Applied Materials Analyst Briefing at SEMICON West 2008 - Final

Corporate Participants

* George Davis Applied Materials Inc. - SVP, CFO * Mike Splinter Applied Materials Inc. - President, CEO * Tom St. Dennis Applied Materials Inc. - SVP, GM * Manfred Kerschbaum Applied Materials Inc. - SVP, GM Applied Global Services * Mark Pinto Applied Materials Inc. - SVP, Chief Technology Officer, Energy and Environmental Solutions

Conference Call Participants

* Gary Hsueh Oppenheimer & Co. - Analyst * Stephen Chin UBS - Analyst * Wes Twigg Pacific Crest - Analyst * Jay Deahna JPMorgan - Analyst * Chris Thunker Banc of America Securities - Analyst * Arthur Murdock Morgan Stanley - Analyst * Steve O'Rourke Deutsche Bank - Analyst * Robert Maire Semiconductor Advisors - Analyst * Mehdi Hosseini Friedman, Billings, Ramsey - Analyst

Presentation

UNIDENTIFIED SPEAKER: The following presentations contain forward-looking statements, including those relating to the industry outlook and trends, Applied business overview, products, prospects, growth opportunities, operational initiatives and financial goals, and the performance and objectives of, and conditions affecting, Applied's silicon business.

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 the slides for today's meeting posted at www.appliedmaterials.com, and in the Company's filings with the SEC. Forward-looking statements are based on information as of July 15, 2008, and Applied Materials assumes no obligation to update such statements.

Please welcome Senior Vice President and CFO, George Davis.

GEORGE DAVIS, SVP, CFO, APPLIED MATERIALS INC.: Good morning, everyone, and when you get a chance, please have a seat. I realize we're webcasting today, so we're starting right on time. We started in a new location, so I don't know how many of you went to the Palace where we've had this event for many years. So our apologies for the confusion. Yes, Mike told me he did. But we're delighted to have you here.

Hopefully, you'll get a chance -- one of the nice things about having it here, I think you get a more complete picture of the Applied show here, including we have a great interactive device out there where you can take a look at, kind of from a three dimensional picture, a number of our new products, using this really cool technology.

So SEMICON is a great week for Applied. We always enjoy this week, not only because of customers and suppliers, but it's a chance again to have a dialogue with our investors. Today our focus, as it always is at SEMICON, is our silicon equipment business.

And I think also we have later in the show -- we'll be talking about the solar business, because Intersolar now is here. So we have a combination where Semi and Intersolar have come together, which is really kind of in line with some of the things that are going on at Applied. But today for us is really a continuation of our New York Analysts Meeting, and so we really have tried to take the New York meeting and make it our complete discussion of the Company's business along with, really, a focus on our three year outlook.

So today we will have no financial presentation. A number of people have asked about that. That is really consistent with the way we've always held Semi -- the Semi show, because we're right on the top of our quarter end. So no updates on the financials today, and I know we'll probably get some questions, and so the answer will remain the same.

Our earnings call is Tuesday, August 12, so that will be a chance, and we'll update everybody on our financial outlook, not only for the quarter, but for the rest of the year at that time. Move on to the agenda for today. So our agenda -- pretty straightforward. We've got Mike Splinter coming up. He'll give an overview of the entire Company, and then we'll follow that with Tom St. Dennis, who will take you through, really, a comprehensive review of what is happening in the silicon equipment group.

Obviously, this is a quite difficult industry environment, and one of the things that's great about SEMICON is regardless of whatever environment that we're in, it's a great chance to learn about where people are investing in technology, what the trends are, and as we come out of this cycle, as we always do, how are people positioned to do well going forward.

So I would encourage you to ask any questions that you have during the Q&A. I'll be up here with Mike and Tom, and we'll be happy to field any questions that you have. Obviously, we like as much as possible to focus on the semiconductor capital equipment business, but again, we're available to answer any questions that you have.

So with that, let me introduce Mike Splinter, our CEO. Mike?

MIKE SPLINTER, PRESIDENT, CEO, APPLIED MATERIALS INC.: Thank you, George. I'd like to also add my welcome to all of you who found the Metreon this morning. I think you know that SEMICON is changing with SEMICON now not being just a semiconductor show, but also Intersolar, a solar show, and so Applied Materials presence at this event has also changed. In our old spot you'll see a much smaller booth. You'll also see a booth at the Intersolar show, and of course, we have this venue here at the Metreon.

I'd like to invite you all to join us at all the Applied locations, spend some time with our executives. And speaking of that, we have a number of the executive staff here this morning, so that if you have any questions that George or Tom or I can't answer, which may be a lot of them, we have some of our business managers here today to help with any details that you might have.

So just to hit a little bit on the industry overview. We've said wafer fab equipment spending is going to be down 25% to 35%. This is a very tough environment that we're in. It is a big downturn. Factory capacity, though, is actually running pretty full. You look around the industry, and utilization is quite high in almost every location, but yet, wafer fab equipment spending is down in every sector.

Earlier in the year we had said that spending would be down 5% to 15%. A big part of the change that we made was when we looked at NAND Flash, the weakness we saw in NAND Flash, going from what we thought would be a growth year to what is going to be a contraction year, as pricing has been very, very weak.

Now, how are we going to come out of this downturn? I think that's the big question, and it's a question that we've been asking ourselves. We look for it to be modest. We look for it to be modest throughout the rest of the year, maybe into early parts of '09. After that, pretty hard to tell what is going to happen, but we do know that there are huge number of semiconductor applications. We think that the growth will be led by NAND Flash and by foundries as the confidence and growth in Internet devices takes place.

At the same time that semiconductor business has been in a tough situation, our display business has had a record year -- had record orders. As we go through the Gen 8.5 order cycle and now into the Gen 8.5 build cycle, the CapEx has been bigger than we anticipated by at least 30%. It's been a great year for this part of the Company, been expanding capacity. And then, of course, in our solar business, this business has been growing fast. Customer acceptance, customer interest has been extremely exciting, and I'll take a few minutes later to talk about that.

When you look at our business model, I really want you to think about what we're doing. We're trying to build the Company in the multiple businesses by focusing on our core competencies, building upon those core competencies that the Company has established over its 40 year history, to create more opportunity and more business models than we've had in the past.

If you look at the organization of the Company now, we have organizations and segments that are reported financially, each one focused on a particular market. SSG is focused on innovation and creating differentiated products for the next generation of technology, and to help our customers be cost effective in that endeavor.

AGS, our service operation, is trying to help customers lower the cost of their operations. We found that is how to be successful in this business, and to do it in a way that they can measure our performance and to share in that success. In display, it's all about cost per area. If we help customers lower the cost per area, we will gain share, our new products will be accepted, and customers will stay with us in the areas that we have very high share.

In energy and environmental solutions, it's really about creating energy, conserving energy, and capturing it, and if we do that at the lowest possible cost, this business will grow, if we can use our core competencies to enhance that business, and the very nature and DNA of Applied Materials to be a profitable organization, have the right cash flow and right operating model, we will be successful in all of these businesses.

I already said a couple of words about what is happening with wafer fab equipment spending, but I think what we recognized fairly early on was 2008 was going to be a tough year. We took action early. We realigned the organization. We looked at our product portfolio. We pruned out some of the products that weren't performing. We took cost reduction actions.

Those actions have taken place throughout the year. We're on track there. And, I think this has allowed Tom and his organization to really focus in on the areas of growth, in areas where we want to keep customers moving ahead to the next generation. It has also allowed us to have better performance than we might have had without these actions.

2008 now, and you saw six product introductions from us in the last few days, is a time when we can position some of our new products, especially in the areas of etch and inspection. You'll hear about that in a lot of detail from Tom.

