應用材料 (AMAT) 2007 Q2 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to the Applied Materials second quarter fiscal year 2007 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.

As a reminder, this conference is being recorded today, May 15, 2007.

I would now like it 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 Materials' fiscal 2007 second 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 Counsel and Corporate Secretary.

Today we will discuss our results for the period ending April 29, 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 our website, www.appliedmaterials.com.

You can also access our slide presentation supporting today's discussion on the investor relations section of our site.

Today's earnings call contains forward-looking statements including those relating to Applied's performance, technology leadership, growth opportunities, cost, integration of acquired businesses, cash generation and deployment, strategic position, our solar business, financial targets, customer's capital spending and fab utilization trends and the outlook for the semiconductor, display and solar industries.

Our 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 containing 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 May 15, 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 website.

George Davis will lead the call with a discussion of our financial performance for the second quarter.

Mike will follow with the highlights on the current industry environment and company progress.

George will close our commentary with our targets for the third 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.

Applied Materials Q2 results were strong.

We exceeded the targets set for revenue and earnings per share and were within targets for orders.

This quarter was a continuation of the memory story, in particular DRAM, as manufacturers added capacity in line with end market demand.

Our fab solutions business continued its steady growth and display customers remained on the side lines during the quarter although Q2 clearly signaled a move off what we believe to be the bottom in display orders experienced in Q1.

During the quarter, we also announced the signing of multiple solar contracts, a significant emerging market for our Nano manufacturing technology.

In line with our guidance, overall orders increased 4% to $2.65 billion, driven primarily from strength from DRAM and flash memory customers in our silicon segment, offset by continuing weakness from our display customers.

Q2 ending backlog was $3.67 billion driven mainly by increased silicon segment orders, cancellations and adjustments of $42 million were partially offset by increases to backlog from the Brooks Software acquisition totaling $31 million.

Our ending backlog does not yet include amounts for the announced solar contracts.

Revenue increased 11% over Q1, significantly exceeding our target and reflecting our improved position in memory.

In particular, strong demand for silicon systems drove increased business in Etch, front end products, inspection, and thin films.

Gross margin was just under 45% and included charges of 50 million related to our previously announced decision to cease development of beam line implant products.

The implant charges equate to about 2 points of gross margin.

We are supporting our customers needs for implant products and adjusting inventory balances in line with demand.

Future costs for implant are estimated at 25 to $35 million for infrastructure and employee related costs.

These costs will be incurred through Q1 of fiscal 2008.

Net income was $411 million, or $0.29 per share.

Non-GAAP net income was $509 million or $0.36 per share demonstrating our focus on operational excellence and reflected a 26% increase over non-GAAP net income in Q1 and a 26% increase over Q2 '06 non-GAAP EPS.

Operating expenses were essentially flat with Q1 as we continue to manage costs.

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

We continue to have strong cash flow performance with free cash flow of $441 million or 17% of revenue.

Cash from operations was 513 million or 20% of revenue.

The Company's capital investment during the quarter was $200 million and included $128 million for the acquisition of Brooks Automation Software Division and $72 million for general capital spending.

During Q2, the Company returned $470 million to its stock holders or 92% of operating cash flow while maintaining our R&D investment commitment which is on pace with the highest levels in our history.

Of the $470 million, $400 million was for share repurchases that retired 21.4 million shares at an average price of $18.71, and $70 million was used for dividends.

During the quarter we also increased our dividend by 20% to $0.06 per share.

Over the six quarters from the beginning of 2006, we have returned $5.1 billion to stock holders through stock repurchases and dividends.

This reflects our commitment to cash flow generation, prudent balance sheet management, and a determination to return capital to our stock holders.

In Q3 we expect to repurchase between 300 and $400 million in stock.

Head count at the end of Q2 was 14,400 regular employees.

Now I would like to discuss our segment results.

The Silicon segment includes our semiconductor, capital equipment business and Etch, front end, thin film and inspection products.

Q2 silicon orders were up 11% over Q1 levels.

As we had anticipated in our first quarter call, memory orders remain strong, led by DRAM.

In Q2, memory accounted for 69% of orders.

Our order composition for the quarter was DRAM 51%, flash memory, 18%, foundries at 12% and logic and other, 19%.

Orders for 65-nanometer and below technology represented over 59% of silicon orders.

Silicon net sales totaled $1.74 billion, a 17% increase over Q1, reflecting continued strength in memory offset by lower spending by foundry and logic customers.

Q2 showed progress in our efforts to grow our Etch and inspection position as our PVC division delivered record revenues and Etch revenues in the quarter were 50% above Q2 '06 levels.

Operating income was $606 million or 35% of sales, up 17% as strong flow through from higher revenue levels and product mix was offset primarily by the charges related to the implant division.

Let me now cover our fab solutions segment, our services business that delivers products to improve the operating efficiency of our customers factories and includes spares and refurbished equipment sales.

Fab solution orders were up 27% year-over-year, but declined 19% from Q1, reflecting the seasonally higher volume of service contract renewals that takes place in the first fiscal quarter.

