應用材料 (AMAT) 2005 Q4 法說會逐字稿

Good afternoon.

Welcome to the Applied Materials fourth quarter and fiscal year-end 2005 earnings 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, November 16, 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, everyone.

And welcome to Applied Materials' fourth quarter and fiscal year-end 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, Senior Vice President, General Counsel and Corporate Secretary.

Financial results for our fourth quarter and fiscal year were released on BusinessWire shortly after 1:05 p.m.

PST.

You can obtain a copy of the news release, as well as view a financial highlights presentation on the Investor section of our website at www.appliedmaterials.com.

Today's earnings call contains forward-looking statements, including those relating to Applied Materials' financial performance, cash generation and cash deployment strategies, scheduled shipments, effective tax rate, operational efficiency, stock program expense, technology leadership, our strategic position, growth opportunities, delivery of stockholder value, financial targets, customer fab utilization trends, capital spending and investment in advance technologies, and end-use demand for our electronic products.

All 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 SEC, including its Form 10-K for fiscal 2004 and its most recent Forms 10-Q and 8-K.

Forward-looking statements are based on information as of November 16, 2005 and the Company assumes no obligation to update any such statement.

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

Nancy will then provide the first quarter 2006 financial targets.

We will then open the conference call for questions and with that, I would like to turn the call over to Nancy Handel.

Nancy?

Thank you, Paul.

Good afternoon, everyone, and thank you for joining us.

Today I will cover both our fourth quarter and 2005 fiscal year results.

Throughout Applied Materials, our employees are focused on advancing our technology leadership, improving efficiency, and executing our growth strategy.

And as you will see from our results with their hard work, we continue to deliver strong financial performance.

Highlights for the fourth fiscal quarter included a 5% increase in revenue from the prior quarter.

This incremental revenue earned in the fourth quarter resulted in a 50% flow-through to gross margin, demonstrating our progress and raising the bar for efficiency and profitability.

We continue to deliver robust cash flow and returned value to stockholders through significant share repurchases and a dividend.

For the fourth fiscal quarter, orders of 1.69 billion exceeded our target and were 15% higher than the third quarter of 2005.

Revenue for the fourth quarter of 1.72 billion also exceeded our target and was 5% higher than the last quarter.

Operating income was 352 million, or 21% of revenue compared to 19% for the third quarter.

Net income was 247 million or $0.15 per share, compared to 370 million, or $0.23 per share for the third quarter.

The results for the fourth quarter included an increase in taxes of 32 million, which reduced earnings per share by $0.02, principally related to the distribution of international earnings under the American Jobs Creation Act of 2004.

Applied's results for the third quarter included a tax adjustment that increased earnings per share by $0.08.

Gross margins for the fourth quarter were 44.2% compared to 43.9% in the third quarter.

As you know, fiscal 2005 was a year of lower semiconductor capital investment, as customers brought chip inventories in-line with demand during the first half of the year.

Our employees responded well in this challenging environment, enhancing overall customer satisfaction, lowering costs, improving efficiency and increasing quality.

During the year we advanced our technology leadership with the addition of new products and we continued to bring solutions to market to enable today's most advanced electronic products.

Fiscal 2005 net sales of 6.99 billion were 13% lower than 2004.

Net income for 2005 was 1.21 billion, or $0.73 per share, down from 1.35 billion, or $0.78 per share for 2004.

New orders in 2005 were 6.39 billion, down 29% from 2004.

In the fourth quarter, DRAM orders represented 35% of total systems orders; flash memory orders were 8%; and foundry orders were 17%; logic and other orders comprised the remaining 40%; 300mm orders represented approximately 81% of total systems orders; and 88% of systems orders were for 100nm and below process technology.

Two orders were in excess of 100 million.

Three orders were between 50 million to 100 million.

And 15 orders were between 10 to 50 million.

Flat panel orders also remained strong.

During the fourth quarter, orders increased from customers in Taiwan, North America and Europe.

Orders by major geographic areas were as follows: Taiwan, 31%;

North America, 23%;

Japan, 17%;

Europe, 14%;

Korea, 8%; and Southeast Asia and China, 7%.

Backlog for the quarter was 2.57 billion, compared to 2.61 billion for the third quarter.

Backlog adjustments totaled 19 million, consisting primarily of currency adjustments and a few cancellations.

Approximately 88% of the system backlog is scheduled for shipment in the next two fiscal quarters, and approximately 83% is for 300mm.

During the fourth quarter, Applied's financial performance exceeded our targets.

Rising fab utilization and investments in advance technology resulted in increased revenue.

Flat panel sales set a record for the sixth consecutive quarter.

Gross margin increased to 44.2% as a result of higher sales and flow-through.

Total operating expenses of 409 million were 6 million lower than the prior quarter, primarily due to a reduction in marketing expenses.

Our operating margin and net income margin excluding one-time tax adjustments met our financial model.

During this quarter, we ceased further development of our mask-pattern generation tools.