And then, finally, the investments that we're making in our supply chain. You saw a groundbreaking last week in Singapore, and that's just part of an overall program to drive our supply chain, to be more efficient, to be more effective, help us drive down our throughput times and cycle times, and better service our customers who, as you know, now 70 -- over 70% are in the Asian region.

Display. What a great year for display. Not only have we had record orders, we'll by the end of the year have record revenues. We see the factories continue to build out. Our business model, of course, helps convince them that it's a good idea to take the products and to build out those factories. They're building the capacity for the next generation of TVs and displays.

We still see customers with confidence to move ahead in that area, and we're seeing growth across all the applications from computers to other kinds of displays to big TVs. Now, yes, you can certainly see some softness in the market in the short-term, but these kind of investments are really building on the long-term.

Our new product, PiVot PVD, is really gaining acceptance, already in production at one customer, but we think this is going to be the next generation -- the next big product for us in display and an exciting product at that.

Similar to the semiconductor group, the display group is expanding their operations in Taiwan. As you may know, we have manufacturing operations in Santa Clara and in Germany. This will help us be more cost effective as we go forward in our display area, and you'll hear more about that over the years as we build out this operation. That operation will also be building some of our solar products and expanding to be able to keep up with that ramp.

AGS, our service organization. Our service organization will have a growth year this year. It will be modest growth, but in this environment, where the capital equipment part of AGS is suffering just like the capital equipment part of SSG, it's a tough challenge to be able to grow, and they're doing it. One of the key things to that is capturing service contracts in Asia. It's traditionally been a very tough task to be able to do that, but our service team is doing that.

You saw the Inotera announcement yesterday. We have a number of other contracts that we've signed in Asia, and we think this performance sharing is the real way to do that. Customers are interested in modifying their variable -- getting more variable spending. They're interested in lowering their cost of operations. AGS has been able to do that.

We see great momentum in our SunFab Operations with AGS. We've already signed four contracts. As we go through the warranty period, AGS will take on the service. We think we're going to have very, very high share there.

And in our crystalline silicon area, where there's already over 1000 tools out, this is an opportunity that AGS will be going after over the next year. So we expect AGS to continue to grow and to have this really be a launching year as silicon comes back next year into a very, very good year in 2009.

The final business group, Energy and Environmental Services. This is an area where we are using our core competencies to grow the Company. You've already seen in our financial reporting much about the glass and web businesses. That's primarily what is in there today. As we ramp solar, you'll start to see a lot of the solar revenue start to come in from crystalline silicon first, and then from our SunFabs before the end of the year.

But we're not just doing glass and web, and we think these businesses can grow significantly. You see green building codes starting to come into play everywhere around the world. We think that that will play very strongly to our glass business, as our products get more effective and higher productivity for those applications.

But also, and I'll talk about solar in a minute, but in lighting we think that we have an outstanding product in LED. We think that there's other areas of lighting that can use solid state that will change the face of how buildings are lit, both inside and outside, and be a significant growth area for us in the future.

And then there's a number of other areas that we think in the energy field, in both conservation and storing energy, that our technology can play a significant role in. We're doing a lot of work in our laboratories. You see Applied Ventures making some investments in battery companies and fuel cell companies. If we find a technology there that really is consistent and excels in performance, you could expect us to play in that area as well.

On solar we have four SunFab lines that are now producing panels. They are in their early stages. Wouldn't call them in production yet, but we're very happy with the way these factories have started to come up, and people have been able to deposit and make solar panels.

One of the solar panels from Signet Solar is outside. I don't think you should walk on it, but you can. These panels can withstand hail, wind, and many of you saw the installation video at Intersolar in Europe. And you can see how easy they are to connect up and install -- one of the concerns that some people had. But the glass industry has been handling panels like this for years. There's really no technology here. It's really just implementing methodologies that have been developed in the past.

We still see strong demand. We signed three major contracts over 300 megawatts in this last quarter. One of those was a return order. We continue to see a number of customers around the world express interest in either expanding or new operations. So we're quite excited about how this is progressing.

Probably one of the areas that goes unnoticed is our crystalline silicon area. We're now shipping $200 million a quarter. We're expanding our capacity pretty much as fast as we can. We've doubled the capacity in our precision wafering systems. We're expanding our capacity in Italy. We have not caught up to demand yet. We're working hard to do that. So, this is still an area that's growing extremely fast, and our products are desired virtually by every company making crystalline silicon solar cells today.

In January, I showed a slide similar to this, and I just wanted to say we're still, as a management team and as a Company, committed to this goal to reach $13 billion to $15 billion by 2010. We certainly think we're going to be through the silicon downturn by then, and with the products we have there, we believe we're going to meet the revenue goals that we had established for that part of the business by 2010.

And other parts of the business we also think are going well enough to say that we're still on track on this. We're still committed to where we're going, not just on the revenue, but on the profitability and cash flow.

And with that, I'm going to turn the stage over to Tom St. Dennis. Tom is going to give you an update on the silicon systems business. And then at the end, we'll come back with George, myself, and you can ask any of the other Applied executives question that you may have. Tom?

TOM ST. DENNIS, SVP, GM, APPLIED MATERIALS INC.: Thank you. I'd like to add my welcome to the investor program here today, and am pleased to have a chance to really highlight the progress that we have been making in SSG and give you some insight to our plans going forward.

Also, I'd like to reinforce the idea that you use the opportunity here to take a look at our interactive display. We also have substantially more information on the full portfolio of products that we have, and in today's presentation I'm going to focus in a couple of areas, but you'll have a chance, with our people and with the kiosk out here, to really explore further all the products that Applied Materials has in this space.

So I'd like to talk a little bit here, just to start, around semiconductors, the demand, and the opportunities that we see going forward. We're very bullish on electronics, and therefore semiconductors, because the critical role that semiconductors play within that. It's a really interesting convergence right now that's going on between incredible capability. As semiconductors are moving from 90 nanometers to 65 nanometers to 45 nanometers and will move on to 32 nanometers in the year, there's incredible capability in the silicon there.

What's interesting in the intersection of it is a generation of people who have grown up with cell phones, the Internet, incredible technologies, really, as a given as they've grown in their lives and in their career, and the possibilities that the combination of these two bring to electronics, to semiconductors, and all is really exciting, and we would expect to see substantial growth and changes in that going forward.

There's -- as Mike said, and as we've communicated before, a tough year. Cycles happen in this particular industry, so they're not new to us. Some of them are more challenging than others, but it really is something that we use this time to focus our activities to look for the chances to really improve position and improve our overall operating performance.

The term slowdown is really a -- probably a bad term, because for us, it's a speedup. It's a chance for us to do more and to really take advantage of this time to move ahead on our strategic objectives, and it really does create a lot of opportunities for us. I'd like to highlight some of those for you today.

And when I look at all this coming together, the formation of SSG last year, it really is a very positive year's worth of progress for us, and I really like the way we're positioned right now, going forward into this kind of a tough cycle, but also to take advantage of the product opportunities and the market opportunities as we see them coming.

So first, let me try to provide some perspective on the environment. We had a slide similar to this in January, and the first half part of it, I think, is really pretty much as we had portrayed it there. On a macroeconomic basis, not necessarily strong, certainly, with the U.S. in the environment that it's at, but around the world growth continues in many different environments, and for many of our customers has become their market as opposed to the U.S.

End markets in computing [in] consumer electronics, remain very strong. Big consumers of semiconductors obviously, and really, the key drivers there. Wafer fab equipment is red. It was red in January. It's redder today, although I don't think you can see it in the color there, but it's been a tough time and looks to be that way through the remainder of the year.

