應用材料 (AMAT) 2007 Q1 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to the Applied Materials first quarter fiscal year 2007 earnings conference call.

During the presentation, all participants will be in a listen-only mode. [OPERATOR INSTRUCTIONS] Afterwards, you will be invited to a participate in a question-and-answer session.

As a reminder, this conference is being recorded today, February 13, 2007.

I would now like to turn the conference over to Mr. Randy Bane, Vice President of Investor Relations Applied Materials.

Please go ahead, sir.

Thank you , Marvin.

Good afternoon, and welcome to Applied Material's fiscal 2007 first quarter conference call.

Joining me on the call today are Mike Splinter, President and CEO, George Davis, Chief Financial Officer; and Joe Sweeney, Senior Vice President, General Council, and Corporate Secretary.

Today we will discuss our results for the period ending January 26, 2007.

The financial results were released this afternoon at 1:05 p.m.Pacific time.

A copy of the news release is available on Business Wire and on our Web site at www.Applied Materials.com.

Today's earnings call contains forward-looking statements including those relating to Applied's performance, technology leadership, growth opportunity, operating efficiencies, tax rate, cash generation and deployment, restructure activities, financial targets our customer's tabulation trends and capital spending, and the outlook for Semiconductor, Display, and Solar industries.

All forward-looking statements are subject to known and unknown risk 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.

Forward-looking statements are based on information as of February 13, 2007, and the Company assumes no obligation to update such statements.

Today's call also contains non-GAAP financial measures.

Reconciliation of these measures to GAAP are contained in our earnings press release issued today and in our earnings call highlights document, both of which are available on the investor page of our Web site.

George Davis will open the call with a discussion of our financial performance for the first fiscal quarter.

After George, Mike will highlight the current industry environment and the current company progress.

George will close our commentary with our targets for the second fiscal quarter of 2007.

After these remarks, we will open the call for questions.

With that I would like to turn the call over to George.

George?

Thank you, Randy.

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

Today I will cover Applied's results for the first quarter of fiscal 2007.

Our Q1 performance was within the range of our targets.

Overall, Q1 was a solid quarter for the Company and represents one of the strongest first quarters in our history.

We continue to execute on the strategies we put in place last year to strengthen our financial and operating performance.

I would like to thank our employees for their contributions in making this happen.

It is their commitment to delivering results that led to this strong performance.

As you know, we are now reporting our financial results with additional information provided by segment.

We are disclosing order, revenue, and operating income for each of our four segments and will continue to provide quantitative targets at the corporate level for our orders, revenue, and EPS outlook.

Now let me review our financial performance in more detail.

Beginning first with a summary of total company results.

Orders totalled 2.54 billion for the quarter, up 24% year-over-year and down 5.6% from the prior quarter.

Orders in Q1 reflected record levels for Fab Solutions and an increase in Silicon orders, which partially offset a significant decline in Display orders.

Q1 orders included seven orders in excess of 100 million.

Backlog for Q1 increased to 3.55 billion compared to 3.4 billion for Q4.

Backlog adjustments totalled 111 million as certain Display and Silicon customers pushed out shipment dates beyond our 12-month booking window.

Revenue for Q1 was 2.28 billion, representing a 23% increase year-over-year, but 10% lower than last quarter.

Silicon, Display, and Fab Solution segments all reported quarter-over-quarter revenue declines with Display the most impacted on a relative basis with a reduction of over 20%.

Gross margin for the first quarter decreased slightly to 46.7% compared to 47.1% for the fourth quarter.

The decline in gross margin was due primarily to lower revenue levels and product mix.

Equity-based compensation charges of 6 million were included in this quarter's gross margin.

First quarter operating expenses consisting of RD&E, marketing and selling, and G&A were 516 million, 6% lower than Q4.

These expense levels reflected savings from cost control initiatives in Q1, our shutdown in December, and lower equity-based compensation costs.

Operating income was 550 million or 24.1% of revenue compared to 25.2% reported for the fourth quarter.

Net income was 403 million or $0.29 per share compared to 449 million or $0.30 per share for the fourth quarter.

Non-GAAP net income was also $0.29 per share as equity compensation expense was partially offset by the positive affects of tax settlements relating to prior-year audits.

Net interest income for the quarter were 20 million, 8 million lower than the previous quarter as a result of lower average cash balances.

Now I would like to discuss our balance sheet and cash flow.

During the quarter, cash, cash equivalents, and investments increased 199 million to 3.41 billion.

The Company generated 381 million in cash from operations, partially offset by 132 million paid to settle the price adjustment on the accelerated stock buyback initiated in the fourth quarter and by 70 million paid in dividends.

Free cash flow generation for Q1 was 322 million, down from 600 million in Q4.

While Q4 was a particularly strong quarter for free cash flow, Q1 is below our 15 to 20% trend -- 15 to 20% of revenue trend due to higher working capital balances in response to changing customer requirements experienced during the quarter.

