應用材料 (AMAT) 2009 Q1 法說會逐字稿

Welcome to the Applied Materials fiscal first quarter 2009 conference call.

During the presentation, all participants will be in listen-only mode.

Afterwards, you will be invited to participate in a question-and-answer session.

As a reminder, this conference is being recorded today, February 10, 2009.

Please note that today's call contains forward-looking statements, which include all statements other than those of historical fact, including those regard Applied's performance; cost reduction actions and anticipated savings and the strategies; cash generation and deployment;breakeven levels and Q2 expectations; as well as customer utilization rates and spending and industry outlooks.

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

Information concerning these risk factors is contained in today's earnings press release and in the Company's filings with the SEC.

Forward-looking statements are based on information as of February 10, 2009, and the Company assumes no obligation to update such statements.

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

Reconciliations of the non-GAAP measures to GAAP measures are contained in today's earnings release and in our financial highlight slides, which are of on the investor page of our website at www.appliedmaterials.com.

I would now like to turn the conference over to Michael Sullivan, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Cara and good afternoon, everyone.

I'm pleased to be joining you in my first earnings call here at Applied Materials.

I know many of you already and I hope to meet many of you for the first time at our analyst day next week.

The event will be held in New York on Wednesday the 18th from 9:00 eastern until 12:30 PM with a live webcast.

If you have any questions about the event, please dial the phone number on today's earnings press release.

Our release was issued shortly after 1:00 PM today on Business Wire and is also available on our website at amat.com.

Joining me on the call today are Mike Splinter, our President and CEO; George Davis, Chief Financial Officer; and Joe Sweeney, our general counsel and corporate secretary.

Today we will discuss our results for the period ending January 25th.

Mike Splinter will lead off the call with comments on the market environment and our Company's strategies.

George will follow with a discussion of our financial performance for the first quarter and our expectations and financial strategies for the future.

After these remarks from Mike and George we'll open the call for your questions.

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

Thanks, Mike, and welcome aboard.

In our November call we said the weakening global economy would have significant impact on all of Applied's businesses and likely affect our customers for a year or more.

With that in mind we moved rapidly to lower our annualized spending by more than $400 million.

We are now implementing further actions, including multi-week shutdowns in Q2 and Q3 and my executive staff and I will be taking additional pay cuts, as well as foregoing bonuses for 2009.

As George will explain shortly, we are on track with our cost reduction goals.

Over Applied's long history we have developed proven strategies for managing challenging business conditions with an eye toward future opportunities.

Our experience, flexible cost structure and balance sheet discipline are the foundation for our plans.

Here's what we're doing.

First, we're preserving our strong balance sheet with a focus on cash flow, so that we maintain the ability to shape our future and support our business priorities.

Second, we are investing in our technology, products, people and customer relationships to enhance our leadership and to position for future growth.

Third, we're using this period to drive operating efficiencies that will lower our cost profile today and increase our leverage during the recovery.

So how bad is it?

Our leading semiconductor customers say that the fall-off in chip demand and pricing is the most severe they have ever experienced.

Losses are mounting almost universally.

Fab utilization is at historic lows for both memory and foundry customers, ranging from 30% to 70% for those factories that aren't completely shut down.

We estimate that output has been reduced by about 25% over the past six months, including about a 10% permanent reduction in memory capacity.

There is essentially no demand for incremental capacity.

Investments in next generation technology are modest and restricted.

The poor utilization is resulting in an unusually severe dropoff of more than 35% in our AGS revenue.

We expect WFE spending to drop roughly 50% in '09 to somewhere between $10 billion and $12 billion, and reaching the upper end of that range will require a clear pickup in demand in the send half of the calendar year.

This is the lowest level of investment in more than 15 years.

We're planning for a prolonged period of weakness.

Clearly, the wafer fab equipment industry will be changed as a result.

However, these are still the early days in this crisis and it is premature to speculate on how fundamental the structural changes will be and how our customers will adapt.

There is much we will still learn over the next year.

Now let's turn to our segments.

In Silicon Systems group our priorities are to strengthen our business in inspection and etch while enhancing our leadership in CVD, PVD and CMP.

We're also putting significant focus on inventory management and supply chain health.

Even though customers have stopped adding capacity they are still driving the technology treadmill, creating opportunities for us to position next generation products.

During the quarter we maintained our momentum in innovative technology with the introduction of new systems for etching wafer level packaging and contacts, as well as new mask inspection product for boosting [lithal] productivity within the fab.

In Services business has been hit by low fab utilization and multi-week shutdowns at customers.