NAND Flash has softened since the January timeframe. It's still above what wafer fab -- equipment is at, but still softer than what we had thought at that time. And DRAM is a tough environment, well documented, I think, around the industry, and all that leads to a perspective for the year of down 25% to 35%.

But if we look forward now on what are the things that are going to really take us out of this particular environment. What is going to be the areas for growth? What will be our real opportunities from a market share gains in different market segments?

Well, NAND Flash continues to have a very bright future in our view. The solid state drives that have been talked about, have been introduced at a very early level at this point in time, are still a tremendous opportunity for our customers and for the industry, and will drive significant demand in the 2009/2010 timeframe.

Many of the technologies we are working on today at the 4X, 3X, and 2X nodes will allow the costs of NAND Flash to come in line with the requirements that they have in place that will allow a much more aggressive push into this space. So in many ways, this is one of those speedup things during this downturn to really work to bring those technologies forward as that will ignite the opportunities around solid state drives.

DRAM. DRAM is central to the -- to computing, and whether it's desk top or the server space, it swings with that. The real challenge right now is the imbalance between supply and demand, and once that is absorbed, and some of the newer technologies begin to come forward, we think that will return to a more -- to a much more healthy space than it's been in. On Foundry we have -- they've been cautious in their investments for the past few years. They've made great progress in several areas on 65 nanometer.

What I find encouraging is that the number of designs that are coming forward at 65 and at 45 -- I do think the transition on 45 nanometer will be smoother than the transition was from 90 to 65, and that's going to create demand at the technology levels at the leading edge for foundries. And again, this is some of the raw materials for the innovation and the kind of new products that we would expect to see coming out from this technological capability.

And, Logic. Logic has been pretty steady and their investments in this space, obviously driven largely around computing, and is in the early phase now of moving on into 32 nanometer. We don't see any challenges -- or any show stoppers. There's plenty of challenges, but no show stoppers for them to move forward in that. So a number of factors, we believe, will have a strong driving force going into the 2009 and 2010 timeframe.

But given the environment as it is today, what is success? How do you measure success? Where do you focus your time? Where is SSG focused to make sure that we make the kind of progress and achieve the objectives that we've laid out for ourselves for this year and going into 2009 and 2010? Well, it's pretty clear for us -- three key areas, our customers, our operational performance, and the alignment of our investments towards those overall goals.

On the customer side, it's been a really interesting evolution and change as we moved into this organization that we call Silicon Systems Group. It consolidated several businesses into one, and it has allowed us to really change our interface with customers, I think, in an extremely positive way.

And it has also allowed us to leverage the portfolio products that Applied has to work at problems that are not just a specific piece of equipment, but are really what the customers care about, which are really the kind of module level performance, and this is an area that we have accelerated in. I want to highlight one of those areas here in a minute, and I think it's going to create more -- or I think there are more opportunities for us in the year ahead, and we would intend to pursue those.

On the operations side, an opportunity for us to, as Mike highlighted, continue down our path of transitioning on to Asia. We talked about this in the January timeframe that we intend to source substantially more of our direct materials from Asia in the 2010 timeframe -- quite a dramatic shift. About 25% was sourced in the 2007 timeframe, and we expect to take it to more like 75% in the 2010 timeframe, and this period of time really does allow us to continue to drive through that with our supply chain, with some investments, and this is another one of those speedup activities during the slowdown.

On the investment side, it really is about making sure that the investments are aligned and focused on the areas where we see the growth. Some of those I'm going to highlight, too, today. But it also has created some opportunities to look at collaboration within the industry. We've expanded our activities with other companies to work with them to bring new capabilities to customers to focus on ways to substantially reduce the overall costs in the business, and it will create some opportunities, we believe, for M&A, and so we keep a close eye on all of those areas now.

As we talked about in January, the success criteria during this period of time was for SSG to outpace the wafer fabrication equipment industry in revenue growth by four points and to improve our operating margins for like levels of revenue also by four points, and the focus areas above certainly are consistent with that.

And what has really come to light is the opportunity to really further expand our collaboration across the industry and leverage that to really bring Applied Materials to our customers in a way where we can provide them more in -- more solutions, more support, and more capability as they work on their strategic objectives. So let me provide a little bit of perspective of some progress to date, and all of these are, I think, consistent with the things we've talked about and are really points along the way towards our goals in 2010.

So what you see here are revenue and profitability bars for the last ten quarters, going back to Q1 of '06, the green part of the bar being revenue, and the gold part of the bar being our operating profit. And what I wanted to do was contrast where we were ten quarters ago as compared to where we were last quarter to really highlight the kind of progress that we've made across the organization.

So when you look at Q1 of '06 and Q2 of '06, which were like levels of revenue within, I think, about $50 million or so for the quarter, you can see that the operating profit has gone up by eight points during that period of time. A lot of this has come from the benefits that we've got through the streamlining and just really the focus within SSG in the last year.

It also is reflective of the progress we've made in our manufacturing and cost as we have the -- really, the core culture of the manufacturing team is driven around quality cost and management of assets, cycle time and such. All of these [have] contributed to a substantially improved performance for those two very similar quarters.

I think the important thing on this is, and it's the nature of our industry, it's highly leveraged with revenue and volume. As we go into the next upturn, you should expect to see substantial gains in profitability, as I think we're well equipped for the customers and technologies we have. We just want to drive more revenue through this business, which will drive substantial growth and profits and also in our cash generation.

Just to highlight a couple of other areas that are in line with that focus on operating performance improvement, this idea of the globalization of the supply chain and leveraging lower cost regions in the world and also leveraging suppliers that have capabilities that are well aligned with our strategic objectives. Just in the last year we've been able to make over 1.5% improvement on our operating margin because of the gains that we've got through this transition that is underway to source more from Asia.

By the same token, or at the same time, we focused on reducing cycle time in manufacturing. This has a significant impact on plant, property, and equipment. The amount of assets that we need to generate a given level of revenue has changed dramatically over the last several years. In the last year we've continued down that path, and we've got strategies and plans for the next three years that will allow us to make substantial gains on that consistent with our operating margin improvement levels.

And then lastly, just making sure that we get our investments aligned and focused in the areas that are going to have the biggest impact for us. Some of this was, as Mike talked about, in terms of really kind of managing the portfolio of opportunities.

We seem to never lack for opportunities. It's just some opportunities are much more significant and have a bigger impact on us than others, and we've taken the time to make sure we get aligned with those, and then we've put -- as we kind of talked about in the January timeframe, make sure you get the wood behind the arrow in the areas where we can have the greatest impact. So I think we have demonstrated an ability to make progress on that, and we will only speed that up, if you will, during this particular period of time.

Mike talked about a groundbreaking that we had last week -- and a picture of five of the most expensive laborers you could imagine shoveling sand, which is probably all we could do. But it was the groundbreaking for our new Asia operations facility in Asia. This is in Singapore.

This is a clear example of investment in the future for the Silicon Systems Group and for our commitment to further improve our ability to deliver to customers. This will have an impact on cycle time. It will have an impact, I believe, on quality. It's going to have a very positive impact in terms of overall profitability, so a key activity for us.

One point to highlight on this is the nature of the facility there and really consistent with what, I think, Applied's awareness is about our carbon footprint in the world, our commitment to lower our carbon footprint over the next several years, and it is -- the facility there is a green mark platinum level building, and it will -- it's going to feature 350 kilowatt power installation of SunFab panels there.

It has a closed-loop containment on water and waste and a number of innovative features, Triple E glass on there. So it is an example, really, of Applied's applying the technologies that we're providing in many of the environmental areas and implementing them here in Singapore. So it should be a showcase for us from that standpoint, and it should -- and it will be an important center of our overall operating performance for the years ahead.

