FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (TMF Ralegh)

Applied Materials, Inc.
(Nasdaq: AMAT)
3050 Bowers Ave.,
Santa Clara, CA 95054
408-727-5555
http://www.appliedmaterials.com

ALEXANDRIA, VA., (May 16, 1997) /FOOLWIRE/ -- Applied Materials, Inc. reported second quarter earnings on May 3, 1997. On a conference call to discuss the quarter's results were Jim Morgan, Chief Executive Officer; Jerry Taylor, Chief Financial Officer; and Steve Newberry, Group Vice President of Global Operations and Planning.

FINANCIAL RESULTS. Applied's second fiscal quarter financial results showed increased momentum and positive gains in nearly all areas. Q2 new orders passed the $1 billion level, up 12% from Q1's $905 million, and up 48% from the Q4 1996 low of $683 million. The Q2 book-to-bill ratio was about 1.13 and Q2 revenues at the $901 million level were up 85 sequentially and reflect broad product momentum. Q1 net income at $102 million was 11.3% of revenues and increased about 15% above Q1's operating income of $89 million, or 10.7% of revenues (before one-time acquisition charges). Q2 performance was attained during a still-challenging market and demonstrates the company's progress against its 1997 goals of introducing new products, gaining market share, and maintaining net income in excess of 10% of revenues during the business recovery cycle. Q2 results of 11.3% net income include about $7 million in pre-tax amortization of intangibles resulting from the acquisition of Opal and Orbot. Gross margin of 46% increased from 44.5% last quarter as cost reduction programs in manufacturing and materials, and reduced cycle times, kicked in.

Overall Q2 performance was somewhat better than management expectations that were set at the beginning of the quarter. Some customers are now beginning to accelerate investment plans, pulling in some orders for delivery for leading technologies. The company is winning key strategic orders and did see stronger ordering activity in regional accounts in both Japan and North America.

EPS were $0.54 vs. $0.48 (before charges) last quarter. Shares outstanding at the end of the quarter amounted to 187.9 million. Backlog stood at $1.485 billion vs. $1.45 billion last quarter. Backlog in terms of months was 4.94 months vs. 5.2 months last quarter. Total operating expenses were 29.6% of revenues, slightly above Q1 results due to two weeks' vacation in Q1, which avoided about $12 million in costs, some in gross margins and some in operating expenses. The second factor came from the ramp of 300 mm program development as we are aggressively ramping all 300 mm programs as customers have begun to speed up their expectations on 300 mm, and we will be seeing this trend continue through the balance of the year.

REVENUE AND PRODUCT MIX. We had very solid product mix across all regions, with growth in nearly all product areas. Our service business grew to a slightly higher percentage, up to 19% vs. 18% of revenues, a normal seasonal trend in the service business due to a normally slow Christmas holiday period. We saw same exciting new trends in product areas. We saw CMP begin shipping multiple units, nearly three times the prior quarter's shipping rate. We also saw the first full quarter of Opal and Orbot business, with revenues from those business at the targeted $25 million level. We also saw some very exciting early product shipments continuing to build in high temperature films as well as in rapid thermal processing, where we continue to take share and have very strong growth.

GEOGRAPHIC REVENUE MIX. The mix showed a strong trend in North American business. North American orders in the quarter were $352 million, or 39% of revenues, up from 35% of revenues last quarter. Europe was at $125 million, or 14%; Japan was at $135 million, or 15%; Korea was at $102 million, or 11%; and Asia/Pacific was $186 million, or 21% of revenues. The numbers show a trend toward logic investment in North America and strong processor demand in North America while Asia/Pacific continues to re-invest in foundries and make some strategic DRAM investments. Regionally, Japan and Korea were down in investment levels from a year ago as investment in DRAM continues to shrink, although Korea is investing in North America with both Samsung and Hyundai investing in new fabs.