We expect to be back within that range over the balance of the year.

During Q1 accounts receivables increased modestly and day sales outstanding grew to 82 days on lower revenue levels and changes in regional mix.

Inventory increased by 112 million, principally due to increases in raw materials in work in process inventories.

The Company completed the accelerated share repurchase in the first fiscal quarter of 2007.

Including the affects of the price adjustments taken in Q1, we repurchased 145 million shares under the accelerated stock buyback program at an average price of $18.08 per share.

Total share repurchases initiated in Q4 resulted in a 10% reduction in shares outstanding at the beginning of that period.

We have a 5 billion, three-year share repurchase authorization in place.

In Q2, we plan to reinitiate our share repurchase activity and expect to purchase between 300 and 400 million in stock.

In December, the Company declared a quarterly cash dividend in the amount of $0.05 per share.

Capital spending for the quarter was 59 million and depreciation and amortization totalled 61 million.

Head count at the end of Q1 was 14,003 regular, full-time employees.

Now I would like to discuss our segment results.

Starting first with Silicon.

Silicon orders of 1.76 billion were up 5% over Q4.

Silicon orders had the following mix.

DRAM was 51%;

Flash Memory, 20%;

Logic and other, 18%; and Foundries 11%. 300 millimeters tools accounted for over 90% of segment orders.

Virtually all of which were at 100 nanometer and smaller process technology levels.

Orders for 65 nanometer and smaller process technology represented over 50% of Silicon orders.

Silicon net sales of 1.49 billion were up 22% year-over-year and down 8% from Q4.

This reflects continued strength in memory, offset by lower spending by Foundry and Logic customers.

Operating income was 520 million or 35% of sales, a decrease of 52 million or 9% from Q4, primarily due to lower revenue and product mix.

Now Fab Solutions.

Fab Solutions orders of 686 million were up 13% year-over-year and 10% over Q4, driven by customer renewals of annual service contracts.

Q1 orders were a record for this segment.

Fab Solutions' net sales of 525 million were up 12% year-over- year, continuing the track record of double-digit growth in this segment.

Net sales were down 11% over the proceeding quarter due to lower wafer starts and utilization and the seasonal reduction in Fab light spending typical of the first quarter.

Operating income was 146 million or 28% of sales, a increase of 23 million or 14% from Q4, again primarily due to lower revenue and product mix.

Let's turn to Display.

Display orders of 67 million were down 288 million or 81% from Q4.

Display net sales of 230 million were up 39% year-over-year, but down 22% over the previous quarter, as LCD panel makers delayed their build plans due to excess inventory levels and strong capacity additions in 2006.

Operating income from this segment was 64 million or 28% of sales, a decrease of 30 million or 32% from Q4, primarily due to lower revenue and product mix.

Now Adjacent Technologies.

Adjacent Technologies net sales of 32 million were up 60% over Q4 due to the timing of revenue recognition of previously-shipped equipment.

I want to talk about unallocated expenses now.

Unallocated expenses of 169 million were down 15% over the previous quarter.

These expenses fall into three buckets of spending of similar size.

First, equity compensation and certain components of variable compensation.

Second, corporate marketing and sales.

And third, other corporate general and administrative functions.

So looking at these groupings of cost, equity and variable compensation is down from Q4 and up slightly year-over-year.

Corporate sales and marketing is essentially flat quarter-over-quarter and year-over-year.

Cost and corporate, general, and administrative areas are flat from Q4, but increased year-over-year primarily reflecting investment in our business transformation initiative.

Now I will turn the call over to Mike Splinter to provide the CEO's perspective.

Mike?

Thanks, George, and good afternoon.

Our first quarter results demonstrate our success in meeting our operational objectives, even in a challenging environment.

At this point in the year, we are where we thought we would be.

And I remain confident that our team will execute effectively throughout the year and deliver on the results we've forecast for 2007.

Let me begin with some comments about the business environment.

In our Fab Solutions segment, the Semiconductor industry is experiencing a seasonal slowdown as anticipated.

Wafer starts dropped during the quarter with Fab utilization in logic and Foundry Fabs approaching 80%, which is slightly lower than we had anticipated.

The lower levels of Fab utilization put downward pressure on spares and service revenue.

We expect to return to revenue growth in Q2 as Fab loadings bottom out and begin to increase and ramp through the remainder of the year.

Wafer start outlook is good for 2007, projected at 8 to 10% growth.

In our Fab Solutions results are expected to exceed that level.

Our Silicon segment bookings were up in Q1, and we expect them to grow again in Q2.

Memory orders were strong, demonstrating the success of our new products and our growing share in this critical market segment.

We expect our overall memory business to remain relatively strong and balanced over the year, with Nan Flash growing in the second half.

As we look out over the next three years, we see more than 20 new memory fabs being plan for production, enabling new applications for both DRAM and Flash to replace disk drives and enhance user experience in cell phone, PCs, and game platforms.