Net sales increased 4% over Q1, primarily due to higher relative sales of refurbished tools.

Net sales were flat year-over-year as our customers' utilization rates were lower in '07, muting the underlying growth in the segment.

Operating income was $141 million or 26% of sales, a 3% decrease as higher revenue and product mix were offset by an in-process R&D charge and other integration costs associated with the Brooks software acquisition.

The display segment includes products and services from manufacturing flat panel displays.

The applied films acquisition is performing above our expectations and was accretive in the quarter.

We are ahead of schedule on lowering material costs and transitioning the display manufacturing footprint to Asia.

Although display orders at $87 million were up modestly from Q1, they were down year-over-year by almost 50% and reflect continuing weakness in the display market overall.

Net sales in display were down 12% from the previous quarter and operating income decreased 33%, primarily due to effects of lower revenue, customer pushouts, and product mix changes.

The adjacent technology segment includes products and services for manufacturing solar cells, high throughput roll to roll coating systems for flexible electronics and web products and energy efficient glass.

New orders of $63 million were more than double Q1, and included a repeat order of solar equipment for a crystal and silicon module production facility.

As our solar business is at a pioneering stage, the operating income in the segment reflects our investment in solar, including spending on supply chain capability, field support and engineering resources, and adding to our already strong R&D talent.

Our initial contracts represent the sale and installation of thin film solar module production lines.

Since this is a completely new business for Applied, revenue will be recognized on these contracts upon customer acceptance, which we anticipate to begin late in 2008.

Let's turn to our operational progress this year.

In the first half of fiscal '07 we made a number of changes to improve financial performance.

Our decision on implant will yield longer-term improvements in profitability and return on investment.

In Q2 we contracted with managed services providers to reduce our IT and business infrastructure support costs.

In addition, we remain focused on our long-term programs to improve manufacturing cost efficiency through a merge in transit and global sourcing and on our business transformation project to simplify our IT systems architecture while improving efficiency and scalability.

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

Mike?

Thank you, George.

Good afternoon.

As George summarized, this was a strong quarter for Applied Materials, particularly in our Silicon segment, which drove 13% revenue growth year-over-year.

We also successfully completed the integration process for applied films, made great strides in establishing our solar business, and closed the acquisition of Brooks software.

From a financial perspective, we performed well while at the same time expanded our strategic opportunities to improve growth and performance.

Let's start with a look at the key areas of progress in the Silicon segment.

According to both Gartner and VLSI Research, we achieved market share growth across a broad set of our products.

This was a strategic objective for the Company to win through technology differentiation by driving leading-edge process innovations for patterning and transistor performance.

I would like to highlight a few areas of improvement.

We grew our position in Etch where multiple memory application wins in the dielectric area enabled over 5 points of share gains.

We expect strong growth in Etch revenue at a rate of 25 to 30% in 2007 and to grow our share at a rate of 25 to 30% in 2007 and to grow our share with our new silicon and metal Etch products.

In CVD and PVD we made great strides, our high aspect ratio or harp films are replacing traditional HDP films because they deliver superior gap-filled performance.

Logic and foundry customers are increasing their use of harp films in strain engineering to improve transistor performance, and our PVD solutions to achieve superior interconnects.

Today we announced Solera, our next generation CVD stress nitride product that will further improve transistor performance by creating dramatically increased levels of strain not achievable in the past.

In addition, we're quite pleased about the traction of the Producer GT platform where in just two quarters, we have placed 60 systems in production and winning every head to head competition.

The Producer GT is quickly becoming the industry benchmark for thin film productivity.

In inspection, our UVision system established a foothold in the largest inspection market with repeat orders and positive momentum as new customers evaluate and adopt this technology differentiation especially for identifying important immersion litho defects.

Based on this market acceptance and continuing strength in other areas such as SEMVision, we expect record revenue and growth for our process diagnostics and control group this year.

Our Centura RP EPI system for selected epitaxy applications experienced rapid growth as DRAM customers made a technology shift to adopt EPI in their advance flows and logic customers ramped production of strained silicon applications.

Our system's superior productivity and control led to a 15-point share gain across the EPI market in 2006.

This strong pull from customers should continue as the market for EPI is expected to increase by more than 50% to over 300 million in 2007.

EPI has traditionally been a logic-only process, but today DRAM is the driver for this growth.

To this growth in the EPI market, along with the other applications I mentioned are great examples of where our advanced technology is helping our memory customers accelerate to 55-nanometers and below.

Fab solutions performance is driven primarily by wafer starts and factory utilization.

We continue to demonstrate growth despite the fact that utilization rates were down more than 10 points from last year at this same time.

In this segment, customers are looking for more ways to increase operating performance from their factories and our efforts are aimed to do just that.

During the quarter we made a strategic move to expand our presence in the software market and close the Brooks acquisition that now enables us to offer a comprehensive application stack for fab management.

These capabilities combined with our expanding process and equipment expertise will position us to drive improvements in our customers' fab operations through better equipment up time and improved factory yields.