Despite this situation we are seeing strength in service contracts, as customers cut fixed costs.

Over the long run this is a fundamental and positive development for our Service team.

In Display demand has softened, following last year's record revenue, with utilizations now as low as 30% to 40% at some factories.

While panel inventory appears to be decreasing and prices are stabilizing, we don't see capital spending recovering this year, so our focus is on product development for Gen 10 and 11 and positioning for the eventual return to capacity buys.

In solar [Velesi] recognized our leadership last week, listing Applied Materials as the number one among the world's PV equipment companies.

We're proud of this achievement, coming just two years after our first product offering.

In terms of the solar outlook, we expect the crystalline silicon equipment market to be down about 50% year over year.

We do expect our next generation products from Baccini cell systems and precision wafering systems will maintain our strong position for the next phase of solar growth.

In thin film solar we achieved sign off on two more SunFabs and completed certification on both single and tandem junction panels.

While SunFab revenue is trending higher, the global credit clunch -- crunch is impacting our new contract flow, and we expect to see a gap in additional contracts for SunFab lines until the credit market stabilizes.

Our focus is on conversion efficiency, factory startup time, and productivity improvements to enhance the competitiveness of our SunFab offering.

Governments around the world are looking at solar and clean tech as key elements of their economic stimulus and job growth plans.

The US is the world's largest electricity market and the recovery package now moving through Congress could accelerate demand for solar over the next 12 months and beyond.

Overall, our current visibility is extremely limited and it's much too soon to say how long this downturn will last.

We took early and decisive actions to focus on our key priorities and preserve our financial strength.

We will continue on that path.

I want to thank the Applied team around the world.

Our people are sacrificing with shutdowns and salary cuts but they are making sure that we are operating efficiently and helping our customers deal with this environment.

As I look to the future I know we have the talent, products, and resolve to turn today's challenges and difficulties into opportunities for growth in the future.

With that, I'll turn the call over to George to provide the details of our operating and financial results.

George?

Thank you, Mike, and good afternoon to everyone.

As a reminder, we published our preliminary results on February 2nd so today I will review our final results for the first quarter.

As Mike said, the Company faced an extremely difficult environment during the quarter.

Orders were down 59% and revenue was at the bottom of the target range.

I will cover our results and then discuss the actions we are taking to reduce spending and preserve our balance sheet.

GAAP earnings per share was a loss of $0.10 and included $133 million in restructuring charges, which lowered earnings by $0.06.

We also took a $48 million provision for doubtful accounts, and an additional $20 million inventory charge, which together reduced earnings by $0.03 per share.

On a non-GAAP basis, which excludes charges primarily related to acquisitions, equity compensation and restructuring, we had a net loss of $3 million, or essentially breakeven on an EPS basis.

Operating expenses of $588 million were up 22% and reflected the impact of the restructuring charge and bad debt charges, offset by $40 million in cost saving actions and approximately $45 million in reductions related to lower expected variable compensation.

Operating expenses on an ongoing basis were down 11% quarter over quarter, reflecting the cost reduction efforts throughout the Company.

Backlog decreased by 16% to $4.05 billion.

Backlog adjustments totaled $369 million.

Financial debookings resulting from order pushouts beyond our 12-month recognition window totaled $278 million.

Of these debookings, $210 million related to China-based wafering customers and approximately $50 million from our semiconductor customers.

We had $94 million in cancellations, almost all from semiconductor customers.

At quarter end, our EES segment represented 34% of backlog, SSG was 25%, AGS was 23% and Display was 17%.

Revenue in the quarter declined 35% from the previous quarter.

As expected, weakness in our Semiconductor and Display segments was compounded by falling revenue in our Global Services group, notably driven by a weak demand for spares.

Gross margin was down nearly ten points to 29.4% and was impacted by the mix effects of lower sales in SSG and AGS.

Cash flow from operations was negative at 14% of revenue and free cash flow was a negative 19%, as working capital changes lagged the falloff in revenue.

In particular, inventories grew as the balance sheet absorbed long lead time items for Display and solar that were committed prior to the change in demand signals.

We are highly focused on inventory management and collections and we know that Q2 is likely to have many of the same challenges we saw in the past quarter.

We suspended our share repurchases program early in Q1, to preserve cash, resulting in only $23 million in repurchases for the quarter.

We do not expect to make any share repurchases in the second quarter.

Our commitment to the dividend remains strong and we paid $80 million in dividends in Q1.

Now to our segment results.