The Foundries, however, continue to hold back on capital investment and are very much in the bottom of the trough at only 11% of our bookings in Q1.

From our analysis and dialogue with our customers, we expect the Foundries to come back in Q3, as 65 nanometer ramps into high-volume production.

Longer-term, we remain confident in the Foundries as they concentrate additional industry R&D programs, referenced in recent announcements, by several top device manufacturers.

We view this as a positive for the industry and especially for Applied Materials.

As this allows greater efficiencies, aligns with where we have been deploying our R&D resources, and should focus the industry more on device design and increased system innovation.

In December, we hosted a technical symposium with executives and technologist from leading chip companies and universities, including AMD, IBM, Intel, TI, and MIT to discuss the imminent move to 32 nanometer device and manufacturing as well as the critical design and process issues that must be resolved.

More recently, industry announcements on the accelerated adoption of high-K dialectics and metal gates starting at the 45 nanometer node clearly signal that the way forward will require new integration solutions and new materials.

Applied's strong market share position in PVD, Oxynitride gates and our core product capabilities in deposition, Etch, CMP, and other Technologies is helping us enable this industry transition.

Now let's turn to the Display business.

It's clear that customers are hesitating or or in between investments.

During 2006, LCD TV volume grew by more than 100%, and for the first time LCD TV passed plasma TVs in the 40 to 44" sweet spot.

We expect TV volume to continue to grow at around 60% in '07 and therefore we do expect orders to be up slightly in Q2 with a more full recovery in orders by Q3 and in revenues by Q4.

For 2007 we expect the Display equipment market to be down 25% or more.

However, our Display segment will perform better than the industry, as we grow our product position in PVD color filter and E-beam test.

Let's review some of our strategic programs for 2007.

In the quarter, our UVision brightfield product captured another repeat order at a key memory customer and is building on the gains achieved in 2006.

We launched several new products, including a metal Etch product targeted at memory technology.

The Applied Opus AdvantEdge.

It includes 50% improved CD control and a 50% improvement in throughput.

This product is doing very well.

Since its release in December, we shipped multiple systems that are already running in production.

We also launched producer GT, a new high productivity CVD product.

This system is exceeding expectations, setting a record for rapid adoption and displacing the competition at multiple customers.

We have 23 Producer GT systems in the field and we expect to more than triple our installed base by the end of Q2.

Both the Opus and the Producer GT demonstrate the advantage of using our common platforms and software to quickly bring new products to the market.

In an announcement released earlier today, we stated that we will cease future development of Beamline implant products and will be closing our operations in Horeschim, England.

Unfortunately, the implant equipment market has changed over the past few years and moved more towards commodization.

We don't see future returns that warrant future investment in Next Generation Beamline products.

I have assured all our customers that we are committed to the support of our installed base and we will continue to provide capacity needs through Applied Global Services.

In our Adjacent Technologies segment, we are making solid progress to complete multiple contracts for solar equipment.

Working toward our objective of more than 200 million in contracts this year.

We are seeing a significant rise in activity as more customers understand the impact of our technology to effectively decrease the cost of producing solar power.

Summing it up, with our improved position in memory, expanding served market in Display, and overrule strengthening market position node-to-node, I see three factors that will benefit Applied and support our success through the remainder of 2007.

First, continued investment by memory manufacturers, particularly NanFlash in the second half, so far, these investments are progressing as planned.

Next, that our Foundry customers commit and spend their CapEx as announced, we should have a clear picture of this by the end of Q2.

Finally, that the Display producers return to capacity expansion to fulfill the needs for holiday '07 and beyond.

In the longer-term, we see plenty of opportunities where Applied can demonstrate our strengths.

We're developing cutting-edge technology solutions to continue to extend Moore's Law well into the future.

We are gaining in service and reinventing what world-class solution means for our customer.

We're expanding our Display products, our solar efforts are gaining traction and are poised to take off as the market for Green Tech grows.

We are investing in exciting, high-growth areas that should pay dividends to our investors for years to come.

Thank you very much and now I'll turn the call back over to George Davis.

George?

Thank you, Mike.

Our targets for the second quarter reflect the industry dynamics that Mike just discussed.

With that as a foundation, we expect orders to be up in the range of 2 to 7%.

We expect revenue to be flat to up 5%.

We expect EPS to be in the range of $0.27 to $0.28 with a tax rate assumption of approximately 34%.

These targets do not include the affects of the impacts associated with the announced closure of our implant operations in the United Kingdom, or the costs occurred as a result of a comprehensive move to manage services in our IT function and some additional minor costs for operational efficiency improvements.

The total cost of these initiatives is expected to be in the range of 105 million to 145 million and will be expensed over the next few quarters.

Thank you and Randy, let's now open the call for questions.

This completes our prepared remarks.

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

Operator, let's begin with the first question, please?