Let's now turn to our emerging business in solar cell technology.

We are in the early stages of establishing our leadership in this market.

It is clear that customers are recognizing and being drawn to the thin film capability we are offering.

The magnitude of the response from customers has frankly surprised us.

We are working closely with leading players in building a technology portfolio around those single and tandem junction silicon for thin film cells.

We have signed contracts totaling approximately 200 megawatts, which is roughly 10% of the world PV production in 2006.

We now have five production lines committed with more in the pipeline.

I am really quite pleased to report that already we have exceeded our initial 2007 goal of $200 million in contracts for our solar group.

In fact, by the close of fiscal Q2, we had surpassed the $300 million mark, and we have raised our target to exceed $400 million through the fiscal year.

Our goal is to have all solar cell pathways both thin film and crystalline silicon lead to Applied Materials and to be the global partner our customers can rely on.

Looking beyond Q2, I would like to summarize our view of the environment for the Silicon and Display industries.

The situation for 2007 can be summed up simply as, Memory Is It.

Memory is at a record percentage of our business, and it continues to be driven by dramatic bit growth in both DRAM and flash.

Overall, we expect WFE to still grow in the 5% range but see increased downside risk to the number.

The short-term view based on our customers plans in the silicon area indicates DRAM orders will trend down next quarter.

DRAM manufacturers continue to invest for the future, and we see significant bit growth absorbing new capacity as Vista becomes main stream and DRAM adoption in cell phones continues to grow.

Meanwhile, flash orders will increase and partly offset the DRAM decline.

Customers continue to drive capacity as new applications appear with the promise of solid state drives still on the horizon.

We expect bookings from foundries will increase but remain relatively weak.

Foundry orders have not return to do levels we expected at the end of Q1 as indicated by foundries being only 12% of our Q2 orders.

Inventories have not diminished as quickly as projected, resulting in lower utilization rates at the leading edge.

New 65-nanometer products continue to tape out at a rapid rate and judging from recent earnings reports, foundry business is improving.

Therefore, we believe foundry utilization rates should start to improve and expect CapEx spending for foundries to recover with increased seasonal demand.

However, for the year, we expect memory to comprise more than 60% of our equipment orders with foundry under 20.

Display market weakness carried over from last quarter with Display orders being roughly flat driven by continued delays, a new investment decisions by the major players as they work through a 10% over supply situation.

We expect display CapEx spending to be down 30 to 40% for the year, more than our prior estimates.

While CapEx is delayed, end markets remain strong with demand for LCD TVs up 50% year-over-year.

As just announced, Applied Materials topped VLSI Researches flat panel display ranking, reaching the number one spot for the first time among flat panel display equipment suppliers.

We still expect our display revenues to out perform the industry.

Due to our strong position in PECVD, our expanding market presence with the addition of color filter PVD, and with our increasing share in test.

Overall, Q2 was a very solid quarter for Applied Materials.

As we look to Q3, we expect DRAM orders to slow from their peak at a modest rate of growth from flash and foundries.

At the same time, we have a significant opportunity ahead of us in solar.

Now I will turn the call back to George for our Q3 targets.

George?

Thank you, Mike.

Our targets for the third quarter reflect the industry dynamics that Mike just summarized.

With that as a foundation, we expect orders to decline in the range of 10 to 15%.

We expect revenue to be within a range of flat to plus or minus 2%, and we expect EPS to be up modestly, $0.30 to $0.32.

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

Great.

Operator, let's begin with the first question.

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

Thanks very much, Mike, it sounds like you're talking about a little bit of a moderation in the rate of recovery in the cycle.

Just wondering what you see sort of beyond the July quarter as inventories further deplete in logic potentially and when do you see the likelihood of pricing changing in DRAM?

Just getting a sense are we moving the recovery out a quarter or what do you see happening out there in the semiconductor side of things?

It is a little hard to say what's going to happen beyond this next quarter with so many parts moving around right now, Jay.

DRAM pricing has continued to go down but bit growth has been at a very, very high level in the first part of the year at something like 80% year-over-year.

Right now we think the DRAM is pretty much where we thought it would be.

In fact, overall memory is pretty much where we thought it would be.

What's a little bit different for us right now is foundry has not come back as quickly as we thought it would be, and that's what we're really going to be monitoring on a day by day, week by week basis here over the next quarter.

Foundry was up last quarter, but not nearly what we thought.

It will be up again this quarter, and the question is, is it really going to kind of meet the numbers that they've the foundry companies put out there for CapEx spending.

Just a a follow up, Mike there was commentary suggesting Intel was cutting its CapEx, your former employer.

I presume you have insights there.

Just wondering if you want to generally talk about micro processors, what are you looking at in terms of spending expectations this year, next year, and assuming that AMD's Barcelona is competitive, how does that impact it?

Does that create an arms race and if it is not competitive intel takes its foot off the gas pedal?

What do you see the outlook for processor spending?

Well, it gets down to some pretty specific customers here.

Maybe I can talk about the market.