So let's talk now about top line, and what our strategies and plans are to move forward and grow revenue faster than the growth in WFE. And I'd like to do that in three areas that we talked about in January. And two of the areas of the greatest opportunity, and two areas that represent substantial challenge, were in metrology and inspection and in etch. Two huge markets where our market share is not as it is in some of the other market segments and a real opportunity for Applied Materials to grow revenue and really grow our ability to help customers in those areas.

So I'd like to go through those in a little bit of detail here. In April you heard an announcement for a product called Aera2. I think this is a -- it's a mask inspection tool for -- with very, very unique characteristics. This is a product that I think is a great example of what Applied Materials is capable of when we take substantial resources and capability, focus it on a market opportunity, and bring, really, a leapfrog level of technology -- a very innovative level of technology to solve problems, and in the end, really, this lowers overall costs for our customers.

And the idea around this is that if you look at masks and reticles today on the leading edge, they look less and less like the patterns that you're trying to put on the wafer. Back in the good old days, the mask looked pretty much like the pattern you wanted on the wafer, and you just simply exposed it through the steppers and the standards and all, and you got what you wanted.

But in today's world, as lithography is reaching, really, its limits, there's been more and more done with optical proximity corrections and really, lots of changes on the top of the mask. So when you look at it, it doesn't look anything like what you're going to get on the wafer, and that becomes very, very problematic, because they're small features and enhancements, and they need to be in absolutely the right location to result in an image on the wafer.

And what is really the breakthrough in our tool is that we're looking at the image that is going to be on the wafer. We're not inspecting the mask and imagining what it might be. We're not inspecting the mask and calculating what it will be. We are looking at what will be on the wafer, and it provides our customers a very fast and high confidence view of exactly what is going to be there.

We were talking about this last night. If you go back 20 years ago, in the display business there was a term called WYSISYG, right? It was what you see is what you get. Well, I think the analogous thing here would be WYSIWYP, which would be what you see is what you print, and this is a very unique thing to Applied Materials and a -- really, a breakthrough that has proven very successful for us and has built us a lot of momentum.

So, lithography, a very expensive part of the business for our customers. The faster that they are able to have high confidence that they are ready to go, that they are defect free in their printing, the better, and this tool provides them unique characteristics that way.

There's another dynamic that's going on here, and that is this was done in a mask fab in the past, where the mask and patterns were created. But now, by the nature of the complexity of it and all, these tools are moving into the wafer fab, and within the wafer fab they are inspecting to ensure that the mask hasn't degraded, because the masks have now reached a point where they're starting to have kind of a lifetime in the fab before they need to be recleaned and all.

So they're making sure that the mask hasn't degraded, that it hasn't changed, and that they understand fully what is going on with it. So more and more customers are moving this technology now into the wafer fab, which expands our market substantially. So it's very encouraging to see that go forward. We've made great progress with this product.

Each customer that has had a chance to look at the technology, look at the outcome of it, and then look at the roadmap of performance and characteristics that we'll bring forward over the next couple of years, has agreed that we've really brought an innovation and breakthrough to the industry. From our standpoint, the opportunities are for cumulative revenues in the $350 million range over this timeframe through 2010 and is -- this is a key component of our growth strategy in metrology and inspection.

The other areas that you're, I think, much more familiar with is in the areas of Brightfield inspection, and this is the UVision product that we introduced a couple of years ago. Back in December we introduced the next generation on this product, consistent with our product roadmap, the UVision 3. This brought higher speed inspection, higher productivity, while keeping all of the characteristics and attributes that UVision brought with utilizing laser technology and substantially higher sensitivity than anything that was on the market.

We continue to make great progress in establishing a strong position, strong foothold, if you will, in the Brightfield market segment. We -- focused in the memory space, and some of the more challenging lithography and inspection activities are there. And in this fiscal year, since the November timeframe, we've expanded our engagements with seven new customers, both in Logic as well as Foundry, in addition to the strength we've had on the memory side.

And the benefit of it is is that our shipments on the Brightfield tools are going to grow year-over-year. Now this is consistent with us strengthening our position in the markets, and is very encouraging that we've got the right roadmap on the product, the right level of applications capability, and really are gaining the respect of customers for what we can do in this critical area.

So if you look now at how all these combine together for us in metrology and inspection, and you look at the calendar years 2007 through 2010, you can see that even in calendar year 2008, the blue bar there, which is the rest of the portfolio products that we have in metrology and inspection, are off on a -- consistent with industry characteristics, but if you look at the contribution from Brightfield as it grows this year, and then also the contribution of Mask, what you see is is that actually on a calendar year basis, revenue is growing in metrology and inspection relative to 2007.

I wish I could say that for other parts of SSG, but I think it's very encouraging to see this in this critical area. And then you can see how we anticipate these two important market segments to contribute to the continued growth for the business through 2010. So, I'd say we're in -- on track, great progress with our Mask tool. Brightfield continues to strengthen its position with -- or we continue to strengthen our position in Brightfield with UVision, and are on track for our direction ahead.

So let me talk about the Etch business. 12 months ago, last year at SEMICON, I think we were very proud of our strong position in the Memory business. More than 80% to 85% of our revenues were coming out of that for the Mask business. We knew that we had a weaker position in Logic and Foundry and were working to grow in that area.

Clearly, the change in the memory market kind of dampened our enthusiasm for our strong position there and has, as we said, has caused us to look at this year as being a time when we are going to contract on a market share basis because of that.

A number of things certainly happened in this space, the changes on DRAM. We had made a -- made very good progress with a product for the metal etch, which was used for aluminum etch in Flash and DRAM. This slowdown is driving a transition on to copper faster, which creates a number of opportunities for us throughout SSG, but makes our market position in aluminum etch less strong and really, less important on a going forward basis.

And then, as you saw, there's been a change at Qimonda, as they've decided to make specific technology change away from trench capacitors to stacked capacitors, more consistent with the rest of the industry. This impacted business for us at Qimonda, but also at Inotera and at Nanya.

So areas where we've had some challenges and setbacks, but true to form, we've got a game plan of how to speed up on that here during this period of time, and we've been focused on, really, continuing down our path of positioning in Logic and Foundry, as well as creating some new opportunities in some important inflections that we see come -- coming forward in Etch overall, and this year is a time when we are keeping our investment on that and accelerating.

So let me talk about some important inflection points that we see coming that are going to have substantial markets with them over this timeframe that we're looking at and give you some insight about where we stand today on this with our products and what we're doing to position to grow in those spaces.

So in patterning, this is really what the industry and what the world is doing to try to augment the challenges that are developing in lithography. As I think most people in our industry are dealing with today, they're pushing lithography as hard as they can and are looking for techniques and opportunities to enhance it or augment it or extend it as much as possible. And lots of activities in this patterning area are developing and growing quite quickly, and I'll highlight one again in a minute.

On the contacts side of the equation, these contacts are long, thin holes, basically, that you -- that we etch down into the chips that end up being the points where you can connect electrically to different parts of the circuit.

The aspect ratios on these, that is, what is the height relative to the width of the hole, are remarkable. They're like 50 to one. I think a straw in your soda is about 40 to one, but the bigger challenge on this is is that's a -- it's done at [15] nanometers, and it's on its way to 30 nanometers. That's getting down to 30 angstroms or -- sorry, 300 angstroms, 300 atoms apart -- across -- very, very challenging.

It turns out that the enabler product and the follow-on generations in this product are uniquely well positioned in it, and it's a market segment that we see growing very strongly to something on the order of $800 million to $850 million in that 2010 timeframe.

Interconnect has got some interesting dynamics to it. It was very much a Logic driven part of the business and is transforming now as copper becomes more pervasive across the memory business, but it's a different kind of an interconnect challenge. It's not about ultra low-k films and some elements of that, nor is it about ten levels of interconnect. It's around more conventional dielectrics, but in many cases, very challenging feature sizes -- and just minimum feature sizes on that.