We will, however, continue selling the Tetra II Mask Etch product and the reticle inspection tools and supporting the installed base.

The tax rate for the fourth quarter was 36.8%.

The annual rate for fiscal 2005 of 23.5% reflects the favorable resolution of a multiyear tax examination recognized in the third quarter, partially offset by the impact of the repatriation of international earnings during the fourth quarter.

We anticipate the effective tax rate for the first quarter of fiscal 2006 to be approximately 32%.

The Company delivered a return on invested capital of nearly 30%.

We define return on invested capital as operating tax -- operating profit aftertax, excluding one-time tax benefits, 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 135 million.

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

During the quarter, cash, cash equivalents and short-term investments decreased 293 million to 5.9 billion as the Company continued to return value to stockholders.

Accounts receivable increased by 90 million during the quarter and inventory decreased by 40 million.

Capital spending for the quarter was 63 million, and depreciation and amortization totaled 74 million.

Headcount at the end of the quarter was 12,576 regular employees.

In the fourth quarter, the Company repurchased approximately 26 million shares of its common stock for $450 million at an average price of 17.37.

In fiscal 2005, we repurchased a total of 101 million shares, with a cash outlay of $1.7 billion.

In the first fiscal quarter of 2006, we planned to repurchase shares in the range of 400 to $600 million.

In September 2005, the Company declared its third quarterly cash dividend in the amount of $0.03 per share payable on December 8th to stockholders of record as of November 17th.

As we enter our first quarter of fiscal 2006, our top financial priority is to continue to drive margin improvement through company-wide material cost reduction initiatives, such as, common platform architecture and parts, lower cost sourcing, integrate to order manufacturing initiative, and continued cycle time reductions.

Through ongoing asset management and operational focus, we intend to enhance productivity and continue to deliver strong free cash flow.

Beginning the first fiscal quarter of 2006, we will implement FASB statement of Financial Accounting Standards No. 123R relating to equity-based compensation.

In order to continue to attract and retain our highly skilled employees, Applied recently introduced a new restricted stock awards program designed to reward our employees for their hard work and commitment to the long-term success of the Company.

Senior executives will continue to receive the majority of their equity compensation in stock options in order to increase their stake in enhancing stockholder value.

We estimate the total pretax cost of the Company's equity incentive programs for the first quarter will be approximately 54 million, or equivalent to $0.02 per share.

Mike will now provide his perspective on the year and the environment ahead.

Mike?

Thanks for that update, Nancy.

As Nancy highlighted, the Company delivered solid financial performance this past quarter, and throughout the year.

I have to say I'm very proud of our employees around the world for their focus and drive on innovation and operational improvements.

In 2005, we executed to our strategy.

We introduced the significant number of new technologically differentiated products, products that are specifically targeted at the high-growth segments of the wafer fab equipment market.

And in several cases, give us entry into new markets, such as it is with UVision, our bright-field inspection system.

We continued to record wins with our breakthrough interconnect transistor and numerous CVD applications.

We've introduced new solutions, such as, RadOx, that meet the unique requirements of the expanding flash market.

This position has Applied Materials to increase our memory share.

We grew our share in the flat panel display market and with our recently announced Gen-8 product, we are helping the industry rapidly scale to larger flat panel LCD-TV sizes.

Our service product portfolio expanded this year, with the addition of EcoSys , or FAB 300, [kitting] and cleaning and many other technology-focused fab offerings.

We are clearly demonstrating improved execution and profitability in our service business generating increased revenues, better margins and growth during a period when customer fab utilization was lower than in 2004.

Through the year, Applied Materials received recognition for strengthening our customer relationships.

Earning awards from major industry leaders like TSMC, Samsung and Intel, this recognition is important not just for the honor of it, but because it reflects the foundation we have laid to establish Applied Materials as a supplier our customers want to do business with.

Our improvements in product cycle time, productivity, quality and reliability have all had a positive impact on our relationships with our customers.

Applied Materials is bringing more to the industry than just the broadest set of products.

Our leadership extends to issues of importance to our customers and the communities where we do business, like the environment, where it is energy savings, water use reduction, or decreasing emissions, we are taking the lead to work with our customers to ensure this industry remains safe, clean around the world.

Applied has many things that are going well, all aimed at creating value for our customers and shareholders.

The Company is well-positioned to grow our technology leadership and with about 700 new patents granted worldwide in 2005, you can expect more great products from Applied Materials.

For the interconnect segment, we've had a good year.

Our SIP EnCoRe II product released a year ago has been qualified and is in production for both 90 and 65nm, and is already in development for 45nm.

Our Black Diamond II product, which is being adopted by the top copper technology customers in the industry, demonstrates our ongoing low k leadership.

On a CMP front, our revolutionary ECMP product has had key strategic wins across the industry, ushering in a new capability for the next generations of technology.

Our HDP-CVD product, now extendible to below 65nm technologies, is widely used in logic and memory.