The situation with micro processors as you know has been a very, very tough war on architectural basis.

We see growth continuing in that space pretty much as we had said last time and high single digits up to up to 10% or so, and it is too early to tell about AMD's product.

AMT was clearly stronger a little more than a year ago and Intel has come back.

With AMD's product take off, hard to tell for us at this pointed, but we do see increased efficiency in the micro processor fabs that's been improving over the -- from both companies over the last year.

If you wrap that together, what's your outlook for processor spending this year and next?

CapEx spending, it gets down to two companies.

I am going to hesitate giving you our number on that.

Thank you.

Our next question is from the line of Timothy Arcuri with Citigroup.

Hi, guys.

Last quarter you guys -- Mike, I think that you were a little more optimistic on what bookings would do through the rest of the this year.

Now we've seen some pushout from some pretty significant customers.

I guess as you look out into the back half of the year, kind of on a realtime basis is the silicon business -- is it continuing to deteriorate?

It would seem there have been a lot of pushouts impacting the third quarter, so that maybe things even get worse in the third quarter before they get better?

So can you talk generally about what the kind of realtime trend is in the silicon business?

Thanks.

Well, obviously this number is our realtime assessment since we're on the call today, Tim, we said down 10 to 15%, and that's with a background of display certainly being off its bottom, so you can kind of judge where it is, but I don't think we have a good picture of what it is going to be like in the fourth quarter at this point, and I think in the fourth quarter again it will really depend how strong memory stays and we think the investments are going to continue there, so then it really gets down to whether the foundry and logic guys are going to make their spending for the second half of the year.

Okay.

I guess if I just quickly run some numbers, Mike, it looks like Silicon business, Silicon bookings guided down maybe thinking down 20% roughly sequentially, which would be embedded in your down 10 to 15 overall number.

Is that kind of the right way to think about it?

Well, larger than our 10 to 15% number, yes.

We're not giving guidance by segment, but you know how to add up the numbers.

Okay.

Thanks, Mike.

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

Thanks for taking my question.

Want to touch on gross margins a little bit, excluding the implant charges, gross margin appear to have increased only 30 basis points and revenues are up 11%.

Seems like incremental margins might have been a bit lower than thought.

Can you talk about what was driving that?

Does it have anything to do with the mix shifting more towards memory?

I think what you're seeing there is you did -- your math is right.

Gross margin would have been up with the pulling out the implant charges.

No.

I think overall it was -- you had some mix issues going on there that had an impact, but really it is -- I don't think there is any real story on the gross margins side other than it was up modestly with the pick up in revenue and then you had some impact obviously on the display side and what's going on there, and that's what really had the most significant impact on the downside.

Okay.

And just a quick follow-up.

I get the same math, silicon orders down 20%.

I assume most of that is coming from memory, I get memory down more than 30% sequentially, obviously a big chunk that far is probably coming from DRAM.

I wanted to understand how you're raising bookings from the solar part.

You talked about taking up that portion to $400 million.

Is any of that going to flow through into bookings in the October or January quarters?

No.

That's a good question.

The outlook for bookings there really starts in the first part of '08, so right now we're -- we'll be talking about these in terms of signing of contracts, but we'll get to the point where we'll be n with a bookings window around the first part of '08.

Okay.

Thank you.

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

Just a follow-on on a previous question.

In terms of fab projects that are out there in the memory market, would you say the number of projects out there is coming down or remaining the same, just timing changing, and in terms of similar sort of overall industry positioning for foundries, is most of the foundry orders that you were hoping for primarily expansions and upgrades or if you can just give us a little more granularity on new versus upgrade in the segments?

So in the memory area the number of projects is actually going up.

The timing of how these get completed, I think, is always a question, but the DRAM guys continue to invest, and as bit growth grows, and still a huge amount of the capacity is on 200mm or some place between 40 and 50% of the capacity on 200mm.

We're expecting over the next couple of generations that we'll need at least 10 to 12 new factories to take over the total 200-millimeter capacity that's currently in flash and DRAM.

The DRAM projects continue to grow and they continue to create new ones.

In foundry right now it is much more filling in capacity that's open in buildings, and around the various four or five foundry companies that you track in the group.

Just as a follow-on to that for a little more detail, is there an inflection point at a particular price at which 200mm memory capacity will come off line or 200mm fabs become less viable, so to speak, or are we at that at $2 price or $1.75 price or is there some way to look to see out in the future where the inflection would be of the memory industry shifting at a faster price to 300?

We haven't looked at it from a pricing stand pointed.

Look a it more from a technology standpoint, Robert.

These technologies keep shifting, and 200-millimeter really isn't cost competitive in the 55-nanometer range and beyond, so it just kind of runs out of gas, and especially in the flash area where the technologies have been moving so rapidly to the leading edge, really driving technology now.

We think that those older 200-millimeter fabs are going to run out of economic steam fairly quickly.

Our predictions is over the next two generations of technology.

Okay.

Thank you.

Our next question is from the line of Patrick Ho with Stifel Nicolaus.