Q2 NEW ORDER ACTIVITY. Orders jumped above the $1 billion level, to $1.014 billion, despite the fact that we are still seeing limited DRAM investment across the world. DRAM pricing is still volatile, but over the quarter, it has improved some vs. earlier periods. Q2 orders were driven, as expected, by selected strategic customer investments in advanced technology using Applied products. Order quote activity in the quarter was strong, driven by our new product portfolio for all types of multi-level interconnect for etch, PVD, CVD, and CMP as well seeing a dramatic increase in high-temperature film orders, very strong epi orders, where we're seeing some epi orders for 64 Mb DRAM requirements, and we're also seeing high-temperature poly orders accelerate as they replace furnace applications in several locations. RTP business is accelerating to record levels. First half RTP orders were 75% above the first half of 1996 with exciting prospects for new penetration in the future.

SINGLE-WAFER-MULTI CHAMBER. We had an exciting event occur during the quarter. We shipped out 5,000th single-wafer multi-chamber system machine in the quarter. That product was introduced in 1987 with the 5000 CVD system. As customers move toward 300 mm, where nearly every tool in the fab will be a single-wafer multi-chamber system, we are extremely well-positioned for that trend. Our 8 inch orders in the quarter were approximately the same level seen in Q1. Six inch orders grew 50%, to $125 million. In total, we had about $770 million in orders for these systems, up from $720 million in Q1. Single-wafer multi-chamber orders are now over 90% of all systems that we ship and have been over 90% in each of the last four quarters. We believe we have the proven technology and experience base and we're seeing nice cost reductions on the systems.

GEOGRAPHIC ORDER MIX.

Q2 order mix:

      40% North America
      13% Europe
      22% Japan
      7% Korea
      18% Asia/Pacific

      Q1 1997 order mix:

      28% North America
      10% Europe
      24% Japan
      15% Korea
      23% Asia/Pacific

      Q4 1996 order mix:

      42% North America
      17% Europe
      26% Japan
      5% Korea
      10% Asia/Pacific

We're seeing in the mix of orders a shift towards logic investment and microprocessor investment in North America and some strategic DRAM investment in North America as well as a slowdown in both Japan and Korea in DRAM fabs.

ORDER SIZE BREAKDOWN.

>$10 million, 18 vs. 15, five of which were North American, 2 European, 6 in Japan, and 5 in Asia/Pacific and Korea

>$20 million, 11 vs. 9

>$60 million, 3 vs. 3

>$80 million 2 (1 over $100 million) vs. 3

We see a steady progression of more sizable investments across the customer base, indicating that the recovery is continuing. We saw a number of key investments by customers, which is an emerging trend favoring Applied's strong geographic presence and product technologies. We saw that re-occur this quarter with four major orders worth noting. In Asia/Pacific, we have taken a $182 million total order from TSMC for a combination of both advanced logic and some DRAM investment. About 25% of the order was for DRAM and 75% was for the company's logic foundry business. About $112 million of that occurred this quarter, the rest came in in pieces during Q3. We had another nice DRAM orders come in in North America for the first US sight from Samsung for $47 million. Then in the US, we had a major microprocessor investment, where business is surging, for $90 million. We had another DRAM investment order in North America for a sight in Washington state for $32 million for 0.25 micron DRAM. About 29% of total orders were for strategic buys for DRAM investment, a very nice trend for the company.

BALANCE SHEET. Once again, the balance sheet continues to be managed and be very solid. There were no unusual items in Q2. Cash was $1.75 billion. Total debt was reduced $22 million and working capital showed continued progress with asset management. Receivables only grew $42 million and DSO (accounts receivable days sales outstanding) dropped one day to 82 days. Inventory increased about $66 million in the quarter, in-line with the revenue ramp going into Q3. Several additional evaluation units for new products were placed in the field with key customers for strategic evaluation. Depreciation and amortization was $51 million, up from $46 million last quarter and capital expenditures amounted to $52 million, up from $34 last quarter. Year-to-date cash has increased $37 million while debt has been reduced $120 million amidst the expenditure of $245 million, net, for the acquisitions of Opal and Orbot. On an operating basis, Applied has generated $403 million in cash in this recovery cycle. Debt is now down to just 9% of total capital. Clearly, Applied has the existing financial resources and cash access to fund major revenue growth or address new business opportunities using our very strong balance sheet.