The other part of it, of course, is in the memory spaces it's all about cost and what can you do to build the most productive, cost effective, and technically capable product. And we believe we've got some interesting opportunities in that space. All three of these inflections will also outgrow the WFE growth rates as we see them over these three years.

So let me try to highlight a little bit of what we've got from a product standpoint and what is our positioning on that. So the first tool on the patterning side has been the AdvantEdge Etch tool. We are in the fifth generation of that, so we would call it a G5, and what we've been able to do is to make a three or four-fold factor improvement in overall CD control and performance in this tool over the last 18 months, and it has resulted in eight new development tool of record positions in memory in this fiscal year.

So the way that we track our progress is by first becoming the tool that the customer uses to do their development on a going forward basis, and that's where you win this development tool of record, or DTOR position. The volume on it then follows as you win a position in the production tool of record, or the PTOR position. So in the patterning space, great progress with the tool with customers that we've really never had an opportunity in this particular area before, we've been able to achieve that.

On the contact side of the equation, this is the enabler I mentioned a minute ago, and we've been able to move into three new DTOR positions this year, and importantly on this is also is that it's in the Logic space as well as in the memory space. So some progress in getting our positions moved into the Logic area.

And then the tool that we would target at this interconnect opportunity is the Producer Etch platform. This leverages all the proven productivity and platform performance of the -- that the Producer has shown in the CVD business and other parts of our business, and allows us to bring technology and capability there at a substantially lower overall cost of ownership, which is critical, as I said, in the memory interconnect space.

And we've had significant progress on this with wins that have converted into a PTOR position, as well as DTOR, just in this fiscal year. So a tough environment, but an opportunity for us to strengthen our position and really target those technology nodes that are moving into the 2009 and 2010 timeframe.

One thing I'd like to highlight is around this self aligned double patterning, which is something we talked about, actually a year ago at SEMICON. We highlighted the fact that in the course of 2007, leveraging the resources across Applied, the Maydan Technology Center, we were able to come up with an innovative capability that had some particularly strong performance characteristics with regards to CD control and line edge roughness that our customers care a great deal about.

Since the January timeframe, what we've done is really gone to work with our customers on a module level basis, if you will. This is a patterning module, and we've expanded our activities on this now and have five engagements with customers around this particular technology. And it's a great example of what a module approach can do, because we're solving a customer's problem of how did they get the patterns on the wafer, cost effectively, with the CD control and the pattern fidelity that they need in order to be successful.

And this is a multi-process step activity, including lithography as well as the films, as well as etch, and all the rest. And while it's really -- gives us a unique approach to customers, particularly in the etch space, where it might be more comfortable, or it might be more convenient, or it may be just more habitual for them to take their existing tool set and try to develop that next level of technology.

This really leapfrogs that, or circumvents that, and allows us to come with tools and capabilities that are very well characterized, particularly because of our capabilities in the Maydan Center and all and to bring that solution to them and help them move forward on their problems faster. So it's been a great benefit for us in Etch.

It's benefited us elsewhere in other products, but I think it's a great example of what Applied resources are capable of doing that uniquely positions us and helps us accelerate those strategic areas, such as Etch, in the growth and the market share that we're targeting for 2010.

So great opportunities there. We see this, by the way, moving beyond NAND Flash. There are possibilities now for this to be used in the Logic space, and all this is going to work towards lower total patterning costs, consistent with customers moving generation to generation along Moore's Law.

So let me try to give you a perspective of kind of today and tomorrow in terms of where we are positioned here. So across the top, 9X, 6X, 5X, those are the kind of technology nodes that are there, and we've got customers down the left side split between memory and the kind of Logic/Foundry space.

The blue box that you see here represents, more or less, kind of, our position today. It's a qualitative thing, but it -- I think it accurately reflects that in many cases we're kind of in a shared position there, kind of a yellow position. What's noticeable is in the Logic and Foundry space, the gap, if you will, we're in a transition from a couple of products going through there, and we really didn't get positions in the 5X space.

If you take these last three inflection points and the development tool of record positions and the things that I talked about there, and you look at, on a going forward basis, kind of the 2009/2010 timeframe, where we would expect to see the 5X node, the 4X node, and the 3X node go forward, it's a much more promising look at things ahead.

Now Customer F is still red, and we'll work on that, but the rest of it is certainly moving in the right direction. And these -- this focus at this point in time, in a year like 2008, is really what gives us a chance to color in some of those dots in a much more promising way on a going forward basis.

Our commitment to Etch remains very strong. Our investments have only accelerated there. The combined capabilities of the Company are going to be what allow us to position and move ahead on these coming nodes in the 2009/2010 timeframe. The third area that I wanted to cover here was really around the core products. There's a broad portfolio of products that Applied Materials has. In the timeframe that we have today, we really can't cover all of those.

By the way, you can see more of those out in the display out there, so take the time. If there's products that we haven't talked about that don't get covered in Q&A, you can catch up and refresh yourself on those in our display. But let me highlight a few areas in the core products and what is going on there.

In the CMP area we have continued to make substantial progress in productivity on these tools. This is a combination of enhancing the operating cost of it in terms of the consumable set, and at the same time, continuing to drive the total output of these tools, the throughput on it, the time to qualify. A number of innovations in terms of metrology and process monitoring have allowed us to substantially improve productivity on these tools.

And, in fact, many of these productivity enhancements have probably shrunk the [SAM] for the tool in the last few years, and now we are focused on what can we do to lower -- continue to lower total cost and have a pipeline of products and technologies that will ensure that we continue to lead in this space and that we continue to provide our customers the best process technologies, as well as the most productive platforms for their CMP needs.

In the CVD space it's, in fact, probably one of the most prolific parts of our business in terms of new applications and new products that are supporting the continued evolution of our customers down the technology nodes. Since 2005 the CVD group has introduced 12 new applications. Some of them have been substantial growth for us.

For example, APF, as well as HARP -- APF stands for the Advanced Patterning Films, and HARP is a fill process for very high aspect ratio features. A very prolific group. Substantial wins and growth in this space. And as you'll see at SEMICON West, still more products coming from the last few years, development activities that are strengthening our positioning, and growing applications for us, growing our SAM, particularly in these patterning films, such as APF.

And lastly, on the PVD side of the equation, a number of new applications. In fact, a new product is being introduced here at SEMICON, all targeted at the use of copper now in the memory space. And what I think is particularly encouraging and important is, in the last year, working with a number of different customers, we've now demonstrated the capability for PVD technology to extend down into the 3X node, and one of our largest Logic customers has given us the endorsement that it will extend into the 2X node.

So the technology, through great innovation, through a substantial IP portfolio, really a great example of, I think, the talent of the Applied technologists and engineering base has driven this technology ahead, probably ten generations further than people thought. I remember in 1997 people signaling the death of PVD with CVD, and yet we've been able to, generation after generation, move it ahead, and it looks like it's good to go through the next three or four nodes.

As I mentioned, there's a number of new products at -- that have been announced in the last week and are being highlighted here at SEMICON West. In the CVD space, three new areas, extensions on two of them. On the HARP product we have an eHARP, which is a further enhancement to fill, and applications in the STI space and PMD.

In the Producer APF area, another extension now on APFx. It turns out that the hard masking world that APF is used in has many, many different applications, and it's not a one size fits all area, and we've got a portfolio of films and applications that support that.

Another particularly cool product is the Snow product. Pardon the pun. The Snow product is really a very, very innovative technology, highly conformal, which many of our customers are searching for for dielectric film and done at very, very low temperatures with an extremely high quality oxide. There's a series of film that we can roadmap and deliver on this over time. I think this is going to become a very important technology platform for us as we go forward.

