter, so that is a high point.

And what was the second part of the question, Stephen?

What is your outlook for flat panel order growth quarter over quarter for July.

Order growth is going to be down.

This was a peak quarter.

Our factory is full through the end of the year.

This is very, very strong situation for us.

So we don't think this represents a big weakness in overall market, but orders will be lower quarter over quarter.

Thank you.

Your next question comes from Steven Pelayo with Fulcrum Global Partners.

Two questions here.

You talked about services as a percentage of revenues.

But, what I'm trying to figure out when you talk about DRAM as a percentage of system orders or so as well as since service orders declined in the April quarter, given the annual contract renewals happen in the January quarter, can you help us understand what service is as a percentage of bookings and then I have one more follow-up question.

Services as a percentage of bookings, I think that would be in line with the kind of percentages that we are seeing in revenue.

Almost exactly.

Almost exactly.

You don't get big fluctuations from the January to the April quarter because of the annual contract renewals?

No, in fact our big contract renewals are in our Q1.

Are they?

Okay.

And then my other question was, it looks like your shares outstanding went down about the same number as the previous quarter when you had bought back $300 million worth.

So I guess, was your stock grants or your common stock issuance up quite a bit?

What should we be thinking about there on that line or cash flow statement?

The share repurchase strategy this time was -- had relatively little impact on the earnings per share calculation.

I guess I'm just looking at your common stock issuance, I think, was about 50 million or so in the previous quarter and by my estimates about 250 million this quarter.

Was there something going on there that it's just kind of a -- it happens on an annual basis on this quarter, or something.

Let's do -- grab a fact here and make sure that we get the straight answer for you.

Okay.

Your next question comes from Raj Seth with S.G. Cowen.

Mike, I'm wondering if you can help quantify your comments around increasing capital intensity at 65.

Perhaps you could compare the cost maybe assuming no reuse of the 65-nanometer logic fab to a 300mm fab at 0.13.

We are really thinking that in the overall capital equipment dollars spent, we are thinking that it's going to increase -- if you compare like 130 down to 65-nanometers, we think it is going -- the capital intensity of -- the capital equipment intensity of the capital dollars spent is going to increase over 60%.

So, you compound that from 130 to 90 to 65.

I guess it's about -- around 25 to 30% increase node over node.

Thank you, that's helpful.

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

Good afternoon.

Just a quick question with regard to Japan.

Good quarter this quarter, do you expect it to remain at low levels as we move into the back half of the calendar year or -- meaning do you think Japan's going to disappoint from their spending plans or do you think we will start to see an uptick from Japan as well.

If you just saw the news today on Japan's economy, it seems to be moving at something close to a 5% GDP increase annualized and consumer spending is up.

I think those are two positive signs in this -- very positive signs in this part of the year, almost all the Japanese semiconductor companies are consumer oriented.

I don't think it's going to last.

Hard to predict what's going to happen two quarters out right now.

I think that the Japanese semiconductor companies are going to be seeing a turn here.

Thank you.

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

Couple of questions.

Mike, if I remember correctly on your last call, I think you talked about second half strength, is this still your view or could things be flat for a while?

And secondly, does your revenue guidance for next quarter reflect any meaningful pushouts of system deliveries?

I still think with the semiconductor industry on a positive trend during this quarter, which I really actually expected it, the positive information on the semiconductor industry to delay a little bit, that the semiconductor industry will do fine in the second half of the year and I do believe orders and deliveries will pick up in the second half of the calendar year.

Obviously our fiscal year is offset by two months.

How much of that we're going to see in August, September and October, we will talk about in August.

But I think that second half is still going to be increased investment.

On revenue pushout, we are seeing some pushouts from foundries and we're seeing some pushouts of start dates on some fabs.

Yes, there are pushouts in the number.

Your next question comes from Bill Ong with American Technology.

Yes, what's your plan for the role of the Metron executives in the business within Applied?

Do you plan to have it dispersed within the global service organization or are you going to try to keep it as a separate entity so the original part of the Metron Company?