Our thermal gap-fill technology, which is called HARP, has become a tool of record at top logic and memory customers due to its device performance benefits and enhanced retention time characteristics in memory.

Our recently announced Siconi Preclean for silicide applications has gained rapid acceptance in our advance customer base and is a significant factor enabling PVD to move to the next generations of technology.

In front-end processes, gate oxidation, RTP, implant and epi, we are offering new performance for transistors that allows them to run fast, but yet stay cool.

Our industry-leading solutions, such as, strain, silicon and ultra-shallow junctions are enabling more powerful, portable and affordable devices.

Acceptance of UVision, our bright-field inspection tool, is progressing faster than we anticipated.

The product is being used by a broad array of customers and the list continues to grow.

We've received repeat orders because UVision has demonstrated the ability to find critical defects at advance technology nodes that no other machine can.

Our flat panel e-beam tester is also enjoying rapid customer acceptance.

We are gaining share with this product and expect further momentum in 2006, as it's noncontact features become more important for performance at the next generation.

I mentioned the gains in our service products.

The strategic alliance we announced earlier in the year with GE already has produced its first win, with additional opportunities being explored at a number of customers around the world.

Across the Company, we focus not just on offering more, but on streamlining our operations and making these gains in efficiency.

Through fiscal 2005, we further reduced cycle time and that cycle time from order placement to start-up in our customers' fabs reached under 120 days, improving our ability to deliver systems quickly when our customers need them.

This achievement reflects a discipline that appears throughout our operational performance.

Nancy addressed our financial results and how we're executing to our published financial model.

We generated significant cash this year and in the quarter, and deployed it to strengthen shareholder value.

In fact, returning all of it and then some through dividends and share repurchase.

Applied Materials is doing many things well, but we're not standing still.

We are setting our priorities to move forward and we are poised to make further progress in 2006.

So, first, we must extend our leadership in our core business through innovation of differentiated systems, service and software products.

We're enhancing our ability to develop new products that exceed our customers' needs in technology and productivity, a spark in innovation, and make sure that the best ideas are commercialized and introduced to the market rapidly.

As a result, we are improving R&D efficiencies and I believe that we'll be able to get more products out that are ready to win in the marketplace.

I'm pleased with our progress through this last year, but as always, I'm impatient with the speed of our progress in some areas.

Tom St. Dennis rejoined Applied and has responsibility for several groups, including front-end products, implant, and etch.

Tom is a very capable executive, as you know, and I'm confident that he will drive improved performance of his entire group.

Also, in that same group, Mitch Taylor recently joined us from Intel to head the Implant Division.

Mitch has extensive knowledge in implant and he will be using this experience to enhance our customer support and accelerate product development.

Second, we must grow the business in new market segments, utilizing leading edge, differentiated nano manufacturing technology.

We intend to broaden our offerings for flash, front-end processes, as well as interconnect, proliferate the integration knowledge we are gaining across our product suite, grow our presence in flat panel display processing and deliver additional solutions for a design for manufacturing.

We will continue to look at opportunities to acquire technologies and companies that make sense.

And with our newly announced Applied ventures, our internal venture capital -- that's our internal venture capital program -- will make strategic investments in areas for long-term potential.

Third, we must deliver world-class operation and financial performance across our Company.

We are focused on moving margins higher and reducing our material costs and overall, cost of goods.

This makes -- making efficiency gains and improving asset utilization, and delivering even stronger financial returns in the years ahead.

Our strategy for 2006 is clear, outgrow and outperform the industry so that we can offer more to our customers and increase shareholder value.

With that in mind, let me share my perspective on 2006 and why I think it will be a positive growth environment for Applied Materials and for wafer fabrication equipment spending.

First it, is clear that more consumers globally are demanding cell handsets, notebook computers, flat panel displays and game consoles.

This demand is strong and should hold up with global economic growth.

We also see the emergence of a new video media riding on a broadband infrastructure that can deliver video to your cell phone, iPOD, or your high-definition TV.

Additionally, growing corporate profitability is expanding IT budgets, again, and producing increased investment in IT in order to drive productivity and improve security.

Given what we know today, we believe 2006 will be a growth year for wafer fabrication equipment spending.

Today, utilization rates are strong.

The advance fabs are full and inventory through the channels is in good shape.

Our Spares business is somewhat of a leading indicator for utilization and from what we are seeing utilization rates are now in the mid 90s with leading edge capacity basically full and foundries approaching full utilization.

Considering their recent investment patterns, wafer fab equipment for foundry is projected to grow something in the neighborhood of 20% in 2006 and we think that there is potential for further upside.

This is a very good environment for Applied Materials.

In the memory market, we are well-positioned to improve our position, as our technology and products are helping deliver better yields and performance.

We expect to see strong memory investments through 2006, particularly for [NAND] Flash, as demand continues strong with about 150% bid growth year-over-year.

In the logic and foundry segments, we are building on our position for advanced manufacturing and growing our development wins at 65nm.

So when we look at -- looked at 2006 we see a positive year.