In the PVD space, as I mentioned, we've continued to focus on interconnect. We have a new capability that we're introducing here called Extensa, which brings a substantially lower cost diffusion barrier capability into the memory space, which we think will have substantial cost per layer for our memory customers, and already we have the tool qualified at a couple of customers.

On the etch space, we've announced the applications now on Producer for interconnect and the applications and the capabilities to move and compete more aggressively now in the memory space. And lastly, in the metrology space, as you know, over the years the SEM review and SEMVision product has been a strong product for us. We raised the bar further now with a G4 MAX product, which enhances substantially the material analysis and further compositional analysis that can go on while utilizing this tool.

So this is what you get for your R&D dollars. This is what we do to make sure that we're bringing performance characteristics and capabilities that our customers need and help them lower their overall costs and, I think, another strong showing from Applied Materials here at SEMICON West.

So to go back to kind of put it all together now about how do we grow those revenues through that 2010 timeframe. How do they all contribute? We look at it now and see in metrology and inspection a chance for us to take our position, kind of, from the 2007 timeframe and grow that by ten to 15 market share points.

In the etch side of the equation, the conversion of these development tool of record positions into production tool of record and volume orders in that 2009 timeframe would contribute somewhere in the five to ten percentage points.

And in the core markets we intend to continue to strengthen and expand our position there with the kind of innovations and the new product introductions as you see here at SEMICON West. Those combined will allow us to meet our goal of greater than 4%, and in some cases could allow us to substantially exceed that. So that's the focus. That's how we've got the R&D dollars aligned. Those, combined with our operational enhancements, should allow us to stay on track towards those goals for 2010.

So it's a difficult environment right now, but I feel like it really plays to the strengths and the assets of Applied Materials, and I feel very good about -- the last year, about our ability to get aligned, get focused, and really drive into this particular environment, really, better position than I think we would have been had we not gone through some of the transitions 12 months ago.

On the technology side of the equation, I think that our investments create opportunity. Our collaborations pull them together and make them real for our customers, and those will be the combination that's going to really fuel the growth for us going towards 2010.

And when we combine that with the progress we've made on an operational basis, I think that the dynamics and the factors are in place for us to see the growth and then see that growth really be delivered to the bottom line in a way that we haven't done in the past. So, very, very challenging period of time. A very exciting period of time. So while the industry slows down, we'll try to speed up a little bit.

So with that, I think I'd like to ask George and Mike to join me on the stage, and we'll take the Q&A from here.

GEORGE DAVIS: Thank you, Tom. So the key here is find one of our investor relations people with a microphone, get their attention, and then we'll ask questions. I think -- hopefully you've gotten a little bit of the tone that, even though this is a very difficult downturn for the semiconductor capital equipment business, there's a lot going on at Applied.

And even within the SSG group, early action has really allowed the team to enter the downturn really well positioned -- operationally and financially. They know where they want to go. And so, it's really a focus now on how do we get positioned in a way that is going to allow us to outgrow the industry. And then, I think, [Mike] covered some of the exciting things going on in other parts of the Company.

So with that, let me start with our first question.

Questions and Answers

GARY HSUEH, ANALYST, OPPENHEIMER & CO.: Thanks. Gary Hsueh, Oppenheimer.

GEORGE DAVIS: Hey, Gary.

GARY HSUEH: Question for Tom St. Dennis. Just impressive market share, kind of, goal there on the inspection metrology side. 10% to 15%, coming out of KLA, particularly in reticle inspection. Before we get too far ahead of ourselves, I was just wondering if you can kind of talk through what's different about the Aera2, UVision 3 products this time compared to, maybe, four or five years ago when, I guess, you guys were talking the same game?

TOM ST. DENNIS: Well, I think on the -- the early Aera activities were expected to unfold and really deploy this way. You know what has really changed, I think in both instances, and which are areas where we need to continue to grow, and it's in our applications capability.

Each of these products, particularly in mask inspection, there's lots of, not only die-to-die activities, but die-to-database, die-to-model, and each of these represents substantial expansions in your algorithms, but also in your organizational capability and all. What you find is you're really building your skill set as an organization, step by step.

It's -- there's no kind of step function change that is going to happen on this. You've got to learn from the leading edge customers on their problems, feed that back into your product requirements, build your organizational capability to service that, and that's really kind of how you get your momentum wheel going.

And I think that in mask inspection and in Brightfield, while we've talked about it for a few years, I think it's how challenging it is with a very capable competitor, but also the time it takes to build your capability as a business. And in both cases, we've established a much stronger capability today than we had two or three years ago, and we are focusing and driving our investments harder on that now than we had in the past.

So both -- and that really applies to etch also. It's very applications intensive. So you build your organizational capability while you build your product capability. Those two things together are how our customers evaluate us, and I think we've changed our profile substantially.

GEORGE DAVIS: Next?

STEPHEN CHIN, ANALYST, UBS: Hi. Good morning. Stephen Chin from UBS.

GEORGE DAVIS: Sure.

STEPHEN CHIN: Could you -- Tom, could you just elaborate a little bit more on the etch market share gain goal of 5% to 10%? You're very strong in the memory customer set. Does that goal include penetration at some of the Logic or Foundry customers as well?

TOM ST. DENNIS: You bet. Yes. The -- as I -- as it sort of shows on there qualitatively, we've got substantially more engagements now on the Logic side, whether it's in high-k/metal gate or if it's in contact, or if it's in some of the extreme low-k back end areas, we are much more strongly positioned today on that, and our development tool of records for some of the 32 nanometer processes coming out. So it includes growth there, as well as continuing our strong position in the memory space and expanding on that. Okay?

STEPHEN CHIN: Had a second question, if I could just sneak it in, on the operating margin goal. What are the other ingredients that you're trying to deliver on to get that 4% gain in operating margin before the direct materials? Maybe you can give us an update on the outsourcing of manufacturing.

TOM ST. DENNIS: Well, it's -- there's a material component in that, to be sure. There's also the change in some of the manufacturing models that we have in place, leveraging the contract manufacturing capability, leveraging our supply chain in a way that substantially impacts the cost there. We also expect to continue to get further improvements in our operating expense that's going to fall through to allow us to get that four percentage point growth.

GEORGE DAVIS: We -- I mean, we took a number of actions leading into this year on portfolio realignment, which had an impact as well, and obviously, announced in January, a cost reduction program, which will contribute as well. So it's a multi-pronged attack. I think what Singapore really represents is part of a long-term cost reduction roadmap, so we have structurally in place the ability to drive down costs over time. Okay?

WES TWIGG, ANALYST, PACIFIC CREST: Wes Twigg, Pacific Crest. Just wondering, given your goal to gain ten to 15 points, market share, in process -- or metrology and inspection and your recent momentum in Brightfield in radical inspection, would those markets provide enough growth to meet those goals, or would you maybe be looking to expand in new metrology markets, maybe through acquisition?

TOM ST. DENNIS: Well, I don't think we have any comment on the acquisition side, but we've got product portfolio that covers the defect review with SEMVision, also Darkfield, and the CD SEM part of the markets, as well as a pipeline of product technologies beyond what is announced. And so, we've got a roadmap of continuing to grow in the existing markets, as well as some further product introductions that would contribute to that. Okay?

GEORGE DAVIS: Jay?

JAY DEAHNA, ANALYST, JPMORGAN: Thanks. Jay Deahna from JPMorgan. Two questions on silicon and then a follow-up on solar, if I could. The first one --

GEORGE DAVIS: We'll give you one on silicon and one on solar. How's that?