Thanks a lot.

Mike, can you just give I guess a little more color in terms of the order flow between this past quarter and the outlook?

Would it be fair to characterize that in terms of the industry you guys obviously provided a better than expected guidance last quarter versus the industry in this quarter seems like it is down a little more.

Is it more timing of when these orders came in, and that's why you're seeing a little bit of the deviation between Q2 and Q3?

Well, a little bit of it is, but really, I think most of it is what's happening with DRAMs and the foundry companies.

From our standpoint, really, the whole memory area is not -- really any different than we thought in general.

It is really the foundry guys that are not coming back as fast as we had anticipated earlier.

You can see it.

You can see how little change there was in our Q2 book, so you look at that and if you're examining our Q2 bookings, obviously Display wasn't as strong a as we would have liked to have seen it, and memories were probably a little bit stronger than we expected, and foundries substantially weaker.

Okay.

I guess just the final question in terms of the foundries.

You mentioned that a lot of these are fill-in capacity buys.

I guess the leading foundry out there is migrating over to 65-nanometers.

Is there any issue there with their yields that's causing them to delay or is it some other factor that's causing them I guess to slow down their new order intakes?

No.

I don't think it is yield particularly.

It is just how many new products they have and whether they're winning the business at 65-nanometer, and the projections on how much capacity they need.

The number of products continues to go up.

There is now something like over something close to 450, 65-nanometer products being tracked about a quarter of those are approaching production, and that will kind of accelerate quarter after quarter.

I don't think there is anything fundamental there.

It is just a matter of how fast the capacity is going to ramp.

Operator?

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

You spend a lot of time talking about DRAM.

Do you still see NAND as a meaningful contributor in the second half of this year?

Of course.

NAND I said would be up in the quarter, and in orders, and so it becomes even more significant with DRAM down.

Okay.

As it relates to your order guidance in your Silicon business, can you maybe give us a rough order mix as a percentage by segment type, memory, logic, DRAM, and foundry in the July quarter?

I think the story is pretty much DRAM coming down, foundry not moving much, much, NAND picking up some of the slack and logic pretty much has been pretty stable throughout the year, and we don't see any change in that pattern.

Overall that's about as much guidance as we can give on a segment basis.

Got it.

Okay.

And then, George, your services revenues are up about 4% sequentially, yet operating margins are down about 200 basis points.

Sounds like there were some IPRD charges embedded within the expenses and some transition costs to Asia.

How long are both of these going to pressure services operating margins going forward, do you think?

I don't think you're going to see a lot of pressure built in, so if you look at what fab solutions operating profit would have been without those charges, it would have been over 27%, so I think that's in line with their operating model.

I think what you're really seeing again is just the impact of the fact thew their customers are experiencing low utilization rates, and that's impacting the mix of products that they're asking the Fab Solutions folks to provide.

I don't think there is really any change in the business model there at all.

If you think about the July quarter, do you expect operating margins to actually improve as I would think utilization begin to improve in Q2?

Yes.

I think they should improve from where they were in certainly where they were in Q2.

Okay.

Great.

Thank you.

Yes.

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

Good afternoon.

Mike, I was wondering if you can clarify two things.

On the Etch market your comments were it would grow 25 to 30% this year.

Can you sort of break that down for us in tells of what you think would be market share gains versus is there actually market growth going on in the Etch market?

Was there another thing, Brett?

Can you ask if after I get done with this one?

The other question was unrelated was on the flat panel side.

I think George said in the beginning he thought Q2 was the bottom, and I was wondering when you thought flat panel growth would continue once you passed the bottom.

Why don't I jump in and take that and maybe Mike can come back to the first question.

On the flat panel side, what I said is we believe we hit the bottom in orders in Q1, so we had orders of at $67 million in Q1 and even though we were up $20 million from that in Q2, it was a modest uptick.

We think that is the Q1 was the bottom.

Okay.

So we think on an Etch market from a market standpoint it will grow a little bit faster than WFE with our estimates on WFE around 5% it will grow on the 5 to 10% range.

Everything else is share movement.

Great.

Thank you.

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

Thanks for taking my question.

A quick question here on your margin assumptions and your guidance for the July quarter.

I am looking at non-GAAP numbers including stock based compensation, and I see the numbers basically $0.34.

If I look at your guidance, you're guiding revenues flat, but you're guiding in the EPS range of 30 to $0.32.

Are there any other moving parts here that are missing and going from April to July in terms of costs?

No.

I think the -- I think obviously I think the mix is going to be a factor in the ultimate performance, and you've got, as Mike talked about what's going on in the industry, you have a lot of sort of puts and take that can affect ultimately what comes down to EPS.

I think the other piece is we're going to be increasing our investment in solar.

I don't expect that to have an incremental impact of more than a penny for the next quarter, but I think those are factors, and I think that's -- it is actually our guidance is actually up quarter over quarter, but from a -- your point is from an ongoing standpoint, we're down from the $0.36, and I think that's just a reflection of the mix issues in the quarter and we'll just see how it plays out.

