Applied Materials, Inc. (AMAT) Q1 2006 Earnings Report, Transcript and Summary

Good afternoon and thank you for standing by. Welcome to the Applied Materials First Quarter Fiscal Year 2006 Earnings Conference Call. During the presentation, all participants will be in a listen-only-mode, afterwards you will be invited to participate in the question and answer session. Please limit your questions to one per firm. As a reminder, this conference call is being recorded today February 15, 2006. I would now like to turn the conference over to Mr. Paul Bowman, Managing Director of Investor Relations, Applied Materials. Please go ahead, sir.

Thank you Katrina. Good afternoon everyone and welcome to Applied Materials First Quarter 2006 Earnings Conference Call. With me today are Mike Splinter, President and CEO, Nancy Handel, Senior Vice President and Chief Financial Officer and Joe Sweeney Senior Vice President, General Counsel & Corporate Secretary. Financial results for our first fiscal quarter were released on business wire shortly after 1:05 pm Pacific Time. For your convenience, a copy of the news release as well as the presentation that contains highlights of today’s call is currently available on the investor section of our website at www.appliedmaterials.com. Today’s earnings call contains forward-looking statements including those relating to Applied Materials financial performance, cash generation, cash deployment strategies, operational efficiency, margins, financial model, tax rate, technology leadership, strategic position, product momentum, growth opportunities, delivery of stockholder value and financial targets, also customer fab utilization trends, capital spending and investments in advance technology and services, end-user demand for flat panel displays and other electronic products and the global economic and industry outlook. Our forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Information concerning these risk factors that contained in today’s earnings press release and in the Company’s filings with the SEC, including its Form 10-K for fiscal 2005 and in it's most recent Forms 10-Q and 8-K. Forward-looking statements are based on information as of February 15, 2006 and the company assumes no obligations to update any such statements. Today’s call also contains non-GAAP financial measures, reconciliation of non-GAAP financial measures to GAAP financial measures are contained in our earnings press release issued today and in the document entitled earnings call highlight both of which are available on the Applied Material’s website. Today’s call will begin with an analysis of first quarter financial results by Nancy Handel followed by Mike Splinter, who will provide an update on the industry environment and applied strategic position. Following Mike’s comments, Nancy will provide the second quarter 2006 financial target. We’ll then open the call for questions. With that, I would like to turn the call over to Nancy. Nancy.

Thank you Paul, good afternoon everyone and thank you for joining us. Today, I will cover the results of the first fiscal quarter of 2006. As we ended 2006, business conditions strengthened and drove improved performance for our side, demand coupled with customer's need for our most advance solution resulted in higher orders and strong profitability. Our continued focus on improving overall efficiency is yielding financial success. Our employee's commitment to delivering technological innovations and value added services that enhance customer’s productivity is what makes us a leader in our industry. Highlights for the first quarter were strong order performance and an increase, an 8% increase in revenue, going through to gross margin at 56%. In addition, we continue to deliver leading, industry leading cash flow and returned value to our stockholders to increased efficiency. For the first fiscal quarter, orders of $2.04 billion surpassed our target and we’re 21% higher than the fourth quarter of 2005. Revenue for the first quarter was $1.86 billion, 8% higher than the last quarter and exceeded our targets. Operating income was $144 million or 8% of revenue compared to 21% for the fourth quarter of 2005. Net income was $143 million or $0.09 per share compared to $247 million or $0.16 per share for the fourth quarter. Results for the first fiscal quarter included asset impairment and restructuring charges of approximately $215 million or $0.08 per share and equity-based compensation expenses of $52 million or $0.02 per share. Of this $52 million, $9 million was reflected in gross margin and $43 million in operating expense. Excluding these charges, the Company wouldn't have reported net income of $312 million or $0.19 per share. Reported gross margin for the first quarter was 45.1% compared to 44.2% for the fourth quarter of 2005. Equity based compensation…

