FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Applied Materials
(Nasdaq: AMAT)
3050 Bowers Avenue
Santa Clara, CA 95054-3299
408-727-5555
http://www.appliedmaterials.com

ALEXANDRIA, VA (August 13, 1997)/FOOLWIRE/ --- Applied Materials released third quarter 1997 results after the market close on Tuesday. The financial results were quite strong with a good performance in nearly all categories. Q3 revenues were $1.057 billion, up 17% sequentially. Net income was $186.6 million or $0.98 per share.

NON-RECURRING ITEMS. That includes two additional items that occured in the quarter. The first item was the Novellus legal settlement that resulted in an $80 million pre-tax gain and the second item was the Submicron Technology charge for bad debt expense of $16.3 million pre-tax.

RESULTS EXCLUDING UNUSUAL ITEMS. Excluding those two items, the operating performance of the company was very strong. Pre-tax income of $223 million, excluding the unusual items, increased 42% above the second quarter on a 17% revenue increase. Net income was $145.2 million or 13.7% of revenues, up from the 13.2% of revenues achieved in Q2. Operating EPS in the quarter was $0.77 per share, up from the comparable $0.54 per share achieved in the prior quarter.

REVENUE AND MARGIN IMPROVEMENTS. All profit and loss statement results were better than expected and their business in the third quarter was driven by increased revenues and improved margins. Revenues did strengthen during the quarter as selected customers are pulling in delivery requests for immediate execution of their advance production requirements.

PERFORMANCE BY CATEGORY. Product revenues accelerated in etch, CVD (chemical vapor deposition), physical vapor deposition, and CMP (chemical mechanical polishing) driven by both market share gains and added investment to the 0.25 and 0.35 micron technology levels. RTP (rapid thermal processing) revenues, which continue to accelerate, grew nearly 50% above the prior quarter. Their service business revenues remained at approximately the same level as Q2, approximately $172 million and totaled 16.3% of total revenues in Q3 versus 19% in Q2. This was as expected since this business grows much more slowly than the product business. The product business grew 21% in Q3 versus Q2, following a 10% increase in Q2 versus Q1 results.

RESULTS BY GEOGRAPHY. The geographic mix of revenues in the quarter was: North America with $447 million or 42% of the business, up from 39% in the prior quarter; Europe remained approximately flat with $124 million; Japan was $196 million, up from $135 million in the prior quarter; and Korea was $71 million or 7% of revenues versus 11% in the prior quarter; Asia Pacific, a very strong growing region for them this year, was $220 million or 21% of revenues. North America continued to strengthen and is up significantly over the prior quarter and the prior year. Europe remained approximately flat. Japan grew modestly. Korea was soft. Asia/Pacific grew significantly. The shift is out of Japan and Korea on a year-over-year basis. Both of them together, one year ago, totaled nearly $527 million and only $267 million this year. The regional drivers were strong logic and microprocessor businesses in North America and logic/foundry business in Asia/Pacific with Europe remaining relatively constant. The shift in Korea does not reflect investments by Samsung and Hyundai in new 64-megabit fabs this year.

MARGINS AND OPERATING RESULTS. Gross margins in Q3 improved to 47.2%, quite a step up from the 46% achieved in the prior quarter. Margin improvements are driven by the sharply higher revenues, continued progress on cost reductions, and very good factory performance resulting in accelerated delivery rate. Revenues have now ramped $221 million or 26% in the last two quarters, well ahead of their expectations. Operating expenses in the third quarter, without the unusual expense item, were $286 million or about 27% of revenues, down from the 29.6% recorded in the prior quarter. Despite the increased R&D investment mostly for 300mm programs and new products, the expenses in total were kept in relatively good shape. Revenues grew well ahead of their infrastructure adds in the quarter and their ongoing net income at $145.2 million increased sharply above the Q2 level. This resulted in an operating EPS in Q3 of $0.77, up nearly 42% on a quarter-over-quarter basis.