JIM MORGAN, CEO. Those of you who have been following the company for a while know that we've compounded our growth at over 30% per year for about 20 years. Several years ago, I talked about a concept of "alpha principal" where once you have a critical mass, you can greatly accelerate the capability of an organization and therefore its opportunities. That was at a time when there was a lot of discussion about larger companies not being responsive and flexible relative to smaller competitors. The bottom line of where we are today indicates that you as investors have a company that it in the right business at the right time with the right capability. At the Microsoft high-tech summit, I observed that Chairs and CEOs of large companies see information technologies as differentiating competitive tools, something that Applied, as a large global company, believes to be true. I also noticed that the carriers and global information providers such as Sprint or MCI are probably going to accelerate their installations of increased bandwidth. That'll make possible greater usage of the technologies that the software, hardware, and semiconductor people make, increasing Applied's opportunities.

If you look ahead at the electronics industry, where semiconductor content is increasing, all of this drives a huge opportunity for Applied, which we are prepared for. Clearly, we've followed a very carefully prepared roadmap since the mid-'80s of developing a very strong technological strategic capability. Clearly, we've become the backbone of semiconductor production. Part of what goes with that is assuring that we're able to achieve market leadership in the areas in we choose to participate. I think we've demonstrated that pretty consistently over time.

The next component of that roadmap was to develop a global presence, going way back to the early days when we set up Applied Materials Japan in 1979. We now, with AKT, have well over 2,000 people in Japan, well over 2,000 people in Europe, so we have very large capabilities and experience. Another issue in the roadmap for success was profitability. We've always been a company that has believed in profitability, although we will accelerate investments if it will benefit our long-term profitability, but we believe you have to be able to make good gross margins and then spend the money intelligently and have something left to finance the business so that we can meet our long-term growth plans.

Then, of course, how do you build a management and an infrastructure that will be able to deal with the opportunities that clearly come to us first? In the last two months, I've been in the US, Japan, Korea, Europe, and Israel talking with many of the customers and spent a great deal of time with our intermediate management and employees in these various regional locations. The global product management structure that we established a few years ago, in combination with the global account management structure, has really propelled the company's capability to dramatically. Most of these people have been with the company for several years and the customers are confident of their abilities to support them.

The other key aspect is how do we do in our ability to cope with downturns, because clearly, Jerry and I were the only two people in the same or similar senior management positions in the company when we entered the downturn about a year ago. Our regional executives, product business heads, and manufacturing people have done a superior job in keeping margins up, allowing us to expand aggressively in areas which were important to our future and still earn over 10% profits. In addition, another aspect of good operational management, which we've always emphasized, is our asset management. Our ability to maintain over $1 billion in cash, in light of making two acquisitions and retiring about $100 million I debt, demonstrates a capability that is important to our long-term growth.

Another key area for us is development and bringing new products to market. Our product introductions over the last twelve months have given us a solid market position, and we are gaining market share in each case. The characteristics that are required in our roadmap for success are there. We see a huge market, probably approaching $40 billion early in the next century, giving Applied the opportunity to grow into a $15 billion company if we do a good job of continuing to develop our capability and take advantage of the opportunities that continue to be presented to us.

STEVE NEWBERRY. In the past few years, we have witnessed the rapid globalization of the semiconductor industry. In only 5-6 years, we have seen the concentration of semiconductor production shift from the 85% of production in the US and Japan, 11% in Europe and 5% in Asia/Pacific move to the current distribution of 74% US and Japan, 14% Europe, and 12% in Asia/Pacific. More importantly than perhaps the current trend is where the trend is going forward from our perspective. We believe that as we enter the next century, we're going to see an acceleration of this globalization to where the US and Japan will be producing about 65% of semiconductor output, Europe maintaining its 14%, but again, another near-doubling of Asia/Pacific to about the 21% level. That will be on a base of about $300-315 billion in semiconductor revenue. As a part of this activity, two very important trends that we've been watching for a number of years have clearly begun to emerge: 1. Cross-regional globalization and 2. Partnering for production.