Well, Metron will stay as a business unit inside of Applied Global Services and there are all the various executives will either -- they will be in their equivalent positions inside of the Metron business unit.

Of course, over time people are able to move around and mix between the service organization and Metron but that's all part of a longer term integration.

Thank you.

Your next question comes from Gerry Fleming with WR Hambrecht.

Yes, Mike, in your original presentation you talked about product trends.

Could you elaborate a little more on what's going on in the copper low K interconnect area that the products that you sell there, especially in etch and plating where it looks like you maybe -- or at least your major competitors may be actually gaining share in those areas?

I think that you -- let me talk that there is many products, obviously, that we have in CMP, PVD and CVD, all of those areas continue to do extremely well.

We continue to advance the technology in all those areas and keep the strong leadership position that we've had.

We continue to offer new applications there.

As we grew market share significantly during 2004, we have some significant wins in dielectric etching this year and expect to announce more in the upcoming months.

In plating, this is an area where we've had very small share.

We do have -- our slim cell machine is in production at a number of places.

It's slowly gaining share.

It certainly hasn't reached the levels we would like it to reach.

It's been growing slower than we anticipated.

We still firmly believe that this tool will show its technology differentiation in dramatic reduction of defects in a 65-nanometer node.

And we think we will continue to gain share there because the machine is very reliable, it's high productivity and produces small defects.

But, certainly not as fast as we would like.

Thank you.

Your next question comes from Mark Bachman with Pacific Crest.

I just like to go back and revisit your foundry comments.

I think for the calendar quarter of this year I think that your comments seemed to be consistent with what your peers are saying and that being that foundry orders are going to be weak.

But you seem to be hinting that the downward CapEx provisions are pretty much a foregone conclusion at the foundries.

Is that the message that you are trying to get across here today?

Well, I think it, again, depends on the specific foundry.

When you add them all up the answer is yes.

In the overall, our view has moved from a bit more negative on overall capital spending.

We think that it will be still -- it will be down single-digit -- in the single-digits this year but I think previously we said flat to down slightly.

I think we're more negative on that.

We think most of that is coming from foundries.

Okay.

Thank you.

Your next question comes from Kevin Vassily with Susquehanna Financial Group.

Yeah, quick question on flat panel business.

Have any of the pushouts that you were referencing earlier been in this segment and what kind of lead times do you have right now on order to delivery in this area?

Thanks.

No, none of the pushouts I referenced are in the flat panel area.

As you -- we kind of look at order to sign off and right now we take revenue at sign off of these tools.

And order to sign off is about six months right now.

Thank you.

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

Thank you.

You touched on this a little bit earlier, but I was curious to know if you could at least qualitatively give us your view of in the memory market capacity versus unit demand through the end of this calendar year and how that may affect orders or capital spendings, particularly in the second half of the year?

Thanks.

My view on this is several things are going to happen to keep the memory capacity very close to the overall demand and being balanced by the end of the year.

Those things are more movement of capacity to flash memory.

And we will see -- which, actually is a bit surprising at this point.

We haven't seen the ramp of the 512-megabyte memory chip.

We think that will start to happen in the second half of the year and some small ramp of the 1 gigabyte, both those taking up a substantial part of the new capacity coming online.

So you're not really concerned about material overcapacity in this market going into the second half?

No.

I mean, there obviously can be ups and downs, but I think if those things plus DDR2 take off, that the capacity will be absorbed.

Thank you.

Your next question comes from Ben Pang with Prudential.

Two quick questions.

In the backlog comment in terms of how much is shippable, you mentioned by the end of the year, is that the fiscal year or the calendar year?

We would look at that as being our next two quarters of our fiscal year.

And second question, on the ECMP, is that for the low 65-nanometer applications or do you expect to see some qualifications of 65-nanometer?

We expect to see a significant number of qualifications at 65-nanometer.

This is really a great tool.

So people will -- the reason people will use it is because it will better -- they will be able to better model the conductor performance.