ORDER AND MARKET SHARE GROWTH. New orders in Q3 reached $1.24 billion. They were quite a bit stronger than anticipated in the quarter and were 22% above the good Q2 order rate. Applied Materials is gaining market share at the 0.35 and 0.25 micron technology level. Another key factor in their market share gain is their proven single wafer multichamber architecture. This system's architecture is highly reliable and customers can count on it for their high-volume production. Applied's single-wafer systems for 8-inch business in Q3 grew 35% above the second quarter level and are nearly two times the order rate taken in Q3 1996 for 8-inch systems. These systems accounted for over 95% of all of Applied's systems shipments in dollars. They have a predominant lead in this area across the industry. At 300mm, single-wafer multi-chamber will be even more critically important.

GEOGRAPHIC ORDER MIX IN Q3. North America had $507 million, crossing the $500 million mark for the first time and was about 41% of the orders, the same percentage of the orders as last quarter. In Europe they recorded $135 million or 11%. Japan was $221 million or 18%. Korea was soft at $59 million or 5%. Asia/Pacific at $319 million was 25% of the total mix, up from 18% in the prior quarter. Again, North America and Asia/Pacific were very strong, each of them up over $100 million above the prior quarter. The customers who placed orders over $10 million each with Applied Materials totaled 27 in the quarter, up from just 18 in the prior quarter, and the scale of orders also increased significantly with 13 orders over $20 million, 7 orders over $40 million, and 3 orders over $100 million, all up sharply from the prior quarter. They closed the quarter with backlog ending at $1.64 billion, up 11% from the prior quarter's levels.

BALANCE SHEET HIGHLIGHTS. The balance sheet is in excellent condition at $4.2 billion of assets, of which $1.1 billion was in cash. The cash position improved by about $29 million in the quarter due to improved operating income and the favorable $80 million deal with Novellus. Receivables and inventory increased in the quarter, but were in line with revenue growth in Q3 and projected revenue growth in Q4. The one unusual item in the quarter was the Applied Materials requirement to repossess the systems that had previously been shipped to warehouses for SMT Corporation pending their transfer to Thailand. Applied seized these items with court-approved documents and regained the inventory and put it back into finished goods. So, there is a small bubble of finished goods inventory. These assets will be sold to customers in Q4 and Q1 1998 and there will be no economic loss to Applied Materials from this issue. Due to prompt action they did not incur any economic loss on that exposure. Capital expenditures rose to $112 million in the quarter, mostly for manufacturing capacity and Santa Clara Applications Lab additions. Q2 capital expenditures were just $52 million. Depreciation and amortization in the quarter was $57 million, up from the $51 million in the prior quarter. Applied's total debt of $206 million at the end of Q3 was basically unchanged. The company is well positioned to support revenue growth with its high quality balance sheet.

STRATEGY. The past 18 months have been a significant challenge for Applied and their industry as they went through accelerated growth and rapid slowdown and a pickup this Spring. During that period they followed a time-tested program of introducing new products, focusing on gaining share, and reducing their costs. They are very proud of the work done to position the company for the next few years. At Semicon West, they felt it was clear from talking to customers at the show that Applied Materials' broad line of capability, series of new technologies available for 200mm, as well as an important demonstration of their 300mm capability showed that they had outstanding capability for customers to use.

TRENDS. In addition to the general growth of the "Information Age" they are seeing silicon consumption increasing from about 19% of electronics in 1995 to close to 30-35% by the 2000-2005 timeframe. There are several trends in place that should affect Applied Materials' business. The Internet alone, which was about $16 billion of chips in 1995 could go to $150-175 million in the early part of the next century. The basic underlying trend for semiconductors is quite solid for the next several years. What is superimposed on that for Applied Materials is the growth of the movement to 0.25 micron and below technology for 200mm and 300mm. That shift is taking place now and will be complemented by the move to 300mm. There are some unusual additive factors to the potential for their industry during the next several years. Applied believes they have demonstrated, by this quarter, that they are clearly in a position to capitalize on that going forward.