And when we look beyond, we see even more opportunity.

As we've seen in applications like Flash, the world's consumers are hungry for technology that helps them do the things they want to do, whether it's swapping photos, sending instant messages, or simply pausing your TV.

At Applied Materials, our technology is aimed at bringing these capabilities to the market.

And bringing them there more rapidly and at less cost, so that we can lower the barriers to entry for new consumers and new applications.

That's how the market will grow and how we will succeed.

Taken together, we believe these factors point to a positive upcoming year and we expect Applied Materials to outgrow and outperform the industry.

We have used 2005 wisely to deliver innovative technology and products, and make significant operational improvements and position the Company for long-term growth.

Thank you.

And now I'll turn the call back over to Nancy Handel to provide our first quarter targets.

Nancy?

Thank you, Mike.

Our first quarter 2006 targets are as follows: Orders, up approximately 7% to 10% from Q4 levels; revenue, up 3% to 5% from Q4 levels; earnings per share, $0.14 to $0.15, which includes an estimated $0.02 per share for equity-based compensation.

With that, I will now turn the call back to Paul.

Thank you, Nancy.

And thank you, Mike.

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

We would like to entertain questions from as many callers as possible.

As such, please limit your questions to one per firm.

Derek, you can begin with the instructions and the first question.

(OPERATOR INSTRUCTIONS) Your first question comes from Edward White with Lehman Brothers.

Hi.

I was just wondering if you could talk a little bit more about the cycle time progress.

You mentioned it's less than 120 days.

Where had it come from and what do you think the opportunities are going forward?

So, hi, Ed.

Hi.

It was down a little more than 10% from -- it was kind of mid 130s at the end of last year and came down under 120 this year.

We think that with our manufacturing initiatives and integrate to order that we should be able to get it down under 100 days, in that range and maybe eventually kind of 90ish.

Okay.

Great.

Thank you very much.

Your next question comes from Brett Hodess with Merrill Lynch.

Good afternoon.

Question is on, as you start to see the orders improving here how are you seeing the competitive environment at this point from a pricing standpoint, Mike?

Well, Brett, you see our, where our gross margin is, it's a competitive world out there, but I don't think there's any real change in the environment right now.

If you deliver technologically differentiated products, it supports your ASP.

All right.

Thank you.

Your next question comes from Jim Covello with Goldman Sachs.

Good afternoon.

Thanks so much.

Quick question.

Of the order guidance for the January quarter, could you help us understand what is "service bookings" and what is "product bookings" sequentially?

The environment for the first quarter should be in-line with the kind of performance that we've seen in Q4.

Each business area will be up, but the mix of business should be improving.

I mean our service business has its major order quarter in Q1 of this year -- of every fiscal year.

So I guess more -- normally the service bookings are disproportionally weighted to the January quarter.

So could you be more specific about what product bookings would be up sequentially in January?

Well, the Systems business should be up.

Our Service business should be up and our flat panel basically would be in the kind of flat area for the quarter.

Next question, please?

Your next question comes from Timothy Arcuri with Citigroup.

Can you give us some idea of what service revenues were and can you also, more to Jim's point, can you give us some idea of what service revenues might be in the January quarter?

Thanks.

Well, service revenues in the fourth quarter were essentially similar in proportion to what they were in the third quarter, so that our, the service business as a percentage of sales might have increased slightly.

AKT was sort of flat, but there really wasn't any appreciable change in the overall mix of the business quarter-on-quarter from Q3 to Q4.

Those were very modest changes.

Okay, but it sounds like -- I mean service should be up in terms of orders sequentially in the first quarter more than systems.

Is that the right way to think about it?

Well, we were talking about revenue in my last comment.

Now, in the outlook for the coming quarter where we've given a target of our revenue being up 3 to 5%, we expect our Systems business to be up;

AGS, basically our Service business will be kind of in the flattish kind of area; and AKT, maybe slightly down.

So service orders flat, you said?

No, I was talking about revenue.

Okay, thanks.

Service orders are always stronger in Q1 of our fiscal year.

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

Thank you.

Mike, I just want to make sure I understand your guidance for fiscal 1Q.

In light of your -- what seems rather bullish commentary on 2006, should we be looking at an environment where we're looking at 5 to 10% quarterly orders growth or should we anticipate something a bit more than that as we look out into 2006?

Well, our for our -- the best judgment we have right now is, I think we said 7 to 10% order growth in Q1.

We think wafer fab equipment spending for overall for 2006 will be up between 5 and 10%, and we expect to do better than the industry and the environment where foundries are going to come back and invest in 2006.

Your next question comes from Jay Deahna with JPMorgan.

Thanks.

Good afternoon.

In terms of CapEx, the wafer fab equipment being up 5 or 10% next year, what do you think the risk is in terms of that going higher or going lower?

I mean are some customers waiting to see sell-through in 4Q, the economic outlook in the first quarter which could tip them one way or the other?

Where do you see the risk bias in that?