Thanks Nancy, good afternoon and I would like to add my welcome to all of you joining the call today. As you can see from our press release, we have an exciting start to 2006. We experience the significant increase in customer demand at year-end which is extended through the quarter and translated in the higher than expected order growth and strong financial performance for Applied Materials. This was the second quarter in a row of increasing revenue and bookings. As we predicted last quarter, Q1 service orders were up primarily due to annual renewals of service and parts contracts. However the upside to our revenue and order projections came from semiconductor systems, which will significantly during the quarter. We are seeing the momentum across our system product portfolio for both high volume production as well as leading-edge 65 and 45 nanometer chip development applications. We are gaining market share and are in good position to continue these gains. I am confident that our innovative technology solutions are driving Applied to outgrow and outperform the industry, with the opportunity to deliver strong financial results throughout 2006. Discussions with customers about the prospects for 2006 leave me feeling really quite optimistic. The basic building blocks for demand in our end market are in place. Global macro-economics are stable with a major role, the economy is growing at respectable rate while emerging markets like China and India continue to boom. Demand for semiconductors and semiconductor related technology continues to increase. Fueled by the continued ramp of broadband around the world, the pervasiveness of PCs and cell phones, with complex chip and display applications and new must have consumer products with increasing amounts of digital content. The worldwide popularity of consumer applications translates directly in the strong chip demand and the need for…

Thank you Mike. Our fiscal second quarter targets are as follows. Orders should be up approximately 15% to 20% from Q1 levels, revenues should be up 13% to 16% from Q1 levels. Earnings per share at $0.22 to $0.23 includes an estimated $0.02 per share for equity-based compensation. We expect strong customer demand for Flash, DRAM and Logic orders this quarter with service and parts below last quarter seasonally high contract renewals. And we expect flat panels to be at a lower level as customers absorb equipment delivery. With that I will turn the call over to Paul.

Thank you Nancy. We will now begin our question and answer session. We would like to entertain questions from as many callers as possible as such please limit your questions to one per firm. Katrina, please begin with the first question.

Thank you good afternoon, Mike two questions, if you look at your systems orders in the April quarter excluding flat panel and service, what’s kind of the apples-to-apples comparison on the order growth there, and do you expect something similar in the July quarter? That’s first question. And then second part is when your competitors seems to saying that there is an abnormal pricing environment in the industry but it looks like your margins are pretty normal compared to previous levels, also wondering if you could kind of expand on that a little bit? Thank you.

Sure, thanks Jay. First of all I think as we said during the call, flat panel orders will be down in Q2 you know kind of our historic pattern on service orders with Q4 being by far the largest, and so the strength is really in the systems, in semiconductor systems here, and that is – that’s what is driving the more than the entire growth of 15% to 20%. We’re really seeing the strength in many areas but if we look back to 2005, there was strong memory investment but our share there was low, we really worked hard to improve our share in memory area and we are starting to see some of our early results from that work, particularly in the CVD area with our APF films, or our HARP films as solid translation with isolation comes into flash memory. So we were really seeing strong, strong orders in semiconductor systems. As far as abnormal pricing if you look at our margin at similar revenue levels it’s between one and two points better than it had been in previous time. So, I don’t think there’s really any abnormal pricing situation here, our ASP are solid and it really technology drives, technology differentiation drives pricing.

Thank you.

Your next question comes from John Pitzer with Credit Suisse.

Satya Kumar for John Pitzer. When I look at your orders by geography, in January orders from Korea have increased substantially and just recently there is been some concern that flash memory tends to be highly seasonal and some chip companies are looking for front half load their CapEx, what kind of linearity are you seeing for the second half in terms of orders given the service seasonality and are you seeing that impact your business in terms of orders at this time?

Well, Kumar as you know we’re not really projecting the second half but my scenario for the second half kind of goes like this. I think that there is going to be continued investments in flash and DRAM in the second half but actually DRAM generally a stronger in the second half to catch up we see this becoming on hopefully before at the end of the year having an impact on DRAM. We see that there is going to be continued more and more products with increased density in flash. So, I don’t see this, the flash memory things going down. But, for us going into the second half we are quite hopeful that boundaries where we have very strong share are going to come back and invest at a higher levels than they are today and then of course our traditional service business and flat panel business were also be stronger in the second half.