Okay.

So, George, I should be basically taking in the shorts in terms of modeling gross margins slightly lower on flat revenues.

Is that just reflecting the mix issue that you're talking about in terms of puts and takes.

I think what we're saying, for all of the same reasons we talked about gross margin -- I mean, gross margin is going to reflect the changes that are going on in Silicon.

Obviously the Silicon segment is the -- has the highest operating profit in the group, so whether you look at it from a gross margin standpoint or from an operating profit standpoint, that's the area of most uncertainty in what's driving the order outlook.

Okay.

I think I understand that.

Based on your order guidance, I think people pretty well articulated that it looks like your Silicon system business is out 20% and just looking at longer term in the back half, and looking at DRAM, what is the singular point driving a worsening view here over the next two quarters in DRAM?

Is it really pricing?

I think pricing if you really want to think about is sort of a lagging indicator.

Is that really just it in terms of kind of worsening feedback from your customers on the DRAM order outlook?

I think it is pretty much just timing, Gary.

I don't think that it is particularly worsening.

It is just where the investments are and the timing of filling out those fabs.

There is still dramatic bit growth, so I think they're really trying to fulfill demand at the current time.

I don't sense major pullback from the DRAM companies or executives.

I think most of them as you know are still quite bullish.

I think my only point here is that basically pricing is lagging indicator, but looking prospectively, I think a lot of the DRAM chip makers your customers are actually accelerating or aggressively transitioning to 70-nanometer, and from the reports that I hear, there is a 45 to 50% cut to costs, and I think at that point DRAM is a little bit more profitable and assuming the big growth there like you said, I think this is kind of a temporary hiccup, but I am just wondering if you can confirm it either way?

I would, you know,i am pretty optimistic about this part of the market and have been really for two-and-a-half years despite pricing -- the prices have kept moving downward particularly in the first six months, I think the DRAM manufacturers are set to fulfill the demand, and that's what they're after.

All right.

Thank you.

Our next question comes from the line of Jesse Pichel with Piper Jaffray.

Thank you for taking my call.

When will you debut your tandem structure thin film product and will you have any IP barrier to entry to prevent [Orlakonian] Axis or INERGO from also making that tandem structure equipment?

Well, we're already selling tandem junction lines, so we're working on our IP position, but can somebody else make a product, sure, but in every competition so far we've won of any substance.

How many of your five lines sold are tandem structure lines and can the single junction lines be later upgraded to tandem?

We announced the sun film contract in April and that is a tandem junction project.

And on could you possibly upgrade, yes, you could possibly upgrade a single junction to a tandem junction.

And your brilliant JV with Q cell, is that also tandem?

Brilliant is a JV of Q cells.

It is not our --

Right.

That's crystalline, silicon line -- well, that's a thin film line at a smaller size than GEN 8.5 delivers.

That's a specific line that we're selling into.

Great.

Congratulations on the traction on that division.

Thank you.

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

You updated us on the solar outlook for this year, but you talked about it being a $500 million business in 2010.

You got any new swags at that or are you alI giving up forecasting the business?

Well, Mark, I made the comment that the magnitude of this kind of surprised us, so I kind of am staying out of the long-term forecasting business right now, and just taking orders and taking contracts, excuse me, and trying to plan how to get them executed and in a very efficient and expertise way, the way our customers expect, but we're if you would have asked me last September would we expect $400 million of contracts, I certainly would have said no.

So I am pretty happy we're in the space, thinking we can do more than 400 million in contracts, and we're really working to organize to execute right now.

And just a follow-on, can you give us any sense of the time line for bringing the costs per watt down and where are you today with costs per watt?

Well, it is almost -- it really depends on the particular customer, and you mean costs per kilowatt hour, I assume.

Yes.

This is what really matters as opposed to costs per capital, cost per watt or those kind of things, and so right now it really almost every one of the line sincerely quite different because it depends on what specific contract that we made, but our goal is to really drive this down over the next couple of years to be very competitive with any form of energy generation, and we think moving our GEN 8.5 has the scale and productivity to be able to do that as we drive up efficiency.

Okay.

Thank you.

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

This is [Chuck Vish] on behalf of Steven.

Two quick questions.

Looking at the foundry CapEx and the commentary by the foundries that second half of '07 going to be CapEx loaded and the with your Display orders likely trending up, is it fair to categorize that July orders will likely be the trough?

I think you've asked the right questions.

If display comes back in the second half or in the fourth quarter and certainly if foundries come back stronger than what we're seeing in the third quarter, then that will be very helpful.

Yep.

And I just have a quick follow-up.

My question is on the -- Mike, can you help us understand how much percentage of equipment are you setting for the regular crystalline versus the tandem and what is your assumption for capital spending for solar equipment in 2008?

Thank you.

All of the things we called contracts are for thin film silicon lines.

I think George talked about a few machines that we're selling into the crystalline line, but predominance is in thin film.

That's right.

That's it.

I don't have a good CapEx spending target estimate for 2008.