And then the other part of it is with the 7 to 10% guidance for the January quarter representing some deceleration from your order growth in the October quarter, is that a holiday phenomenon or what?

Why would that be?

Well, we're building on orders already, but a few comments about CapEx first, Jay.

Kind of looking into 2006, certainly we have to get through this holiday selling season here, and see where inventory ends up at.

We'll certainly impact some of the judgement of what people are going to spend next year.

But with the factories generally full and for the foundries to expand their revenue next year they have to add some capacity.

So we think that, assuming the global economy stays reasonably strong and we get through the end of the year here in good shape, we're positively biased.

But we think the risk is more short-term than throughout next year and we think if we're going to bet on any place where there's going to be upside it would be in the foundry space. 7 to 10% on our order increase was on top of a 15% increase, so we're -- that's our judgement at the current time.

Yes, but that's basically you're saying service is going to grow something north of 10% sequentially, which implies equipment lost in the midpoint coming off of a pretty strong quarter.

So that represents deceleration.

Is that simply the law of large numbers or is that just what you see now and we'll revise it later if necessary?

Well, that's what we see now, clearly.

So we would revise it if we saw something different, but that's where our judgement is today and we didn't say that, how much service was going to be up.

Okay.

Thanks.

Your next question comes from Patrick Ho with Legg Mason.

All right, thanks a lot.

In terms of the make-up for the fourth quarter -- I mean for your January end quarter, 1Q '06, do you see a pick-up in the foundries or is the mix going to be pretty much the same as it was in 4Q '05?

Mix will be pretty much the same as it was in Q4.

We expect a little improvement from the flash guys, a little improvement from the logic guys.

So I guess are the foundries still kind of waiting -- taking a wait-and-see approach from your standpoint?

Well, we saw a little bit of increase in Q3 and we think that their share of our overall bookings will be at that same percentage in Q1.

Thanks a lot.

Your next question comes from Bill Lu with Piper Jaffray.

Yes, hi there.

Good afternoon.

I just have a question about your operating expenses.

The marketing and sales expenses were down in the quarter, but the overall SG&A was still about 10 or 11% of sales.

So compare that to Lam Research at 13%, I'm just wondering, I know you've got a lot more product line, but it would seem like you would be able to get some more synergies between the different divisions.

So can you talk a little more about that and what is the room there, if that's the right way to look at it?

Well, the operational budget that we have supports a significant investment in R&D, as you can see from the numbers we've presented.

Our marketing and selling on a quarterly basis was effected by the fact that we had some trade show expenses in the prior quarter that obviously don't, didn't get repeated in the fourth quarter and our G&A was up slightly.

We do, in the Company, have a continuing focus on operational efficiency and cost reduction that we think supports our business strategy.

So these expenses in Q4 are really in-line with the kind of operating expense budgets we've had throughout the year.

Your next question comes from Stephen Chin with UBS.

Hey, thank you.

Hi, Mike and Nancy.

On the January order guidance of up 7 and up 10%, can you provide us some color on what geographies are likely to provide that strength?

Thanks.

Sure.

The geographies that we think are -- we don't think anybody's going to be down.

So let's -- so we think that the areas that are going to be up are -- we're going to see a little bit of upside and a little bit of upside in Japan.

And we'll -- other than -- since we already talked about what the mix by segment in the industry is, you can kind of get the picture.

Thank you.

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

Yes, hi.

Could you just speculate, sounds like your 7 to 10% order guidance, I know we're harping on this, but it's probably what people are most interested in.

A little bit deceleration.

Should people be worried that we're getting close to the peak or as we go into April, should we see that reaccelerate or maybe we're just being conservative for January?

Maybe just give us a little bit of color on [indiscernible] about the top.

Thanks.

Well, I'm not into speculation, Michael, but I think we're pretty pleased with orders continuing to increase quarter-over-quarter.

We're very positively biased in our thinking in '06.

We think that the fundamental factors will allow us to continue growth.

I wouldn't even start talking about a peak at this point.

It's good to hear.

Thanks.

Your next question comes from John Pitzer with CSFB.

Hey, John.

Mr. Pitzer, your line is open.

Can you guys hear me?

Just barely, John.

You'll need to speak up.

Okay.

I'll speak up.

I'm sorry, guys.

Thanks.

Congratulations on a good quarter.

Mike, in your prepared comments you talked about foundry spending being up 20% in 2006 and you kind of shared some of the reasons behind that which seem logical.

I'm kind of curious if you could do the same thing for your DRAM business.

I guess some of the concerns in the marketplace, given what DRAM spot pricing has done, despite what's been a really robust unit market for PCs, what's your confidence level in DRAM spending with 2 X where foundry is right now with a portion of your business being up next year in '06?

Thank you.

Well, I don't think it will be up at the kind of percentages of our overall business that it's been at.

Because I don't -- so I don't think it will keep pace with the overall market, but I do think that memory spending is going to be quite strong next year.