ETCH GROUP HIGHLIGHTS. At the present time, they feel they have significant momentum in the 0.25 micron arena and feel that they are gaining share at a rate that exceeds or is close to 50% for those tools going into 0.25 micron fabs, be it DRAM or non-DRAM. Despite the fact that the overall size of the etch market is about flat this year, they are looking at growth next year between 15-18%. This year has been the year of 0.25 micron qualification and companies continue to invest for these reasons.

ETCH MARKET SHARE SEGMENTS. In total, when you take the entire market to 0.25 micron and all the other segments, Applied believes they have made a significant increase in market share in 1997 and are projecting they will be slightly higher than 38% of total market share for 1997. They have been gaining share at the expense of all of their competitors. The major driving force is their ability to introduce a whole bevy of new products. In metal etch they will have greater than 50% market share in 1997 which is a significant increase over the past. In silicon etch, they have been able to get some good drag from the success of metal into the same or similar accounts to penetrate the silicon applications. In those segments they believe, in the 0.25 micron segment, they are achieving greater than 40% market share. They think their overall share in silicon will be in the 35-36% range. In dielectric, it is a very large market and is the biggest segment of the etch market, about 45% of the total etch market is dielectric and will probably continue to edge up. In 1997 they have been able to gain share because their product family has productivity advantages over the competition. In 300mm they are making very substantial progress and will be shipping a number of products toward the end of the calendar year.

ETCH MARKET IS GROWING. In general, the overall market for etch is growing, it is the fastest growing segment of the equipment business so it is very strategically important to Applied. They now believe they have a leading market share situation and are gaining market share and have gained throughout the cycle. They have been able to do that with higher margins. The reason is that they have focused on the design, to do a much better job with design and solve their problems inside the development programs instead of in a product support situation in the field. They believe they will be able to grow this business quite dramatically. They believe the etch market, by the year 2000 will be over $6 billion, so being able to take their goal of 50% market share means they will be a fairly large organization even compared to today.

LOOKING BACK AT STRATEGIES AND GOALS. Q4 1997 looks like it is going to be quite promising. One year ago, the semiconductor equipment industry was in a severe slowdown and that continued to be an issue for the next several quarters. Applied set out to achieve several key goals during this industry downturn. They said they would focus on market share gains across their extensive product business units and would bring additional products to market to further strengthen their competitive position. They also said they would drive 300mm investment for the next generation products to be ready for the technology shift to 64 and 256 megabit when the customer wanted to move to the 12-inch wafer. They also said they would extend their global sales and service capability to be prepared for the initial semiconductor recovery and that they would still achieve over 10% net income each quarter with aggressive expense and asset management controls on a global basis. They believe they accomplished all the goals they set out to accomplish a year ago.

EXPECTATIONS FOR Q4 AND FY97. They expect Q4 1997 revenues to cross the $1.2 billion level and expect to grow 15% quarter-over-quarter in revenue growth. They also expect new orders to continue to be above revenue levels with a positive BTB ratio during the fourth quarter. They expect gross margins to improve modestly from the strong Q3 level and are in a significant manufacturing ramp now for additional production. They will have to add some people and space as necessary to support their early 1998 growth prospects. On the expense side, the 300mm programs are continuing to accelerate for early 1998 deliveries. That will continue with selected shipments planned through early next year. They expect net income as a percent of revenue will reach the 14% level in the fourth quarter, up from the 13.7% increase in Q3. Earnings per share in Q4 should reach about $0.90, up from the $0.77 of operating performance in Q3. Based on their Q4 outlook, Applied will again achieve positive year-over-year comparisons. Revenues should be up nearly 40% year-over-year with net income up over 90% year-over-year on comparable operating yields. For the total year 1997, this outlook would put the orders close to the $4.5 billion level for the year with revenues just over the $4 billion level for the year and an operating EPS of $2.69.

1998 OUTLOOK. They will provide guidance for 1998 in the next conference call targeted for Thursday, November 20, 1997. They do expect 1998 and the next several years to be positive growth years for the equipment industry and they do expect 1998 to be a positive growth year for Applied Materials in both revenues and earnings.

* 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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