This industry has been kind of going up 40% a year for the last six years, and there is for us we're more interested in the significant movement of thin films and the credibility that we have established in thin film capability.

That's much more meaningful to us at the current time.

Actually CapEx could stay flat for us, and we could do dramatically better in 2008.

I doubt that's going to happen, though.

Thank you.

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

Congratulations on the profitability this quarter, and I apologize if I ask a repetitive question, because I got dropped from the call for a second.

Relative to the outlook in DRAM, is it for complicated than the last year DRAM makers had record profitability and they spent record CapEx and now they're losing money, and so they're going to cut back on the CapEx and they'll probably stay cautious on the CapEx until they started making some money again and I know that the DRAM spending isn't any different than what you have thought today thinking about going forward, don't they need to start making money again before they start spending again?

Probably a discussion that people need to have with DRAM guys, Jim, but I don't sense any pullback from those guys.

They're very aggressive.

The bit growth was 80% in the first part of the year.

They get an advantage from going to next generation of technology.

I think they're going to continue to invest, and I see the pricing curve, too.

I know what's the contract prices have been and what spot pricing is and, it is down dramatically, but I don't sense that they're going off their strategic plans particularly.

Historically we've had downturns in cap equipment before and downturns have been driven by lack of customer profitability.

Do we think it is a little different this time?

Is there more urgency for strategic spending or do you think ultimately that profitability is what drives the intermediate at term spending outlook for these guys?

Well, eventually profitability.

They have to be profitable, right, to keep investing, and to acquire financing, however, they do it, so it is certainly not unrelated.

For some period of time they can invest where they think bit growth is going to out strip capacity, and they will get back to a pricing -- or get back to stable pricing which they certainly haven't seen in the first six months of this year, but as you know for the previous year was pretty darn good.

Absolutely.

Final question to George.

George, can you help us understand when you think the solar business would get to corporate average profitability?

If I heard it right I think you're talking about recognizing revenue in later in '08.

At what point do you think the solar segment equals the overall corporate average?

Let's call it on operating margins.

Yes.

What I have said and I still believe this to be true is these first few projects are going to be our learning projects, where they start with and I would say rather than overall I think now that we're reporting at the segment level, I think they're similar to -- they will be similar to a blend of the display and fab solutions market as you think about it because they'll have both an equipment component and a services component.

I think we'll have some learning curve spending that goes with these first few contracts in establishing everything from line efficiency to some of the process work that we're doing for our customers, so I think once we get through this, there is no reason to believe that future business won't reflect the kind of mix that I talked about.

And you think that's 2009 or --

I think as I said we'll start recognizing revenue on the announced contracts at the end of '08, maybe growing a little bit into the first part of '09, so I think after that we should expect to start seeing a more normalized margin.

Great.

That's very helpful.

Thanks so much.

You're welcome.

Thanks, Jim.

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

Hi.

This is Peter Kim for Steven O'Rourke.

Thanks for taking my questions.

I wanted to follow up on the solar.

Looks like solar on an orders basis is going to be comparable larger than your display business in 2007.

I was wondering you provide a turnkey solution of which a certain percentage of that business is your own equipment.

I was wondering if you recognizing the overall revenue from the turnkey solution or only for your equipment and if I could follow up and ask about the gross margin potential for one versus the other?

So we will recognize revenue on a turnkey basis.

Now, the mix of the equipment and the capital value is really largely dominated by our equipment, so it is probably not as big a difference as you might imagine if you're trying to model it, so pretty much I would just view the turnkey business to have a modest impact overall on the margin on the gross margin.

Now that you've been in it for awhile and have had several orders and had significant interaction with our customers, I was wondering if you're looking at the overall turnkey solution, do you see any opportunities whether other technologies that you currently have expertise in could lend itself to the solar business whereby you can grow your portion of the business?

Well, we're certainly -- let's start with thin films.

As George alluded to, the vast amount of CapEx and value-added in any one of these lines is Applied Materials related.

The way we got into this business really was about by applying in an effective way was by applying our capability in thin films and our platforms from our display area to be able to put together a solution really that no one else has at this time.

So we're certainly looking at the rest of our product portfolio to see where it could apply here, either in thin films or crystalline, but right now the contracts that we talked about are in the crystalline area.

We also offer ETON tool that does PVD nitride for crystalline silicon at the time.

Thank you.

Our next question is from Mehdi Hosseini from FBR.

Thanks for taking my question.

I want to keep the focus on a non-silicon, and to that extent to the fab solutions if I recall last year SemiCon West you had a lot of high hopes.

If you could just give us update where you see the fab solution, what are the growth prospects there especially with reorganization of Metron acquisition, and then on the solar, especially on the thin film, don't you think that the growth of this particular business line more so depends on your customers being able to form a business model especially given my assumption that your technology is most suitable and economic for a solar farm business model?

Sure.

Let me try to answer the fab solutions questions first.

We're still quite bullish about fab solutions on a relative look at this market, we have -- a small share.