DRAM spending -- when I look at the market, I think units are going to continue to increase very rapidly.

Decisis are increasing.

I think the onset of Vista, assuming that it comes in mid year to the third quarter of next year will drive increase usage, increased amounts of memory per PC, so I think that's going to drive it.

And then there's a secondary factor on how fast Flash grows and how much of DRAM capacity gets utilized for production of Flash, which it's hard for us to separate.

So when you add all that up, I think memory spending might be flat to modestly up and Flash will be up, Flash spending will be up relatively and DRAM will be down relatively.

Great.

Thank you.

Your next question comes from Suresh Balaraman with ThinkEquity Partners.

Thanks.

Mike and Nancy, my concern is that we have not really seen a classic cycle that lasts two to four years since probably the year 2000.

And we've always had this two to three quarters of mini updates and then a downturn of a similar duration.

And any thoughts that this would be different?

I know you can probably not look beyond 2006, but are we in the stage where you get up a couple of quarters and then go down?

And that somewhat seems like it's based on your outlook of a 5 to 10% growth for next year.

Thanks.

I don't know that I can predict the whole cycle.

It's just -- I think that we have a good opportunity for this to last for a significant number of quarters.

There's just a lot of factors here, and too many to make a judgement at this point.

But with factory utilization where it is, people trying to invest more cautiously, we have a chance to -- and throughput times coming down not only with the Applied Materials, but in other parts of the equipment industry.

It helps mute some of that oversupply or undersupply situations, which allows more consistent growth.

And any thoughts on if you'll have some kind of sequential downtick in the April quarter?

I mean -- ?

No, I don't have any thoughts about that.

Thanks.

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

Yes, thanks for taking my question.

With overall factory utilization pretty tight, Mike, are you seeing better visibility from your key customers or do you think you're declining cycle time is kind of limiting your visibility?

We don't think our declining cycle time particularly limits our visibility.

We have detailed discussions with every one of our major customers, and as you know, our top 20 customers or so -- make up a huge, the large majority of our business.

So we're very, very close in discussions and, with all of those customers and I think our optimism reflects largely their optimism as well.

Okay.

Thank you.

Your next question comes from Bill Ong with American Technology Research.

Yes, nice quarter.

Just like to get your thoughts on the WSTS chip forecast for next year, up 9%?

Does that seem consistent with your WFE forecast of 5 to 10%?

Do you think it's in-line or conservative?

If you think it's conservative, do you think '07, I know that's a stretch, would be up?

Because WSTS is looking for 11%-type of growth rate in the '07 time period.

I think they do a pretty good job at doing their analysis.

And it's consistent with what we think long-term for the chip industry, whether it's going to be 9 or 11, I wouldn't comment.

Okay.

Thanks.

Your next question comes from Gary Su with CIBC World Markets.

Hi.

Thanks for taking my question.

Just a point of clarification, Mike.

Did you -- you said that wafer fab equipment spending would be up 5 to 10% next year according to your forecast.

What do you think CapEx is?

Well, we did say that wafer fab equipment would be up 5 to 10.

We think CapEx will be up closer, 5, 6, that kind of range.

So we think that what WFE continues to take a bigger portion of the overall CapEx.

Okay, and if I look at consensus numbers for you guys for calendar '06, people are already modeling 15, 16% growth and relative to kind of 5 to 10% sort of industry growth, I mean where do you think you're going to really get sort of the juice for the share gains next year?

Well, I think two major items, but I think you understand our share in memory versus foundries.

Our -- the key -- our key products, our key foundation products play to those companies that have multiple layers of metal.

As foundry and logic grows, that's very, very positive for us.

The other thing is our Service business has been growing.

It's been strong.

We have been very proud of the way that's gone.

We're offering more products and more applications to the memory guys, which during this last year has been an issue for us because we're so strong in interconnect area, memory doesn't have that same kind of interconnect.

And then our AKT business, we're expanding our product offerings and we're gaining share with the ones we have.

Okay, great.

Thank you.

Your next question comes from Shekhar Pramanick with Moors & Cabot.

Hi, good afternoon.

Two questions.

One question for Mike.

You talked about [doubling or feeling] a good growth here in '06 and we agreed, but what do you see in the flat panel investment side?

Do you think that flat panel CapEx is going grow or you're going to grow because you'll have a lot more product?

And also, if you'll talk on investment coming out of China.

Thank you.

Sure.

We think flat panels is going to be roughly -- the investment in flat panel's going to be roughly flat.

The major suppliers will start their Gen 8 investments, and -- but we still think that we're going to get more exposure there as we add products.

In China, 2005 was a real dearth of investment in China.

We think that changes in 2006 and they are going to get back.

Maybe it won't be at the levels of 2004, but still significant growth in investment in China in chip manufacturing.

By the way, we also are seeing an increase in flat panel spending in China.

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

Thank you.

Nancy, you're paying out on cash here in terms of buybacks and dividends a little more than the free cash flow.