JAY DEAHNA: Okay. That's fine. The first one on silicon is actually sort of relates to the overall Company as well, I believe, and that is in the last conference call and a couple of investor conferences, you called the October quarter as a turn with a fairly high degree of confidence from a booking, shipment, and revenue perspective. Wondering if you could give us an update on whether or not that is still the call.

And then the question on solar is Signet has demonstrated working panels. Just wondering if any of your other customers have demonstrated working panels, kind of where they stand on getting a tandem junction panel out the door, and whether or not solar in general can be profitable in the October quarter?

GEORGE DAVIS: Sure. So let me just talk a little bit about the industry, and when we came out, I think people were a little surprised, because we had a far more bearish outlook for the second half of the year than the many others in the industry, and I think, really, it's played out as we seen it, and Q3 for us looks like a bottom compared to Q4. But again, as Mike described it, it's -- we don't see a big uptick. We really just see kind of a modest -- if there's an uptick, it will be modest.

On the solar side, -- oh, go ahead. Yes. You use the term turn. I think it's more flattish than a turn -- the term turn might suggest. Okay? And let me have Mark Pinto here address your question on solar.

MARK PINTO, SVP, CHIEF TECHNOLOGY OFFICER, ENERGY AND ENVIRONMENTAL SOLUTIONS, APPLIED MATERIALS INC.: We can say that we have now panels out [on four customers], and I don't want to comment any further on specifics of technology, but four customers have working panels.

GEORGE DAVIS: Okay. We have a question. Okay. Over there, sir. Yes -- sorry, it's hard to see back there.

UNIDENTIFIED AUDIENCE MEMBER: Thanks. The question is on how quickly we think we can get the issues in the Display business kind of cleaned up. It almost feels like display today is a little bit like maybe DRAM last year. It's easy to see how DRAM with all the cuts, we could see much better trends in 2009, but there's already a little bit excess in display, and presumably, a lot of the orders that you've gotten there haven't shipped yet, so that would exacerbate the excess a little bit.

But -- so just to get the Company firing on all cylinders, now that DRAM seems to be kind of where it needs to be, and maybe NAND seems to be where it needs to be, how quickly can we get the display shipments down to where we need to be, so that we're not adding excess capacity, and AMAT can kind of fire on all cylinders outside of solar?

MIKE SPLINTER: Yes. I don't think we're seeing a slowdown in shipments or requests from customers to delay shipments in display. I do think that this 8.5 Generation will play out. If you look at the -- I don't think what's happening in display really is anything different than a big cycle.

We'll see the next cycle at Gen 10. We're already seeing some momentum there at Gen 10, but that's going to really start sometime next year. The next few quarters are going to be orders down, revenue up in display. I don't -- I think that's just the way that cycle goes.

UNIDENTIFIED AUDIENCE MEMBER: Sure.

GEORGE DAVIS: Yes, and I think that's pretty consistent with the way we've been talking about it. Also, I mean, there's a -- what we've seen in display is the very nature of the way customers order, the deposit structure, and the length of time, really, between the end market and where they have to put the capital in place. It's not quite as short-term.

UNIDENTIFIED AUDIENCE MEMBER: Am I thinking about it wrong, though, to say that, kind of, this time last year there was a little bit excess in DRAM, but your shipments were still going out, but you exacerbated the excess supply, and now the cuts have happened, and so we can set ourself for another cycle there?

And in display today, there's a little bit of excess supply, yet your shipments are going out, but you'll exacerbate that excess, and not until the shipments get cut can we really be in the same kind of good situation in display that we -- I think we're in right now in DRAM and NAND, as we head into next year?

GEORGE DAVIS: I guess I would -- I understand your -- the point that you're making, but I would reject the connection between what we saw in the DRAM markets and what we're seeing in the display markets.

UNIDENTIFIED AUDIENCE MEMBER: Thank you.

GEORGE DAVIS: All right, thanks. [Tim]?

UNIDENTIFIED AUDIENCE MEMBER: Hi. Thanks. Two things. Number one, there seems to be some changes relative to the biggest memory maker out there. How they spend money, they're maybe kind of reconsidering adding capacity in smaller increments and things like that. So the first question is, do you think that that's a secular change, or is it a cyclical change?

So are they just making that decision because it's the bottom of the cycle, and they're actually losing money? Or, is there some kind of secular issue there going forward that they're going to kind of change how they add capacity and act more like a foundry versus a memory company that adds supply in big, big increments, first of all?

And then, second question is on solar, George. What is the breakeven in solar? You said that right now you're doing about $200 million a quarter in the silicon side. So is the overall break even, say, $400 million to $450 million? Is that the right way to think about it? Thanks.

GEORGE DAVIS: Okay. Do you want to talk Samsung first?

MIKE SPLINTER: Well, it's hard to talk about a specific -- details about a specific customer, but you know there's been a management change there. We actually knew that was the case back in May. So, I think this management -- new management team is not so new to us. Some of the players are -- come back from other assignments.

I do think they're going to be a little more cautious in the short-term, but there's still huge capacity that has to be put on for NAND, and I think as it becomes clear how solid state drives will play out over the next couple years, we're going to significant capacity. I don't think we're going to see that key memory maker be timid in adding capacity when they need to -- or lose share to other makers. I don't think we're going to see that kind of thing happen.

GEORGE DAVIS: On a solar front, the way I would describe it, really, our view hasn't changed. We're shipping at around $200 million a quarter right now in crystalline silicon, but that's not revenued right now. And so, that's -- I think the combination of getting the two acquisitions fully integrated, and when you start to see the normalized flow through of revenue, we've already said that will help.

And then also we've said clearly in '09 we'll be breakeven and really better than breakeven, so let's watch another couple quarters. I think you'll see the flow through. We like the economics both in the basic structure of the deals that we're seeing, both in the crystalline silicon and in the thin film solar. So the -- we're on track for the 2010 outlook that we've had, which is 25% to 35% operating margins coming out of the solar business.

UNIDENTIFIED AUDIENCE MEMBER: (inaudible question-microphone inaccessible)

GEORGE DAVIS: We really -- I'm not going to guide to a specific revenue level right now.

UNIDENTIFIED AUDIENCE MEMBER: Maybe for Tom and Mike, in terms of the ambitious goals you're setting for the etch marketplace and the penetration with memory customers, how do you see the changing landscape in terms of the memory customer alliances that are starting to form and potentially the elimination of a few memory customers over the next several years?

TOM ST. DENNIS: Well, I think that the music is playing, and people are marching around the chairs. I don't know --

MIKE SPLINTER: Lucky we have three here.

GEORGE DAVIS: Yes, exactly.

TOM ST. DENNIS: Good point. So it's hard to make a call about which way that's going to go. We're engaged with all those customers and have been for many years, and that's just part of managing the business is making sure that you target the critical areas, and make sure you win the ones that are going to be -- they're going to be [height of] leverage for you going forward. So undoubtedly there will be some change in that. I think we're well positioned, regardless how that change unfolds.

CHRIS THUNKER, ANALYST, BANC OF AMERICA SECURITIES: [Chris Thunker] from Banc of America Securities. Two questions, one on solar. As we integrate Baccini and the other acquisitions are going to improve your profitability for [Applied]. Is there any reason not to think that looking out in 2010, assuming the industry continues to grow, that you could potentially exceed your [full] operating margin target [at Applied] to kind of get into the silicon operating margin territory?

GEORGE DAVIS: Well, I like your confidence, and we feel very good about the business. I think right now, given the maturity of the business and where we are, I think we're comfortable with our outlook for 2010, but I'm not ready to raise that outlook right now.

CHRIS THUNKER: Just a quick follow on question on the silicon side. When I look at the NAND Flash, besides Samsung, if I look at next year in terms of capacity additions, Toshiba who is the second big player, their current Fab is the top four. It's pretty much almost running at maybe, like [75%] capacity, and probably it will get filled out by end of the year or early 1Q, 2009.