So it will allow the circuit designers to be able to predict performance better.

Thank you very much.

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

This is (Inaudible-audio) I had a quick question on the backlog.

Could you give us more color on the decline in order backlog sequentially this quarter?

I think this is the -- eventually the book-to-bill ratio that you have seen over the past couple of quarters works its way through showing up in the decline in the backlog.

Our backlog at 2.85 billion was a good number.

As you know, we've talked fairly extensively about how we've gotten our cycle times down inside the factories.

That allows us to respond to our customers in a much more timely manner and meet their needs inside of a quarter.

Thank you.

Your next question comes from Mehdi Hosseini with Friedman Billings Ramsey.

I have two questions, one regarding services.

Can you talk about pricing, if there is any pricing pressure?

You talked about system.

SP's(ph) kind of stable but if you could elaborate on the pricing and the services?

And also, Mike, you talked about flash capacity and insufficient capacity for flash.

Can you help us understand the total dollars of revenue opportunity that DRAM vendors could provide you as they convert existing 200mm year-end capacity to flash?

Thank you.

Service pricing, I don't think we're really seeing any dramatic swings here.

Most of our service gross margin movement is because of the integration of Metron, I think you knew Metron's financials as a public company.

We are working hard on getting the integration done and getting the -- and taking advantage of the synergies but that work is not done yet.

So that is most of the movement in the service gross margin line.

Pricing I don't think is really impacting us a whole lot.

We're working very hard to reduce -- where we do have pricing pressure on spare parts, we are working very hard to reduce the cost of those.

So I think those two are kind of keeping up.

I really don't know how to answer your question crisply on flash capacity dollars that we'd get from a conversion of a DRAM -- 200mm DRAM factory to flash.

It's so dependent on the customer and the specific process that they are running and how many tools they have to change out.

I couldn't venture a guess.

Just one follow on the services.

Is that fair to say that spares is the largest part of your services business and if there is a pricing pressure then it would impact overall services business?

Well, sure, spares is the biggest part of our service business today but we have many, many products and we're increasing the number of products we have in the service area.

But there is always, I think, a thing that happens here.

If we are able to reduce our costs and share some of that savings with our customers, our share of the spares market will increase and it will be a positive impact on us overall.

Thank you.

Next question, operator.

Your next question is a follow-up question from John Pitzer with CSFB.

Thanks, guys.

Mike, one of the unique characteristics of this cycle is you are seeing a lot more IDMs offering foundry business like Toshiba to guys like Zilon(ph).

I'm kind of curious, how do you classify IDMs that are starting to offer foundry business.

Is it pegged into your foundry numbers to day and if it's not, if you did it that way would foundry be as weak as you are characterizing today and would the pickup in the back half be as strong as you characterizing?

Thanks.

In the case of where an IDM is making a specific investment for a foundry, we classify that as foundry.

If it's some mixed model, we will classify it as whatever is the primary focus of their business.

And so if one company starts a whole fab, that fab would get classified in our foundry numbers.

Operator, we're going to take one last question and then we will make our closing remarks.

Your final question is a follow-up question from Jay Deahna with JP Morgan.

Thank you.

Couple of quick ones here.

What's the story with the bid for Unaxis?

I saw something on that.

And then secondly, it sounds like you got a pretty compelling new illuminization cluster with some CVD aluminum seat, or something like that.

Could you talk a little bit about that, please?

Sure.

No comment on the bid for Unaxis, I'm not sure where that information -- where the question even came from, Jay.

On the aluminum CVD, this product is pretty hot right now.

And with many, many companies continuing on with aluminum metalization or aluminum for last layer before bonding, I think this product is going to be very positive for us for the foreseeable future.

Thanks for that question.

That was one product we didn't talk about today.

All right, thanks Derek.

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

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

I would like to thank everyone for your interest in Applied Materials and this concludes our call.

Ladies and gentlemen, that concludes today's Applied Materials second quarter fiscal year 2005 earnings release conference call.

You may now disconnect.