Silicon Systems orders decreased 79% from Q4, with reductions across all sectors, as customers have minimized their equipment spending other than for advanced technology deployments.

Our order composition was: Logic and other, 58%; DRAM, 26%; flash memory, 12%; and foundries at 4%.

SSG revenue was down 27% from Q4, reflecting lower DRAM and foundry business.

Operating profit fell to about 6% due to lower revenue, a weaker product mix and expenses related to inventory and bad debt.

Excluding the bad debt charge, operating profit would have been above 9%.

Gross margin in the segment was approximately 45%, despite the low absolute level of revenue.

In AGS orders dropped 38% from Q4, while revenue dropped 35%, as customers reduced factory utilization to historically low levels.

Spares demand dropped at a higher rate than the drop in equipment spending.

This is clearly outside of the typical pattern and led to lower revenue than expected based on historical correlations.

As a result, operating profit fell to 7%, or if you exclude bad debt expense, 11%.

In Display orders dropped 59% from Q4 and revenue fell 55%, as the LCD market downturn resulted in extremely low customer factory utilization and marginal demand for new equipment.

Operating profits dropped to 17%, on low factory absorption, and higher inventory reserves.

In EES orders decreased by 34% from Q4, while revenue dropped 33%, primarily due to declines in our precision wafering business.

As a reminder, PWS benefited in Q4 of last year from an additional month of revenue as we aligned reporting periods.

In thin film, Applied recognized revenue on our second and third SunFab production lines during the quarter.

EES operating profit declined in line with the falloff in crystalline silicon revenue and the weak margins of our initial SunFab factories.

In our Corporate segment, the quarter-over-quarter reduction in operating expenses reflected both the adjustment for bonus accruals not utilized in 2008 and the ongoing cost reduction in our G&A functions.

Let me spend a few moments many on our outlook.

The year ahead presents significant challenges and we are intently focused on managing our cash and cost structure.

Our cost reduction efforts are well under way and we expect to exceed the $400 million in annualized cost savings from the plan announced in Q1.

Total headcount reductions expected under the plan are now above 2,000 positions, or approximately 14% of our headcount at the end of our 2008 fiscal year.

The continuing deterioration in our end markets is expected to lead to additional restructuring activities, which are now under evaluation.

By the end of fiscal 2009 we expect to reduce our quarterly revenue breakeven level to below $1.2 billion and our free cash flow breakeven revenue level to approximately $1 billion.

Both of these measures are, of course, sensitive to product mix.

We are also continuing to take multi-week shutdowns in many of our businesses in both Q2 and Q3, as we have done in the past two quarters.

These actions typically save $35 million to $40 million per quarter in labor-related costs.

We believe these shutdowns allow us to keep critical resources in place while reducing costs in difficult times.

We recognize that these actions directly impact our employees and we are very appreciative of their continuing dedication and hard work.

Because of the economic uncertainty and lack of visibility, we are not providing specific targets for orders, revenue or earnings.

We expect revenue decreases across all segments, and we believe overall revenue will be down by more than 30% quarter over quarter.

We expect Display and SSG to be the most impacted segments.

We expect at least one additional SunFab sign off in Q2 and any revenue upside in our EES segment would come from acceleration of other SunFab factory acceptances, as we are seeing improvement in our startup cycle time.

Now, Mike, let's open the call up for questions.

Thank you, George.

To help us reach as many of you as we can please ask just one question and no more than one brief follow up.

Cara, let's begin with the first question, please.

(Operator Instructions).

Your first question will come from the line of Jay Deahna with JPMorgan.

Thanks very much.

A couple questions.

Good afternoon.

Given the pickup recently in memory prices, are you seeing any signs of life there or any indications that maybe one or two of the big memory guys might want to get that process going, maybe in 3Q, a little bit early, so that would be the first topic?

Then the second topic on solar, more for silicon in particular, how are you doing on tandem junction and are you thinking about accelerating your revenue recognition policy to percent of completion or shipment at some point by the end of this year for SunFab?

Okay, I think that was three questions, Jay.

so let's see if we can get all three of them done.

Memory prices, yes, in the last couple weeks we've seen a bit of a pickup.

I think 10% or 12% last week and maybe 7% in the last week or so.

I think this is more due to cutback of supply and shutdown of factories than to real demand pickup at this point, but I think it's still too early to say.

I don't -- I wouldn't say that we're seeing anybody getting anxious to add capacity.

People are still working on next generation of technology, though.

How are we doing on tandem junction?