Our first question comes from the line of Jay Deahna with JPMorgan.

Thank you.

Congratulations on your execution, there Mike and George.

A couple questions.

First of all, on the cycle, we've heard some of your competitors characterize it as the memory is front half loaded and IBM and the Foundry come back in the second half.

Just wondering to what extent you see the Foundry and the IDMs coming back.

You said flash might be back end loaded as well.

Just wondering where you see shipments being higher in the second half of the calendar year than the first half.

And what is the risk in memory in the first half.

That's the first question.

And the second question is Intel and IBM recently made some announcements about metal gates coming in at 45 nanometers.

Just wondering if you can explain what that means about Applied Materials.

Sure, Jay, I think you asked more than a couple.

At any rate, a few comments on how the memory Foundry -- how we view that.

Right now, as you could tell from George's comments, the front half of our year is very DRAM intensive and 50% of our orders with DRAM are shipping heavily to the DRAM manufacturers.

That seems to be going along.

We expect DRAM to phase down a little bit going into our second half and a few very big Flash projects to go through.

That's really what we're counting on.

We do expect Foundry to come back.

It's been trending down over the last three quarters.

Last quarter, if you recall, service 16% of our orders, this quarter it's 11%.

I don't think it can get a whole lot lower.

We're seeing some signs now that there's some 65 nanometer and 45 nanometer buys.

We see roughly 300 -- almost 300 new 65 nanometer designs in the Foundries.

And that's usually the point the volume really starts to take off.

We're pretty confident about the Foundries coming back in the second half of the year.

It just depends how much.

If they spend what they say they were going to do, we meet our objectives for the year.

You asked at the end of your question there about risk in the first half.

For us I see very little risk in the first half.

We're building to commitments and shipping our mixture for the next 13 weeks.

I don't think we see much risk there.

As far as metal gates and what it means for us.

On metal gates, I think we're in a very, very good position.

Not only with those two customers but we've been doing our on R&D in this area and working with customers across the industry.

I think we're going to see accelerated adoption here and I think we'll win all the metal gates, High-K dialectics is a story where we have very good technology as well, and you'll see us be strong as more and more companies announce their capability in that area.

Mike, is that a situation where a batch oxide deposition from one of your competitors could transition into a single wafer tool sold by Applied?

It, mostly, Jay, in the dielectric area, we have a very, very strong share we our DPM product so where we see some potential change over may be in the memory area where most of the capacitor dielectrics are done in a batch system.

I think most of the people who are working on advanced logic are using a single wafer for this layer today.

Okay.

Thanks, Mike.

Our next question comes from the line of Satya Kumar with Credit Suisse.

Hi.

Thanks for taking my call.

Mike, I'm totally with you in thinking that the memory guys have to spend a lot between now and 2008 in terms of trying to hit their opportunities, but if I look at the pricing in the memory market more recently, particularly focusing on DRAM it's been down more like 25 to 30% just in the last six week and in all the debit of what's really going on.

When you're saying you don't see much risk for memory in the first half, is that based what you're hearing from your customers today?

Are you handicapping that to any extent of the decline in memory prices?

You have to look at the memory pricing over a little bit longer term.

If you look back to 2006, DRAM prices were incredibly strong.

I think probably set a record for strength.

And so seeing 20 plus percent downside here in the first part of 2007, I don't think, is very surprising at all as some additional capacity comes on.

I think people are going to continue to put on this capacity with a projected bit growth as the conversion to Vista occurs.

Now I think there's been a lot written lately about Vista hasn't spurred any increase demand in PCs.

I don't think it would.

I do think that it will spur increased growth in DRAMs in PCs over the year as more and more of the computers are are incorporated with Vista onboard and the experience improves with utilizing increased DRAM on board those machines.

So that's kind of our view and I think that's going to drive an awful lot of bit growth in DRAM in the second half of the year.

Also, if you look at the DRAM makers' profitability also set records last year, I think they have a lot of room to move down in pricing without much affecting their profitability.

Okay.

Specifically, looking out into the April quarter, when you're guiding up for bookings, what are you assuming for Silicon bookings?

And within Silicon, what's your assumption for memory and logic and foundry?

Satya, hi.

This is George.

We're not going to be guiding on a segment basis.

Overall, I think the general industry trends that we talked about are going to have to suffice.

Okay, thank you.

Our next question comes from the line of Tim Arcuri with Citigroup.

Hi, guys.

A couple things.

First of all, if I listen to your biggest customers in the memory space and I listen to their public conference calls last month, they pretty strongly indicated that the CapEx would be front half loaded this year by about 2 to 1.

And since then, Nan pricing has gotten worse than what they thought it would be in Q1.

As the prior question indicated, DRAM [inaudible] your impact worse as well.

But I guess you see memory spending being more balanced through the year, so you don't actually agree with what they said?

Is that what I should read in this?

You should take our call -- Tim, you should take our comments on our fiscal year.