We've been adding a lot of products into what was formerly Metron and getting rid of some that didn't make sense for us, so we're still really quite bullish here about our potential.

You look at what we've done with our chamber performance services, our abatement products now with software will be in that software solutions will be in that group as well, and I think you can expect to continue to see us add more and more full fab service kind of products.

Would it exceed $2.5 billion over the next let's say four quarters?

Is that what you implied by being bullish?

I am not sure I am giving a forecast for the segment, but we have said we expect double-digit growth out of this segment, so I think it is pretty easy to get in the ballpark.

Just on a fiscal year basis, right?

Yes, that's how we do our finances.

In fiscal '06 they had 2.26 billion in revenue, and so if you grow that, if you grow that at 10% a couple years I think you get to your factual number.

Sure.

Okay.

And then on the solar side, more of a long-term and whether the risk and rewards for you, help me understand what your customers are doing or what you see them doing in terms of a solar farm business model?

Yes.

All of these customers are at the current time international, and one of the great things about the thin film approach is because of the potential for big panel size, it helps you reduce some of the costs of installation, and you can imagine having as you said a solar farm or on a big box building where you're going to put megawatts of solar.

You can imagine having accrue with cranes, a real construction operation that's efficient as opposed to somebody with a tool belt trying to carry things on top of a roofer where you're retrofitting, so the markets that we're trying to go after are like solar farms, like new construction, and that those solutions are being worked by the customers we're working with, but in every case we've been convinced that they have a channel to sell their product that they're building capacity for, and our global capability has allowed us to help them and earn their trust to deliver the solution.

It is interesting.

It is I think a lot of people are trying to figure out what's going to be the end driver of demand as they try to put together forecasts on this.

I think it has been a tough analysis.

One of the things we see certainly our customers see and you certainly get the sense of it from the government officials we talk to and various countries, if the cost of subsidy for solar could come down alone, that would drive a tremendous interest on in a number of countries that don't currently provide these subsidies because they're very expensive.

Right now it is pretty localized with where governments are driving these things, and what you're seeing is I think increasing confidence that if these kinds of technologies, if not a technology we're bringing can lower the cost per watt, then you're going to see first increased subsidies around the world and then again continued investment and continued cost reduction to get to the point where then you're competing with grid electricity.

Just as a quick follow or rather clarification, did you say that operating margin for solar when the revenues are recognized is going to be comparable to the corporate average?

No.

What we're talking about, what I said is it would be -- if you think about it, it is a lot like -- it is a combination of our display business and the fab solutions businesses at least today in terms of the equipment composition and the types of services that we would be providing, so I would use that as a guiding and really once we get through the first few projects which are really the existence proof and that's really our focus over the next year.

Operator, we'll take one last question and make our closing remarks.

Our last question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

Thank you for the quote for memory.

I think I can use this quote to two years down the road.

If I look at your top 20 customers, looks like the four foundries and two big logic, they're pretty stable and steady, and whatever the fluctuation is coming from the memory guys, the business will be driven by memory.

I wonder if we can comment on that.

Well, I think that that's pretty good observation, and we do think that there is some shift going on in the industry.

Clearly during this last couple of quarters the people we thought were in the logic business for the long haul have moved to more of a foundry model.

I think that's going to continue.

That trend is going to continue over a period of time, so more of the wafers in the world are going to get built in foundries, so if I was going to maybe make a little bit of an alteration to the view in two years from now, it is going to be foundry and memory is it because the foundries are going to drive over a period of time a larger number of the wafers in the industry, and then we just all believe that there is no ability to we would a need for more and more memory any time in the foreseeable future.

SanDisk introduced their solid state drive today, and Vista experiences on the scale that Microsoft gives almost double that of a normal hard disk drive, so that's the kind of performance that moving in this direction is going to have, and I think it is going to be gigantic for our business and for our competitors business, but it is going to be foundry and memory in a couple of years, the logic companies I think will stabilize over the next few years.

I don't know whether that's two or longer, but I think they will stabilize.

Okay.

Just sneak in one last question.

You talked a little about PVC being strong.

Can you give under the circumstances more color particularly on RETicle inspection?

I don't know if you have talked about RETicle inspection business in the past and how that is doing?

Gee, what are you hearing with RETicle inspection?

I am hearing you're being evaluated at the last customer.

Mahesh, I think I will suffice it to say our PVC unit has had a very successful 2006.

They're having a much more successful 2007.

We like the products that they have.

They're coming out with the really excellent technology, and yet we have a lot of work to do in products like UVision and you can understand we're coming out with more products.

This is one that's I think quite interesting for the future, but the core products are what's driving the record revenue.

Okay.

Thank you very much.

You bet.

Thank you.

Okay.

Thank you, and we would like to thank all of you for joining us in our discussion on Applied Materials financial results.

We would like to remind you that a replay of this call and the supporting slide package will be available on our website starting at 5:00 today, 5 p.m.

Pacific time and will remain posted until May 30th.

Thank you for your interest in Applied Materials.

This concludes our call.

This concludes today's conference call.

You may now disconnect.