In the lab we're now seeing efficiencies, 9%, and as we continue to work on that, that'll continue to go up and we'll have a sign off in Q2, I think, for our first factory.

And then Jay, on the revenue recognition, I would say we need to really get through these first SunFab startups and then that'll probably be the direction we'll go is percentage of completion, so my guess is it would be for factory sign offs after 2009 would be my best guess at this point.

Great, thanks, Jay.

Cara, can we have the next question, please?

Your next question comes from the line of Timothy Arcuri with Citi.

Hi, a couple things.

First of all, George, can you talk about breakeven in the silicon business and in solar and how that's going to lay out the next few quarters?

And I guess as a follow up, does the lack of capital out there for your solar customers, has that made you at all reconsider your business model relative to being a little bit more vertically integrated on the thin film side?

Okay.

Well, I'll take the first two and then maybe Mike jump in on the second.

So on solar and SSG breakeven, I think you saw we continue to have very strong gross margins, as I mentioned, in SSG, even at these revenue levels, and I think by any historic standards that team has done a great job in getting their variable cost where it needs to be and certainly it's helping us through this.

That being said, we're going to continue to invest strongly in that business.

It's important for positioning coming out, so we're breakeven at the expense of R&D is really not part of our operating model.

But again, we start from a very strong position in SSG.

In EES what we're really dealing with here now is the crystalline silicon margins, before you take a look at the impact of acquisition charges, are actually quite good and is at the level that we were hoping to achieve coming -- as part of the acquisition.

It's really these initial SunFab sign offs where we're really absorbing all the margin in the learning curve in these first few deals.

I think what you'll see is two things.

One, the SunFab profitability will increase over the year as we move through the startup process, and then you'll see -- that combined with the crystalline silicon, I think you'll see some improvement in profitability there.

Not ready to call the breakeven yet because mix is such a huge factor for that business.

Hey, Tim, despite the credit crunch we're still talking to a number of customers in our pipeline that are planning -- either new customers or repeat customers, that are planning projects, so at least at the current time we're not changing the business model there.

Okay, thank you, Tim.

And next question, please, Cara.

Your next question comes from the line of Patrick Ho with Stifel Nicolaus.

Thanks a lot.

First question, in terms of the cancellations you took a lot this quarter, do you plan another round of it in the April quarter and then leveling it off there?

And the second question is, in terms of the memory consolidation that potentially is going to happen, especially with a lot of the Asian DRAM chip makers, how do you feel you're positioned with the potential winners from that or the consolidators of that industry?

So on the adjustments that we took to backlog reflect really our best understanding of the market conditions and our customers' situation today, so we're not staggering them as we go.

So it'll be -- we'll have to see what we learn during this quarter and if there's further cancellations or if we get push-outs beyond our window then we'll go ahead and debook.

But we had anticipated, as you may recall, at the end of last quarter that, while we hadn't seen any cancellations, given what was going on in the crystalline silicon markets around the world,that we expected to see some activity, and certainly as you saw from the large component of wafering customers that pushed out that we saw fairly a significant effect already in our first quarter.

Whether that will continue or not we'll have to see, but this is our best view at this time.

Patrick, the consolidation that's likely to take place in Taiwan, it's still uncertain who the consolidator is going to be, so it's a little tough to speculate but one might be a Japanese company, one might be a US company and I think we're well positioned -- assuming that their technology would be proliferated throughout Taiwan we're in very good shape with both of those companies.

Thank you for your questions.

Cara, next question, please.

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

Hi, Mike, hi, George.

A question on the solar business.

I know, Mike, you said the crystalline equipment sales could be down 50% this year, but given that you had some sign offs this quarter and maybe another sign off next quarter are you still budgeting for the solar division to grow sales year over year here in fiscal 2009?

My second question is, there was talk in the press yesterday that Applied would temporarily close the Austin manufacturing plant for about four weeks in June.

[Could you clarify what you're planning on and then should we model a negative gross margin (inaudible) in the July quarter given the factory under absorption?] Thanks.

So, yes, we should assume that SunFab will scale and revenue should increase throughout this year.

What is going to happen here, though, is we are going to have a gap of a few quarters after essentially this credit cru -- after our current projects go through, maybe some of the follow ons go through, because of the credit crunch right now we're not seeing new contracts being signed.

So we'll see that some time later, maybe it'll be into 2010.

And then on the margins for SSG, I think it's too early to guide you to specifics, but clearly we've said that we think the overall revenue will be down 30% in Display and SSG will be down most significantly so that will lead to factory absorption issues.

We have a variable model but it's not quite that variable.