Is that something you're pretty comfortable with given the size of your cash and would that be a consistent trend through 2006?

It is something that we're comfortable with.

We've indicated a strong commitment to returning shareholder value through a repurchase and dividend, and utilizing our free cash flow to do that and I would expect that to continue.

And that doesn't limit you in terms of any opportunities on the acquisition front?

No, don't think so.

Cash balances are pretty healthy, so we're -- we would be prepared to utilize it to advance our growth agenda in many ways.

And would the 400 million in buyback of stock be pretty consistent number through most of 2006?

We have indicated for Q1 it's 400 to $600 million is our range and we look at that on a quarterly basis.

But I think that's a reasonable assumption.

Okay.

Thank you.

Your next question comes from Raj Seth with SG Cowen & Company.

Hi, thanks.

Just a quick one, Mike.

Where do you think we are in the 65nm decision cycle?

I've heard some suggest that most decisions will be made by the end of this year and others suggest that we're earlier than that.

Where are we?

It depends on the customer, but we think there's another six to nine months left before the decision cycle is going to complete.

Okay.

Thanks.

So leading companies have already made decisions.

Trailing companies have not.

Thank you.

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

Good afternoon, guys.

Congratulations on a good quarter.

Nancy, you mentioned that you guys were sort of ceasing development in mask-pattern generators.

Can you just sort of help us understand what that adds to your margin, how much of an impact does that have on the operating margin?

It actually doesn't have any significant impact on the margin or expense levels.

It's fairly small numbers historically and with what we've, expense that we've saved by closing down certain features of that program.

Okay, and then just, Mike, you mentioned that you expect to essentially grow in a flat PD market.

You mentioned getting a boost from the launch of new products.

When should we anticipate the launch of new products there that are going to sort of materially increase your footprint in that part of the industry?

Well, when we do it, we're not in the habit of preannouncing products, although once in a while I slip.

But we're going to have some introductions this year and I'll just say stay tuned.

Great.

Thank you.

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

Yes, going forward with the guidance being up 7 to 10% or the guidance being up next year, I'm assuming [indiscernible] assumes that memory spending will continue to be strong and foundry comes back in a little bit to support that.

Is there any chance out there that memory or, in particular, DRAM might slow down considering we've been on this sort of spending binge and memory for about a year now or better?

Or are the indications that you are getting from customers that there's no sign of, I guess slowdown or a pullback by the memory customers?

We don't see any sign yet of any pullback, Robert.

I see comp -- pretty large confidence by the major guys.

Okay.

So they are all still committed and this is the second tier companies of memory business remain firmly committed?

Yes.

You know, it's been amazing.

The second tier guys are just as committed as the first, and aggressive as the first tier guys.

Okay.

Very good.

Thank you.

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

Great, just two questions on service here, one near-term, one long-term.

Could you help us understand what the seasonal impact is to your fiscal first quarter service, maybe do it by quantifying.

What was the dollar increase, let's say last year in your January quarter for service?

And then I guess I would expect it to be something more this year given the 300mm tools can have warranty and Metron now involved.

And then the longer-term question for service, you guys really knocked my socks off back in March in the analyst meeting talking about the service addressable market going from 3.5 to $8.5 billion market opportunity.

Can you help us understand now that the fiscal year is completed, maybe what did you do in total service this year?

How did that compare to the previous years?

And maybe start thinking about how much more of that addressable market you could start talking about adding next year?

Sorry, two questions.

Dollar increase last year in fiscal 1Q '05 and then to service bookings and then a longer-term service question.

Well, the service bookings in terms of -- have had, historically have had their good quarter in Q1 and so we're looking at --.

How much has that business historically on a quarter-over-quarter change?

I would have thought it would have been about 100, 150 million and that's pretty much all your guiding for bookings this current upcoming quarter.

So it almost suggests to me your system bookings are down and that just doesn't sound right.

So can you help us understand what it's been historically?

No, I mean they are up in the same ratio that they have been up before.

I mean starting from a solid base of performance this quarter and then all of our service contracts, a lot of service contracts renew in the January time frame and that's the way it's been always previously.

But I would add, if you think our -- you should not think that our system orders are down.

Right.

You should not come to that conclusion that our system orders are down in Q1.

Okay, and then the longer-term question on service or can we quantify what you guys did for total service in fiscal '05 versus '04, maybe even just a change?

Well, the numbers were up for the -- we had growth in service for the year;

I'm just going to say that.

And from an addressable market standpoint, we're going to keep -- it's almost impossible for us to talk about market share and service because the market is large and our share is small even though we have a very large service business now.

And so because our aim is to continue to add new products and expand the TaN that we can address.

So, well, we've moved it from 3 to 8 during this last year, we expect to continue to move that up.

It won't be as big a step in an addressable market probably in the next year because we're going to do an awful lot of work to grow our presence in the products that we have.

Okay, Mike.

Maybe I would just add that I think you guys hinted back in March that there's a potential you guys might start breaking out service and/or AKT.