And the way we see our revenue playing out here in our delivery discussions with them, we think that over the year it's going to be pretty balanced.

DRAM will be loaded in the front half and more Flash in the second half.

Okay.

Okay.

I guess, then, just as a follow-up, George, if you're not going to give out what Silicon orders will be in the April quarter, which is embedded in your up 2 to 7, I wanted to confirm that means memory holders would be up as well?

Yes, I think that's right.

Tim, you can assume -- one thing that you can assume is our AGS orders will follow their traditional seasonal pattern with Q1 being by far the highest quarter.

Okay, guys.

Thanks.

Our next question comes from the line of Stephen Chin with UBS.

Hi, thank you.

Mike, is it fair to assume that you think this just-ended January quarter was the trough order quarter in this cycle?

That was my first question.

Well, I believe it was certainly trough orders for logic and Foundries, yes.

Okay, and --

And Display.

(laughter) and Display, thanks.

Fair enough.

Call you please share with us what your estimates for 2007 Semiconductor CapEx could be and do you think AMAC can grow faster than that?

Sure.

We think Semiconductor CapEx is going to be roughly a little over 4% increase year-over-year.

We think WFE will grow a little faster than that, closer to 6.

So pick a small range there.

And then we think Applied Materials will grow faster than that, primarily because during the last year and a half we've gained an awful lot of share in the memory area and we are gaining node-to-node so as 65 nanometer builds out and 45 nanometer starts to get a little bit beyond the R&D stage, I think we'll see positive affects.

Great, thank you.

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

Hi.

I was wondering if you could talk a little bit about -- more about the dynamics of logic .

We've talked about some of the memory trends, but how do you see that playing out as the year unfolds?

We think Q1 is -- calendar Q1 will be the bottoming out of the utilization fall.

We've seen it fall to 80%, it will probably go a little bit below that before it starts to come back in particular in the Foundries.

But then I believe with a number of products -- and you've heard announcements in the last few days from the likes of QualCom and BroadCom how they're moving their product line to 65 nanometer.

We think that buildout of the 65 nanometer and ramp of those products is going to help drive the rest of the year for the Foundries and really that will be the thing that gets them to spend their projected capital that they've talked about earlier in the year.

As far as logic, as the big logic players go, they seem to be dwindling as more companies announce that they're going to depend more on Foundries.

That will also help push more volume to the foundries as well, but we see the two big logic makers continuing on their plans to spend their capital.

Okay.

We think that will be more balanced over the year.

Okay.

Secondly, do you see any lasting cost benefit from the Horeschim shutdown?

Any financial benefit that goes beyond the one-time charges you've talked about?

Hi, Ed, this is George.

Yes, we certainly do.

Clearly, that business was going to be operating at a loss this year, and based on the investment that would have been required competitively, it would have been operating at a loss for at least the next few years after that as well.

So in essence, that's an avoidance.

Obviously you have the cost structure associated with that as well that was talked about in the release.

Great.

Thank you.

Our next question comes from the line of Harlan Sur with Morgan Stanley.

Good afternoon.

Mike, you talked a lot about the chip design and tape out activity at 65 nanometers.

We've seen quite a few of the leading [inaudible] semiconductors companies, as you've mentioned, making aggressive moves towards that technology node.

My guess is that with the design cycle times as they are, the Foundries will need more capacity to support all these tape outs by middle of this year.

With that in mind, are you expecting the Foundry order contribution for 65 nanometer in the April quarter to be up significantly, or is that more of a July quarter ramp?

We believe it will be up in this quarter, but we believe it will be up modestly and then we think it will be strong in our July quarter -- our quarter that ends in July.

Okay, great.

Along those same lines, do you still expect memory to represent about 50 to 60% of the semi product mix for the foreseeable future, or do the Foundry and logic guys start to increase as a part of the mix second half?

Our current projection, Harlan is for the memory -- for memory spending this year to be about half of the overall WFE spending.

Obviously, when you look at the overall mix, that the percentages are higher in the front half because Foundry and logic is so relatively low.

I think that kind of covers it.

Okay, great.

A question for you, George.

With the reestablishment of the R&D tax credit, I thought your tax rate would have dropped by a percent or two, but you're guiding 34%; is that correct going forward?

The R&D tax credit, Harlan, is a little less than a 1% benefit for us and so obviously we'll have the full-year affect of the refund spread out over the year, but that was all taken in the first quarter.

Got it.

And what was responsible for the -- last question.

What was responsible for the lower than expected tax rate in the first quarter?

In Q1, we had a settlement of some prior years' federal tax audits that resulted in about a 4 point impact on our tax rate.

And again, about $0.02 per share on EPS.

Great.

Thank you very much.

You're welcome.

Our next question comes from the line of Gary Hsueh with CIBC World Markets.

Hi, guys.

I want to switch gears a little bit here and focus down on costs.