Stephen, thanks for your questions.

Cara?

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

Hi, thanks.

George, I was wondering if you could clarify this, how many SunFab lines are out there to which you've shipped equipment and you've not recognized revenue on?

If you could help quantify the dollar value [and potential unrecognized revenues] it would be great.

And secondly, on the balance sheet you now have the highest inventories, both in dollars and in days, receivable days have also increased.

During the last downturn AMAT was very good with generating cash.

This cycle it appears fundamentally different just given the high credit risk for your customers, both memory and solar.

How should we think about cash generation this cycle, particularly with regards to the balance sheet items?

Yes, first off, let me deal with the sign off question.

We've signed off three.

We said that effectively we ship to eight factories so there's five more.

We're not guiding to the revenue, but many of them have both a sign off -- revenue at sign off and then a bonus potential and we'll talk more about those as each are realized.

On the inventory side, actually we've continued to have very strong cash flow discipline and I think if you look at the free cash flow that we had in 2008, even with a very different mix, we're right on top of the kind of free cash flow that we were generating in 2004, for instance.

So I would say this quarter, obviously we're experiencing the inventory effects of having businesses that were in expansion mode even as we were experiencing a very severe downturn within SSG and also a falloff in some of the Services related revenue, as well.

So I wouldn't say it's really a change.

The mix of our backlog, as you know, is very different than historically.

We're at -- as I said, 34% of our backlog today is EES and if you think about that over half of that is SunFab lines, which are fully secured by LCs and cash.

Display, which is really coming off of a big ramp up and then ramp down is at 17%.

You've got AGS at 23% of our backlog and SSG at 25%.

So when you look at the mix of our business today the inventory really reflects -- and the inventory management reflects the impacts of the different end markets there.

We certainly expect to drive down inventory over time and we had -- we have working capital impacts this quarter but we think they're reflective of the underlying business.

Thank you.

Cara, we'll take the next question, please.

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

Great.

Good afternoon, guys, thanks so much.

Mike, if I heard you right I think you said you believed that there's been about 10% of memory capacity has been permanently taken offline.

That's one of the big points of debate I think right now about some of this capacity that's come offline, how much of it is permanently gone versus how much could come back on pretty quickly if pricing were to continue to increase.

How do you measure what's coming offline permanently versus what can come back?

And then as part of that my followup would be the fact that the spares business is down so much more than it would be in previous cycles, is part of that because customers are taking their -- the stuff that's been shuttered and kind of tearing that apart, using the spare parts to replace what's left in the fab running and is that part of the reason that some of this capacity is gone?

Thank you.

Yes, Jim, the way we're looking at this, last year we believed that 200-millimeter was some place between 17% and 20% of the overall memory capacity.

We think that'll be under 10% this year and we think that that's permanent.

And then we think a little bit of 300-millimeter --I think you know what I'm referring to -- will come offline this year, so that's where we're looking at as being permanent.

On the spares, I just think customers are using every means possible not to spend money and some of that is taking spares off of idle equipment or shuttered equipment.

But if that -- if those pieces of equipment are going to come back online or in service in upcoming months or quarters, I think we'll see a snapback on spares.

I think, Jim, that in our view, based on this pattern that spares utilization or spare -- kind of a sign change in spares sales will be a good leading indicator for capacity utilization coming back up.

Thanks, Jim.

Thank you.

Cara, back to you.

Your next question comes from the line of Gary Hsueh with Oppenheimer & Co.

Thank you for taking my question.

Just a quick question here on EES orders versus the revenue run rate.

It sounds like in terms of the credit crunch, in terms of the crystalline silicon business, everything is headed for a downturn there, but yet the orders relative to the revenue intake it's pretty much in line.

Can you give us a near-term picture on what's stabilizing in relative terms the EES business relative to silicon and Display?

And a quick follow-up for George.

George, how much of that $400 million in annual operating expenses are you actually going to be taking about of the EES division as opposed to the other divisions?

Right.

Gary, I think the big stabilizing factor right now for EES business is still Europe has terrific feed-in tariffs and while Spain may be maxed out, Italy and Greece, France are ramping up theirs and we'll see increased demand out of those countries, so I think that's the big stabilizing effect in the EES market.

And then, of course, I think there will be some anticipation soon on what's going to happen in the US.

George, you want to comment on orders versus revenue?

Sure.

I think one of the other factors is that even with some of the financial debookings that we saw in the wafering side, there still are selective crystalline silicon customers around the world who have capacity build-out plans that are proceeding and they're moving ahead and ordering the leading edge equipment, both from our wafering and from our metalization business.