That would certainly clear up some of this confusion.

Hopefully you guys will consider doing that in the future.

Operator, we're going to take the next question.

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

Thanks for taking my question.

Mike, you mentioned that WFE in '06 was going to be up -- or you estimated it would be up about 5 to 10%.

As you talk to your top 20 customers, is there any reason to believe that that spending may be either front half loaded or back half loaded, or do you see it pretty much linear through the year?

Thank you.

Well, it's never linear, but I think that that's kind of the assumption we're going to -- we're kind of moving on right now, that spending is kind of going to -- it's not going to be flat linear.

It's going to be growing through the year at a relatively even rate.

So kind of growing off of the first quarter level?

Yes, off our first quarter level.

I mean but when we talk about WFE in '06, we're talking about calendar year kind of number.

Just not -- we don't judge our customers based on our fiscal year.

Next question, Derek?

Your next question comes from Kevin Vassily with Susquehanna.

Yes, back to your flat panel business.

So if you look at kind of the announced products that you have, the CVD tool and the inspection tool, have you been shipping anything else that has helped --?

[Laughter].

-- keep your wires in and revenues at reasonably high levels here?

We're not shipping anything else that's contributing to orders of revenue at this point.

Okay, great.

Thank you.

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

Hi, Nancy.

Can you discuss real quick where the delta came in your orders, the up 15% in Q4 versus where you thought you would be?

If I remember going back to your August transcript, you actually said that service would be up, silicon up, and flat panel being up.

So I'm just wondering where the delta came from.

Well, let's see.

In terms of the order book for Q4, the appreciable differences I think -- well, it came through in basically all areas.

So the flat panel business was a good business in the fourth quarter.

And we saw good contributions across all of them, including the Systems business.

So the Panel business really came through well.

Okay, and then in your January quarter, service bookings there, typically do you get about 40% of all annual renewals in your January quarter?

Yes, the -- [multiple speakers] yes.

Mark , we're not going to go into that level of detail.

What we've already commented on is that the trend there is up as we go from our fourth quarter into our first quarter.

Okay.

Thanks all.

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

Yes, I have a question regarding the mix of your booking by geography.

If I look at the past couple of years, Taiwan has represented about 24% and this past quarter that mix went up to 31%.

And if I were to use the historical average, it suggests to me that Taiwan and bookings may have to [decelerate] significantly in the latter part of next year.

Is that the right way of looking at this or any kind of comment you may have on here?

I think that you have to think of Taiwan a little differently than just foundries.

Taiwan is foundries, DRAMs and flat panels these days, and so there's a whole mix in that order book.

I don't see -- I don't know what's going to happen at the end of next year, but I see a positive bias for spending in Taiwan.

And [multiple speakers] --.

So in other words, as Gen 8 is spending we'll pick up later next year, would that help with the mix?

Oh, sure, of course.

One comment that I will make about the Service business that, as I said, we grew our Service business during this year and we grew it with products that are substantially different than our historical, just break-fix business.

So if you -- I think you have to think about it a little bit differently than you have thought in the past.

Those orders are, come at different pace than the normal break-fix business.

And if I may just get one clarification.

Nancy, did you say flat panel display bookings were significantly up in the October quarter?

The Panel business had a good quarter in Q4.

In terms of booking?

In terms of orders, that's correct.

All right.

Thank you.

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

So if you could queue up the last question.

Your final question is a follow-up question from Timothy Arcuri with Citigroup.

Hi.

On that front can you help me understand something?

If I look at Taiwan orders, they were up about $300 million sequentially.

If I look at memory, it was down about $30 million sequentially.

And if I look at foundry, it was up about $130 million sequentially.

So if you net out memory and foundry, that's up about $100 million, yet Taiwan was up $300 million.

So where's the extra piece coming from?

Was that all flat panel?

Well, I'm not sure we broke out Taiwan memory, Tim, so there was Taiwan memory up and flat panel was up, and of course, foundry became a bigger part of our overall order book, as you point out, 100 million.

Right, but there's no, there's that $200 million piece that seems to be unaccounted for in Taiwan because the only things in Taiwan are either foundry or memory.

So it would seem that --.

There's flat panel, big flat panel in Taiwan.

Okay.

So your -- so basically flat panel orders could have doubled sequentially in October?

No.

We didn't say that as a whole, and, no, that's not right, but in Taiwan, they could have, yes.

Okay, Derek.

I would probably have to sit down and redo your math.

Are you doing math -- you're doing math -- I thought you were mixing some math from Taiwan and overall, and so I think we can sit down and probably go through it and get it straightened out.

Okay, great.

Thanks.

All right, Derek.

We would like to make our closing remarks here.

And we would like to thank everyone for listening to our fourth quarter and fiscal year 2005 earnings announcement.

The Webcast of this call is available on our website and will remain there until November 30th.

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

That concludes the Applied Materials fourth quarter and fiscal year-end 2005 earnings conference call.

You may now disconnect.