You guys have done a pretty good job here in Q1 on reining in costs, if I look at your Silcon business your core business you're hitting around 35% gross margin and if I look at a comparable kind of run rate in the last fiscal year, you're 200 basis points lower.

You're obviously doing something in the right direction in your core Silicon business.

I wanted to ask a quick question, George.

It seems like a lot of the equity compensation seems to have affected or benefited in the quarter the unallocated costs.

Just wondering with a specifically drove margins up in the Silicon business in Q1.

Whether it was shutdowns or anything else that you might be doing?

And a follow-up to that would be, at the current kind o$1500 million kind of revenue run rate throughout the rest of this year given that you're cutting the I&M Plant business, how much can you grow margins at flattish revenues?

Let me just talk about the cost picture in general.

Again, we don't break out gross margin by segment, but I think the answer is instructive across all of our groups.

First off, in the first quarter we knew that revenue was going to be down for the quarter, going to be a little bit of a challenging quarter, so across the board cost controls were put into place and these were cost cutting in addition to a shutdown.

But longer-term, we also have a number of initiatives that you're aware of, whether it be in manufacturing and their moves to modular tests and emerging transit.

Obviously, we're constantly working on lowering our material costs, which also impacts gross margin and particular for Silicon and for Fab Solutions.

And then on the OpEx side, we're actually in an investment mode right now on business transformation, so we'll be investing in that and you see that, that shows up in the unallocated expenses in '07, but we expect to start to see the real benefits from that in '08.

In general, in a period particularly a quarter where we were challenged like Q1, we were going to be very cost conscious, which means we have to be very thoughtful about it.

At the same time, We are going to continue to invest in the new product options that Mike talked about and other strategic priorities of the Company

George, I guess, my question was basically the knock [inaudible] has been that kind of straight from its former financial targets, and now you've had one quarter where it looks like you're make up or getting some lost ground there.

Are you going to be able to give us some targets here by the different segments in terms of revenue run rate and what your targeted operating margins should be in those businesses?

I think that would be pretty helpful.

I understand that.

As you noted, we were right on model this quarter.

I think you have to take into account that the model, when it was established, the company had a very different mix, it had a different capital structure, and it didn't take into account anything it didn't have an option expensing in place.

So one of the things that people struggle with is the doing the adjustments to the model.

But the fact of the matter is segment reporting really makes the comparison to the hold model less relevant.

You have far more visibility into the business than you had.

I don't think we intend to put targets out for each segment, but rather I think it gives you -- you'll have an opportunity to really see how the segments improve over time.

I think that will be -- that will be the indicator whether the improvements that we're driving through the organization are making it to the bottom line, which is a key priority for me.

Okay.

Finally, George, if I just can try and pin you down here on operating margins for the Silicon business, you hit 35% operating margins.

Now if revenues were flat at the you aren't $1.5 billion and you're cutting your I&M plant business, just on cutting the I&M plant business, how much more could you see your operating margin expand off of 35% in Q1?

Gary, we'll have a lot better view of that after we go through the process of evaluating all of our customer commitments and working with our customers over this quarter as we wind down.

Why don't we talk about this next quarter?

All right.

Perfect.

Thank you so much.

You bet.

Our next question comes from the line of Brett Hodess with Merrill Lynch.

Good afternoon.

Just to follow-up on that, sounds like, then, that cost savings from shutting down Horeschim and changing th IM PLant business are not necessary built into the forecast yet?

That's correct.

Okay.

If you look at the process you went through in deciding to shut down the Iron implant development, Mike, are there other product lines that you think might not be meeting your hurdle rates going forward, or is that pretty much it?

Well, we don't -- we're not going to make any announcements today, Brett.

We made one.

I think that's -- that kept us pretty busy.

We're looking at all of our underperforming businesses and evaluating their strategic position in the Company and whether we think that they can grow and be significant contributors to the overall company and to our shareholders.

I don't have much to say on that other than we are going to use the same kind of process and we are using the same kind of process to evaluate everyone of our businesses.

Very good, thank you.

And that applies to our products as well.

We'll take a look at whether or not a new product investment is likely to provide a sufficient return.

This is a good thing George is driving throughout the company.

So you can expect better performance or else, kind of.

Thank you.

Our next question comes from the line of Mark Bachman with Pacific Crest Securities.

Hi, Mike.

In the press release today, there was a comment attributed to you, and I think you mentioned again on this call that you thought the implant market had moved towards commodization.

Can you explain what this means and how the implant segment would be any different than other segments in the cap equipment space, say Etch, or [inaudible] deposition?

Well, IM implant is a -- I think there's very little differentiation between the five suppliers in the market and everybody can accelerate IMs and embed them in Silicon at relatively similar -- in relatively similar ways.

The difference between almost any other area is the others areas are very application-intensive.

Whether that -- just an example in our CVD area, advanced patterning films or stressed nitride, these kind of things are very difficult, very interactive and unlike implant where you can see prices under pressure and that market not getting the kind of gross margins that we would expect short-term or long-term.