We also see increasing demand for our ATON tools as capacity in these crystalline silicon factories gets larger and the value proposition for that tool increases.

In terms of cost reductions and the impact on EES, clearly that's a growing part of our business, but if you look at relative to Q4 we are pulling back on some of the spending there, obviously also as some of the customer developments have slowed.

But also as with every business, we're looking at every R&D program, every aspect of spending and looking for ways of minimizing those costs and EES is doing their part, as well.

But there still will be a significant investment in that business for the year.

Thank you, Gary.

Cara?

Your next question comes from the line of C.J.

Muse with Barclays Capital.

Yes, good afternoon, thank you for taking my question.

I guess first question, considering EES is mostly coming from backlog and you guided to the crystalline silicon side, could you give us an idea of what you think EES can grow in calendar '09 relative to the one billion you printed in '08?

And then secondly, on the M&A front could you talk about your outlook for consolidation for the overall space, and then in terms of Applied specifically whether your focus is on silicon versus solar and I guess as part of that discussion whether any divestitures are on the table, as well?

Thank you.

Let me take the growth year over year in EES.

We were -- we generated 800 -- approximately $800 million of revenue in EES in '08 and remember that also included some revenue from the glass and web business, which is in there, as well.

We do think it will grow year over year.

As you know, we'vre -- we're quite reluctant to forecast any parts of our business out multiple periods and this is no exception, but as we look at backlog today and the activity today we do believe we'll be up over the $800 million year over year, it'll be the one group.

In the M&A space we want to be both disciplined and patient in this area.

I do think that in semiconductor equipment there does need to be some consolidation or at least fewer players than we have today.

In a market where capital intensity over the long haul has been modestly going down it's going to be harder to support so many companies.

On the other hand, getting consolidation to happen has been quite difficult if you look over the history of this market.

So I think there needs to be a triggering event, what that will be is hard to say.

And as far as our focus on silicon versus solar, we're committed to both those spaces and as long as a company would have a strategic fit and it's good for our shareholders, we would be interested.

No real divestitures, major divestitures planned at this time.

C.J., thank you for your questions.

Cara?

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

(inaudible) the WFB market probably around $10 billion to $12 billion and to hit the high end --

Mehdi, I'm sorry to interrupt, but we didn't catch the first part of your question.

Would you mind starting that over?

Sure.

Mike talked about the WFB market size of about $10 billion to $12 billion in 2009 and for to hit the high end of that target, the business has to pick up significantly in the second half.

First, what gives you the confidence that that would happen?

What I see in the horizon is anything like that, so why not just be conservative?

And number two, George, you talked about a breakeven point of less than $1.2 billion, does that include additional restructuring that is coming, or does that -- does that include it or not?

Sure, let me -- I can just answer that for you now.

The breakeven number, as you know, we were on an ongoing basis effectively breakeven this quarter, so it does not -- it's not meant to include any extraordinary items, any extraordinary reserves, it's really the ongoing operations of the business.

Mehdi, as far as the WFE -- this is kind of a projection -- how we're handling things internally, we are not structuring to plan on an uptick in the second half.

We brought down the spending, we're bringing down the breakeven point as the cost savings go through.

It'll be as low as George described, so we're not really planning internally on any snapback or increase in spending, but in normal years, where there is a buying increase in the second half of the year, you would expect some increase in spending to support that.

But whether it'll happen, whether the down side will be 50%, as we're projecting, or 60%, I think, I don't have much more visibility than that.

Mehdi, thank you.

Cara, next question, please.

Yes, sir.

Your next question comes from the line of [Brent Hodess] with Merrill Lynch.

Good afternoon.

Really, two questions.

On the SunFab, the gap that you might get next year because of the credit crisis, I was wondering how the longer-term contracts, like the AK you have out last year on the $1.9 billion contract, how does that play into the gap?

Are those things -- will those -- are those things getting pushed out further or are those still on track, some of those larger, longer-term projects?

Well, it's hard to describe what's happening with one customer, but they're working to finish their building and looking at their own schedule and demands.

So we're staying very, very close to them and working to make sure that their pro -- the factory comes up on time and it's sized to meet their off-take agreements.

Just a quick follow on, on the inventory, it sounded to me, George, that you were saying that if either inventories or days of inventories would rise again in the coming quarter for the same reason, you've got these longer lead time products that were still being built as the demand shut off and pushouts occurred?

What I said was that we believed that all the same sort of pressures will exist in the quarter.