In the past few years, the investment in a region has largely been from companies that were headquartered in that region. As we saw the expansion of Asia/Pacific, we saw the Koreans and Taiwanese ramp up their investments in those respective countries. Europe was an exception, where a number of Japanese and American firms invested over the last 5-6 years to avoid the trade barrier and trade conflict concerns that were occurring on that continent. Now we see a very strong trend of investment all over the world by the large global semiconductor companies. From our information, we believe there are currently 24 fabs from 21 companies that have been announced for start-up in 1997 and 1998 that are cross-regional investments. These investments represent about $22 to $25 billion in total capital, with about $10-11 in wafer front-end equipment investment for these fabs. This will represent about 30% of the wafer fab equipment opportunity over the next two years. Nine of these 24 fabs are what we call joint-venture or partnership fabs the likes of Dominion in the US, which is IBM-Toshiba-Siemens, AMD-Fujitsu in Japan, and Anam-Ankar-TI in Korea.

These are significant because, in the past our customers had a tendency to form joint venture to develop a technology but produce it separately, with a few exceptions. We now see a growing trend of partnership production fabs. We also see an increase in investment by Koreans, who are setting up fabs for the first time outside Korea, in the US and the UK. The Japanese are continuing their expansion in the US. and Europe and we also see them moving aggressively into China and Asia/Pacific. US and European companies remain active, particularly US firms, but also European companies, and in particular, Siemens with investments in the UK, US, and in Taiwan. We believe that this clear trend will accelerate over the next few years and we believe this increases the requirement for equipment companies to be true global partners, with strong capabilities on a very broad basis. For many years, we've talked about the benefits of cultural diversity, where a multi-national executive management team and infrastructure will have the ability to help a Korean company build a fab in Scotland or an Israeli company build a fab in Taiwan. The era is now upon us where out investments in management and international capabilities are now being applied specifically in these cross-regional and production partnering fabs where leadership from all around the world is required to be successful.

For instance, the Dominion fab has people and equipment coming from three different continents combining with customers who are technology from one company, production and support from another, and financial resources from another. All of this puts enormous pressure on the equipment supplier to coordinate it, to deal with the communication around the world with the partner companies, and most importantly, to be able to bring an execution capability to bear so that the fab can hit its ramp-up requirements quickly and be brought online to start leveraging these $2 billion investments that our customers are dealing with today.

GUIDANCE FOR Q3. Six months into the year, we see the future as being a lot brighter than one year ago and at the beginning of the fiscal year. We see orders continuing to accelerate to the $1.075 billion level in Q3 with revenues just crossing the billion-dollar level, probably $1.005 billion in Q3 with gross margins making modest progress, up maybe 0.5 points each quarter through the end of the year as cost reduction programs continue. We will also feel some impact from the rapid introduction of products. We expect net income in the quarter to well exceed the 10% goal that we had set, to the 12.5% level in Q3 and Q4. Net income will improve despite the fact that we plan to advance our 300 mm investment programs to meet the customer expectations of new product development there. We will ramp 300 mm costs additionally in the last half of 1997. We led the industry very dramatically in the 200 mm transition and we intend to repeat our success in the move to 300 mm. Earnings per share in Q3 is targeted at $0.67, up 24% from Q2's $0.54. Q3 should show an outstanding number of shares of 188.7 million.

For fiscal 1997, we now expect to see orders slightly above the $4.1 billion level, revenues in the range of $3.8 to $3.9 billion, and EPS for the full year of $2.46. Q4 shares will be about 190 million, and the total year average shares outstanding will be approximately 188.5 million. Overall, we are looking forward to showing our strengths in the second half, with a 21% increase in revenues from the first half of 1997, with a 42% increase in EPS from the first half to the second half. These earnings projections do not include charges from the acquisitions completed in Q1 or the favorable impact of an intellectual property lawsuit settlement from Novellus.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

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