And the next Fab is pretty much [congealed] for like 2010, early 2010. So there seems to be a pretty big [wad in your] spending in '09 versus '07 or '08. Is it right that we look at the [capacitization] of the NAND side, or am I missing something over there?

GEORGE DAVIS: Tom, you want to comment?

TOM ST. DENNIS: Yes, I think that -- so Toshiba is -- I don't think they're comfortable with their current kind of factory scheduling that way, are working to try to mitigate those things. I do think that there is still some room to run in Fab 4 -- in YokkaichiY4.

They have -- many times the way these things -- these goals go, they set kind of a published goal of what they're going to get done, and then they've got some very aggressive internal goals on it. So, I do think they've got some substantial capacity that they can drive into that facility, but they are working hard to get [line 5] -- Y5 or whatever, wherever it's going to go to move ahead quickly.

GEORGE DAVIS: I also think the solid state drive market, when it comes and when people decide that it's time to invest the position, you're going to see aggressive investment, so it's hard to look at these things ratably, because I think it will be -- there will be some very aggressive action, once people decide that the market is ready.

ARTHUR MURDOCK, ANALYST, MORGAN STANLEY: Hi. [Arthur Murdock], Morgan Stanley. First one for George. George, 2010, [setting a] $15 billion goal is not too far, but if I look in the two to five years out and look at the moving parts and dial in the cyclicality (inaudible) silicon business, it appears to me that 2008 could be the last year in the next two to five years where your revenues are down year-over-year basis, because the solar kind of gives you that visibility. Would you agree with that assessment?

GEORGE DAVIS: Yes, well, I find it --

MIKE SPLINTER: You want to say no?

GEORGE DAVIS: Yes, I'd say it's hard to say, because we are very highly cyclical. If we had a series of cycles moving the same directions, you could see a world where that might happen, but we have a very, very strong growing leg in solar that I think represents a lot of strength going forward. I think also AGS has shown not only that it is resilient [in that] our services business, but the breadth of markets that it's addressing is growing.

So all those factors are positive in my mind, and display will go through its cycles, but our positioning -- if you look at our positioning in display, not only do we continue to have very strong CVD position, but PiVot really opens up a very large new SAM, which should play out over the next couple years. So, I think there's a lot of factors that are positive for us, but I'm not going to call year by year yet.

ARTHUR MURDOCK: Yes, and then second one for Tom.

GEORGE DAVIS: Okay.

ARTHUR MURDOCK: There is a perception that Applied Materials could be losing its focus in silicon as it expands into solar, and there could be a talent drain from the silicon group into the solar group. What steps are you taking to prevent that talent drain and incentivizing people to stay focused on silicon?

TOM ST. DENNIS: Well, I don't know as it -- we're staying focused on the goals and objectives that Applied Materials has. One of the things that was, I think, unique about Applied's position to move into solar was the infrastructure and platform we had with the display products and the Gen 8.5 product, and the talent we have within the Company to be able to move rapidly to drive that opportunity.

We've continued a strong college recruiting program. We've continued to promote and advance people internally. In a lot of ways it's created opportunities for our people to grow, as there's been more things internally open up, something that a lot of the other companies, I think, in the silicon business have been struggling with. There hasn't been the internal growth opportunities for folks.

So we've got a good, deep talent pool. We're restocking it, if you will, with good technologists, and it's created opportunities for our people. In terms of focus, I'd be happy for you to meet some of the other staff members in SSG. We're focused.

GEORGE DAVIS: Yes. I'd add one other comment. I think that it's easier to bring the people to Applied Materials now than it's been at any time in certainly the last five years. People are excited about the Company's future.

TOM ST. DENNIS: Yes.

STEVE O'ROURKE, ANALYST, DEUTSCHE BANK: Yes. Steve O'Rourke from Deutsche Bank. Two questions. First, any change in the competitive picture or your market position in CMP? And two, with respect to the service business, are you seeing it evolve differently for your new businesses, like solar? That is, should we expect more out of service?

TOM ST. DENNIS: So on the CMP side of the equation, it's been competitive, and we've had some struggles on that. We lost a little bit of share last year there. We have, I think refreshed some of the product capabilities and gone more aggressively at that, and have a number of continuing product pipeline things that are going to ensure that we keep a strong position and grow that position.

GEORGE DAVIS: Manfred Kerschbaum, who runs our Services business, is here, and he'll address the services question, and then we'll have one more question.

MANFRED KERSCHBAUM, SVP, GM APPLIED GLOBAL SERVICES, APPLIED MATERIALS INC.: Yes, good question, Steve. Exciting answer here too because, of course, we have a different customer here, especially in the solar side, that is not -- typically has a history of running Fab, so they're very willing to outsource complete service turnkey packages.

And also, of course, kind of similar answer to what Tom gave earlier on the talent. We use a lot of our knowledge and our talent to enable worldwide, simultaneous deployment of those service packages. That, I think, brings Applied Materials in a very unique position there. So, yes, we are addressing those markets differently. They are far more turnkey packages than we have in silicon, but we don't give up on silicon either. We have a great momentum there also.

GEORGE DAVIS: Great. Last question, and then, just to point out, we will be up here if you want to come up and ask questions later, but we've got to wrap up for --. Oh, Robert, go ahead, and then we'll (inaudible) we'll catch you in the back next. So, two more questions.

ROBERT MAIRE, ANALYST, SEMICONDUCTOR ADVISORS: Yes, Robert Maire, Semiconductor Advisors. What's your view of 450 millimeter, given that the Big Three have put their weight behind it? One of your competitors yesterday said, just say no, they're not developing tools. Will you be developing tools and investing, and given that the last wafer [size] transition gave the industry a little bit of a haircut, including Applied, to some extent?

TOM ST. DENNIS: Well, I think it's a matter of timing, right, and that there's a time in the future where 450 will certainly have a role. We're not investing in it today, and we don't see that timing today, either on the customer demand or the customer benefit side of that equation. And so, I think that this has been a dialogue that is going on.

They certainly have thrown some weight behind it, but I think there's more clarity coming out and more insight to really what are the dynamics that are there. And, we think that there's a tremendous amount of productivity and capacity that can be realized with 300 millimeter today, and so, that's where we're focused.

MEHDI HOSSEINI, ANALYST, FRIEDMAN, BILLINGS, RAMSEY: Yes, Mehdi Hosseini from Friedman, Billings, Ramsey. Two quick questions on the solar. Of the four customers, you said, that are making panels, one has already been certified. Could you comment on the other three? When do you expect certification to be done? And then, regarding the very end customer, when would you expect the field data to come out that would support the kind of cost structures that you have been anticipating?

GEORGE DAVIS: Okay. Mark, do you want to comment on that? Mark Pinto?

MARK PINTO: So thus far there are no customers that have certified panels. They're just come off the line, so that's not physically possible yet. It will happen in the next few quarters as they ramp up the output.

In -- what was the other question you had?

MEHDI HOSSEINI: Yes, when is the -- no, well, actually, the field data that would support the kind of [levelized] cost?

MARK PINTO: Well, I think we already have the field data. I think if you see the video that we have of the demonstration of the installation procedure. I think a minute and a half to install the panels. Four or less people -- we think maybe down to two people for each 5.7 square meter panel that you see out there, and you'll see that video running. Takes a very simple machine on a truck, as long as you have a big enough installation where you can bring something like that in, and we've done the calculations.

You can do -- it's very simple to do. You can see the number of people. You can see the equipment that it takes. So it's -- we feel we're there and ready to go with that.

GEORGE DAVIS: All right. I want to thank everybody for coming and enjoy SEMICON, and again, have a great week.

[Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes.

In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.]