We actually believe that we'll have better inventory performance in Q2 than we had in Q1 and again, we had fairly significant inventory increases in both Display and EES and we think any of the increases will be far more moderate or be decreases in those areas.

Is there --

Thank you for your questions.

Cara, next question, please.

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

Hi.

Thank you, good evening.

A question on backlog and risk assessment, you've got 34% of backlog with EES, some significant debookings this quarter, how do you gauge the backlog risk going forward when you consider the state of the industry?

And secondly the HCT debookings, the wafering debookings is pretty significant, is that gone or pushed out?

How are you looking at it?

That is pushed out at this point and so it's PW -- for those on the call that aren't familiar with the term HCT that was the name of the company that we acquired.

We call it Precision Wafering Services and that's PWS.

For the backlog -- for PWS that was pushed out outside of our 12-month window.

We still see a number of customers that are actively taking tools at this time and supporting the backlog that we have and some of the backlog we have is already shipped and just awaiting sign off.

So there's a number of factors that give us comfort.

And remember half of the -- roughly half of the EES backlog is related to thin film and is fully secured and predominantly shipped.

Your next question comes from the line of Edwin Mok with Needham & Company.

[So thinking of my question], since no one asked a question on Display let me start with that.

Just on Display (inaudible) came down to basically minimum level.

In the last cycle back in '07 you were able to maintain revenue at a high level because you were shipping over the backlog.

How do you look at this cycle?

Do you expect revenue to stay at this $100-something million level?

And then my follow up is on crystalline silicon equipment.

I was just wondering, are you -- do you guys see any ASP pressure given the slowdown in the end market there?

So on Display, on the revenue we were able to -- we saw revenue more moderated under the -- and that really was more a reflection of the order and acceptance pattern of the last downturn.

This is different because of the absolute low level of capacity that some of our customers are experiencing, so we would expect revenue to go below previous lows.

And also, orders are already down at low levels in Q1 and will go even lower, so that's -- Display is really in a holding pattern until customers start to see a recovery in consumer demand.

What we're seeing in the crystalline silicon is really a move towards better technology.

What customers are looking for is better productivity, say, on the Baccini cell systems, lines, they're looking to be able to handle thinner wafers, which are going to help them reduce the costs of the cells.

So they're really looking now to technology and I think for us this is a very, very good thing because we know how to keep that treadmill going and keep moving our developments from one generation to the next.

Okay, Edwin, thank you.

Cara, next question, please.

Your next question comes from the line of Atif Malik with Morgan Stanley.

Hi, thanks for taking my questions.

George, your SSG gross margins are bottoming at a much lower revenue level versus the 2001 cycle, especially relative to your peers.

Is this an artifact of separating the [stairs or] services or is it really real?

I'm not sure what your point is there.

The 45% gross margins on SSG, how should we think about the gross margin trajectory from here?

Is this where the bottom is for the gross margins in the SSG business?

Well, I think it depends on the level of revenue.

I think 45% at the level of revenue we're at today is very, very strong and I think if -- make sure, also, when you compare us to competitors that you're taking into account the fact that we're generally a quarter ahead in terms of where our revenue is because we revenue on shipment.

But we think we've made a lot of progress over the last five years reducing the cost of sales relative to our margin and we've taken out as much as seven to eight points in that regard through a number of steps.

So I think we're in very good shape from operating and gross margin perspective.

Obviously we had a little bit of impact on the operating margin this quarter also from bad debt reserves, but the fact is our operating margin really reflects our continuing investment in technology.

Okay.

Quick follow up on Display.

Are you actively engaged with the display vendors for solar thin film projects down the road?

Anybody who is thinking about solar thin film is talking to us, yes.

Thanks, Atif.

You're next ques --

Cara, next question, please.

Yes, sir.

Your next question comes from the line of Tim Summers with [Wonderlick Securities].

Thanks and good afternoon, everyone.

You mentioned that your SSG orders in the quarter were about $246 million.

You annualize that you're at $1 billion.

And Mike you said WFE this year even at the low end was $10 billion, which would give you a market share of 10%.

I think we all know your market share is a lot higher than that.

Does that suggest that orders in this quarter are perhaps artificially low and you're going to see some sort of bounce going forward or how can you reconcile your WFE numbers with this quarter's SSG orders?

Thanks.

Wow, I don't know that I can reconcile the $10 billion to $12 billion with this quarter's orders for you in any -- you can't measure market share on a quarterly basis.

I think you know where our market share is, closer to 20% of WFE, so this quarter is -- people have just stopped ordering.