Just wondering there, if the products are so much alike, wouldn't there be equal market share, then, across all the competitors there?

Then it gets down to who's willing -- a pricing game.

That's what it ends up being.

Mark, this is George.

I think also if you just look historically at the financial returns for all the players within the implant segment, I think it kind of support that is view as well.

Okay.

Also in that press release today, the only location that was mentioned was Horeschim.

Will there be any changes to your implant facilities out in Beverly, Massachusetts?

Well, Beverly is incorporated into the overall implant division, that's correct, so there will be changes there as well.

Just the last thing there, on the release, you only discussed beam length architectures, does this suggest that Applied has not given up on its nonbeam technologies?

Yes, that's correct.

Thank you so much.

Also, I want to add, we have a very healthy and growing service and spares business supporting implant and that will continue.

Our next question comes from the line of Robert Maire with Needham.

By the way, congratulations on some nice numbers.

Two questions.

Given that we've gone through what to me appears to be at least a relatively benign down cycle, if you can call it adown cycle, really more like a soft period and the up part of the cycle was relatively benign as well.

Are we moving into a new period here where the belt between the peak operating revenue is off by perhaps 20%, 30%, from what we'd experience during a weak period as compared to the bad 'ole days when we had 60, 70, 80% variations?

I guess I'd answer the question in two different ways, Robert.

In this particular part of the cycle that we've just kind of go back over the last few quarters.

The downside and the depth of the trough of the Foundries have been masked by continued investment by the memory manufacturers and significant growth in the memory manufacturers.

So I think that in part the trough has been masked.

Now, lots of things have happened in the industry, including shorter lead times, better management of inventory, all those kind of elements that help mute the peaks and the troughs.

I think because we see better management in our customers, we're trying to do a better job of running our operations and being more responsive and allowing our customers to add capacity quicker.

So I do think that peaks and troughs will be muted.

I don't know how to give you an estimate.

If we take a look at 2005 to 2006, I think that -- and then 2007, I think that 2005 capital spending was off 10%, but it wasn't off as much because memory was spending more. 2006 was up 25 -- 25% nominally, 20 to 25%, but that was probably up a little more than we might think because memories were spending.

And then at the end of the year, it masked the trough some.

I think once we get through this big growth cycle in memory, we'll be able to tell.

I do expect peaks and troughs to be more muted, but hard to judge whether that means plus or minus 20%.

I'm much more apt to think it's in that range than plus or minus 60 or bigger percentages that we saw in the past.

Okay.

The other question was, in terms of the assets from Horeschim and your beam line implant, any potential thoughts about selling any of those assets, or would you be holding on to those given perhaps other technologies or any disposition of those?

Sure, Robert, it's George.

Our view on that is it's really a function of, we needed to take action today, we felt, and going down a path of selling or an acquisition just was inconsistent with that timetable, but that's certainly something that we can consider over time.

Our key thing is to meet our customer requirements and to make sure that commitment that is we made are fully met and their needs going forward are anticipated.

Once we get through that process and obviously making sure that our employees are treated as fairly as possible, then we can consider some other alternatives.

Okay, great.

Thank you.

Con grates, again.

Thanks.

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

Hi, this is Kate Gabloski on behalf of Jim Covello.

Most of my questions have been answered, but I was hoping to get a clarification of what your non-GAAP gross margins were during the quarter.

I noticed there was 13 million items associated with the write-up of the inventory fair value.

I was wondering if that's something we should be taking out of the gross margin line?

Yes, I would say that the impact on gross margin was less than half a point from acquisition activities.

Okay.

Just one other question.

In terms of your services bookings, how did that do quarter over quarter compared to your product bookings?

Service bookings were up.

Again, the service business has their peak orders in Q1 when customers renew their service contracts.

Silicon orders were also up, but to a lesser extent.

Okay, thank you.

Yes.

Our next question comes from the line of Mark Fitzgerald with Bank of America.

Thanks.

The guidance about the $200 million in bookings for the solar business, is that into the traditional solar markets or is there evidence here that there's a more Silicon application that you guys have been working on that's taking off?

That $200 million will be mostly, if not all, in flat -- in thin film amorphous Silicon.

We will and we already do have orders for nitride deposition systems for crystal and silicon, but we're very focused on this thin film solar cells, which we think will drive costs down, Mark.

So we're excited about that.

Hey, Mark, it's George.

Let me add one point to that.

We've used the term bookings, we've been very careful to use the term contracts.

These are -- this is a new market that we're entering and new business models will be used and so we're not using the term bookings, we're really reflecting to contractual commitments that we make with customers.

Okay.

Just to follow-on to that, in the contracts that you've guys have written here, is there any evidence that people -- that what you're selling here are into these large megawatt facilities that someone is actually putting in other than development lines here capacity for this amorphous silicon application?