It is as unusual as certainly anybody I've talked to in this industry has seen.

This is the worst downturn in the history of semiconductor equipment business.

So, no, what's going to happen from here?

I think it's premature to say there's going to be some bounce back, I wouldn't say that know -- seeing what I'm seeing today.

Would I like to see one?

Of course.

Would we need to see one to get to $10 billion?

Yes.

So the orders are just incredibly and unusually low.

Tim, did you have a follow up?

I'm fine, thanks.

Okay, thank you.

Cara, please.

Your next question comes from the line of Daniel Berenbaum with [Aruba USA].

Hi, guys, thanks for taking my call.

I understand you don't want to give guidance but just to give me some perspective on visibility, how much of your business now is turns business and how much would you normally have visibility on a quarter ahead?

And then the follow-up question is when you talk about wafer fab equipment spending being $10 billion to $12 billion, it sounds like one customer could be 30% or more of that wafer fab equipment spending, maybe a second customer brings you up to 50% of that, are you seeing any issues from that concentration of spending at your top two or three customers?

Yes, I would say certainly the turns business is a factor, but not -- I don't know that I could tell you it's any materially different than it is at various times, because it fluctuates so much based on where we are in the cycle.

So I wouldn't -- there's -- I wouldn't take anything from the drawdown of backlog in this environment.

On the concentration, this has been a movement for a number of years now, ten years probably, to a smaller number of customers having a bigger part of the WFE spend.

This particular downturn I think will cause that to further get concentrated.

We've been focusing for quite some time on those key areas where the R&D decisions are being made, so for those I think if you pick the top five customers that still -- that spend capital in the semiconductor area, you get to a very high percentage of our revenues.

So we've been concentrating on those -- the R&D areas where the decisions are made -- being made for several years now to enhance our share and position.

Dan, thank you.

Cara?

Your next question comes from the line of Weston Twigg with Pacific Crest.

Hi, I just had a follow up.

In response to Satya's question earlier you mentioned that equipment has been shipped to eight SunFab factories but that's the same number you mentioned two quarters ago, I believe.

Now that you've signed off three SunFabs why haven't you shipped equipment to any more customers?

We've got -- we do have some additional equipment shipping to two more customers and -- or actually two more factories, I should say, and that will begin in actually this quarter, so it's just a function of the timing and the readiness of the factories.

Okay.

And so future customers are moving ahead with plans or do you have any customers that are postponing their SunFab plans?

We've already said that we have a number of customers that are experiencing financing issues and so those customers are working out their financing arrangements.

And then a number of our customers had fully secured financing going into this and they're proceeding ahead essentially on schedule and that's where our focus is right now.

And then as Mike talked about, we need to see some recovery in the financing markets to get some of these other customers and quite frankly, the large backlog of customers prior to the -- really the fall economic crisis back in the pipeline.

Okay, thanks.

Thanks, Wes.

Cara?

Your next question comes from the line of Timothy Arcuri with Citi.

Can you -- George, can you actually break inventory out by product group?

We have.

We can provide that information.

Essentially, I think it's probably more instructive to talk about it this way.

If you look at semiconductor systems they're down about $100 million year over year in their inventory, as you would expect in this environment.

It's really Display that has grown year over year and EES, driven really not only by the addition of the crystalline silicon businesses but predominantly by SunFab where we've grown year over year.

We're also seeing AGS with slight increases of inventory and that really was a function of the dramatic falloff in their revenue relative to what their normal demand signals would have told them.

But those things are all being worked and so I think really the -- I think when people focus on the inventory, you really have to take a look at our -- at the growth of our EES business, which adds about $600 million of inventory year over year to the Company.

Thanks, Tim.

Cara, we have time for one more question and then we'll give our concluding remarks, please.

Your final question will come from the line of Edwin Mok with Needham & Company.

Thanks for squeezing this in, just a quick question.

The $321 million orders for EES, how many SunFab lines did you guys book in the last quarter?

We did not book -- we did not make a SunFab contract in the last quarter.

We did have orders.

George, what were the --?

We had approximately $120 million in orders related to sun film projects.

SunFab .

SunFab projects, excuse me.

Great, thanks.

Thanks, Edwin.

What we'd like to do is thank everyone for joining us on the call this afternoon.

A replay of this call and a supporting slide package will be available on our website today beginning at 5:00 PM Pacific time and we'll keep it there posted until February the 25th.

So thank you for your continued interest in Applied Materials.

This concludes today's conference call.

You may now disconnect.