This will be real capacity, Mark.

In fact, one of the things that we -- one of the indicators we intend to give you as we start mounting these up is how many megawatts of capacity we've sold.

In my mind, this is kind of the measure of how much progress that we'll be making over the year.

So you can look forward to us kind of keeping a running indicator on how many megawatts of solar power we're selling.

Okay.

Just one quick follow-up question here.

On the share count for your EPS for the guidance here, what are you using many.

We're not giving a guidance.

I can give you the weighted average shares for the quarter, if that would be helpful?

For the April quarter?

No, for the January quarter.

Oh, okay.

I've got that one.

I'm set.

Thank you.

Okay, okay.

We have to buy the shares back first, Mark.

Not sure how many we're -- we've got a range.

We have said 300 to 400, though, million in shares.

Our next question comes from the line of Stephen O'Rourke with Deutsche Bank.

Thank you.

What drove the silicon segment backlog adjustments and can you quantify what they were?

Most of the adjustments were debookings and so just being pushed outside we had minor cancellations, about 25 million in cancellations, which was split between the Silicon business and the refer business in our Fab Solutions.

Can you say what segment, was this a memory segment, was it logic Foundry, or?

No, we don't break it out to that level of detail.

Okay.

One other follow-up.

On the 45 nanometer metal gates, is there a way to quantify the incremental opportunity per Fab that Applied Materials can address?

It's a little bit difficult.

I haven't really done it in average of a 30,000 wafer Fab, but you can expect that there'll be a different system for P channel transistors, different system for end channel transistors as these products start to move out into production.

Fair enough.

Thank you.

Our next question comes from the line of Mehdi Hosseini with FBR.

In your prepared remarks, you were talking about one large Flash order, particularly large in the sec half of calendar year.

Could you give us some idea as to whether the milestones for these large order to actually take place.

Is that mostly during a strategic investment, or something else out there?

And also, the markets in the Silicon business, the markets you're strong, I assume CVD, PVD, what is the growth projection you're seeing if the WFE is going to grow at 6% plus this year, would you expect that double-digit growth out of the CVD, PVD segments?

We don't really give that kind of projection down to the product level, but on your first question, Mehdi, actually what I said was there's several orders.

There are a small number of major factory or Flash factories are going in to the second half of the year.

It's the three big Flash guys.

I don't think there's any secret about who they are or where their big Fabs are.

We're expecting them to continue -- those three companies to continue their capacity expansion as planned.

So I don't think it's anymore fancy than that.

I will say that we do expect CVD to continue to grow faster than the overall WFE market by a substantial amount.

It's just so many more applications coming in the CVD space.

Okay.

Going back to the Flash commentary.

Micron was talking about as much as a 40% reduction in die costs, but they have to get the Fab capacity up to 40/50K per month.

So to that extent, are these three Flash products that are scheduled for second half, it seems to me more a strategic end, and as as long as Flash prices don't drop to zero or less than zero, they're going to execute there.

Could you share your opinion on that?

I believe they are going to execute their plans., I don't know I would use the word strategic.

These companies are competitive and hard driving trying to capture share in a fast-growing market.

At least units are fast-growing.

We still expect growth to be 150% this year.

So that's still our thought process, I think that's much the thought process of many of the customers and why they're investing.

All right.

Thank you.

Excuse me, operator, we have time for one more question.

Okay.

Our next question -- our last question comes from the line of Patrick Ho with Stifel Nicholas.

Thanks a lot.

You've answered a lot of my questions already, but hearing from some of your competitors this earnings seasons about near-term order trends, some of which are guiding flat to down sequentially, can some of your upside be attributed to your strength or your better-than-expected market share gains, especially in the memory market.

Am I correct to assume that?

Patrick, we believe that you would be correct in assuming that.

If we look back to 2005, our share in memories was -- I don't want to use the word dismal, but maybe it's the best description, and we've working very hard on applications that are effective for the memory makers.

We've actually made more progress with the flash manufacturers than the DRAM manufacturers, but we've made very good progress there as well.

Great.

I guess as a follow-up to the market share story, is this also correct to assume that you remain highly leveraged to the Foundry Group and once they pick up their spending trends as you're forecasting, perhaps in the second half of this calendar year, that that should also allow you guys to benefit from that recovery?

Yes we feel like we have maintained and even strengthened our position with the foundries a bit.

We have invested and worked hard in particular with the IBM Group and invested in Albany.

We have a strong relationship with DSMC, UMC, Charter and SMIC..

If they come back in the second half in the year in the way we expect, it should be very positive for us.

Great.

Thank you.

Thank you.

We would like to thank you all for joining us today.

We would also like to remind you, that there will be a replay of this call available to you on our Web site beginning at 5:00 p.m. today and will be there and remain posted until February 28.

Thank you for your interest in Applied Materials.

This concludes our call.

This concludes today's conference call.

You may now disconnect.