Thanks, can you pick it off a real quick follow-up there. It looks like your margin scheme in better than expected and that’s been sort of trend that you guys are having, even all the efforts which you were doing for cycle down improvement and operational executions and the consolidation. Do you feel a potential that you could perhaps to address your target models in the near future, thanks. A – Nancy Handel: We are actually quite pleased with the margin improvement that we’ve seen in this quarter and this is a result of a continued assessment we have across many disciplines that we’ve discussed before with our cycle time reductions and our focus on material cost sourcing from lower cost regions and a lot of work in common platforms and part, so we got good initiatives underway that we expect to continue to deliver benefits to the company, and so as revenue levels increase we would expect our margins to increase as the gross margin level and we’ve reflected that in the model though as to buy and to increase.

Okay, thanks.

You know one thing I might add about the gross margins, in previous revenue, when we previous similar revenue levels our service percentage was much smaller than it is today in the mid 20s.

Next question Katrina.

Your next question comes from Edward White with Lehman Brothers. Q – Edward White: Hi, I was wondering, when you look at the foundries do you have any senses to, what’s driving and what sort of kept them, from investing more now and what the key factors are would be for them to invest in the second half of the year sort of, what they seem to be current year and what about the situation in China, how do you see the foundries there trending as we go through the year?

You know Ed, I think it’s difficult to make a general statement here because it’s almost different by everyone of the major foundry. So, I would encourage you to go ask, my compatriot CEOs in those companies. But when you look around from area-to-area part of it is just ramp on 90-nanometers and how high the utilization is there how fast they can move products off 130 down to 90 and to the advance nodes, I think that’s the biggest part of it. And, then to your question about China which is also largely a foundry question, we think that there will be, we’ll see some increase in China investment in Q2, we’ll see that growth continue in Q3 and Q4. We don’t expect it to be back to 2004 levels yet but it will be pretty good. Q – Edward White: Great, thank you.

Your next question comes from Timothy Arcuri with Citigroup.

Hi, actually I had two things. Number one, Mike can you give us some idea in the guidance about 15% to 20% sequentially, what you think the customer bucket breakdown might look like? So, memory logic foundry, thanks and then I have a follow-up, thanks.

We think that memory that’s flash and DRAM together will be about half the orders and then logic will be around 30 and then the remainder will be, foundries will be just slightly under 20.

Okay, great, and then I guess………

Hey, Tim, you know typically in the past foundries have been above, on average when you look at your historic above 30.

Right, of course, of course, thanks. Nancy, then can you actually breakout if you, it seem to me that if I go back it would seem that service towards flat panel; if you kind of add up both of those as a group that they are roughly 35% to 40% of the total orders. So, if you take those down pretty significantly in the April quarter, it would seem that if you isolate the semiconductor product orders that they are up something in excess of 30% sequentially as per the guidance, is that the right way to think about it?

It’s the right way to think about it we’ve – as we’ve talked before, I mean we don’t provide that product kind of level of detail but the business in the second quarter is going to be driven strongly by the systems area of investment. So your conclusions were headed the right direction.

Thanks.

Your next question comes from Jim Covello with Goldman Sachs. Q – James Covello: Good evening, thanks so much. Basically one quick question, two parts; on the for the – both the NAND flash and then for the foundries, is there a pricing expectation or bit growth expectation for NAND flash that you are using to base your CapEx estimate on. And then for the foundries, when you talk about improving foundry CapEx in the second half, is there a foundry utilization rate assumption that you are making to drive that CapEx expectation? Thank you.

We’re thinking that bit growth and flash is going to be in the 150% range. And for the foundry utilization, something approaching 90%. Q – James Covello: Okay so first on the NAND flash, is there a pricing assumption that you have along with the bit growth?

You mean a bit, price for bit? Q – James Covello: Well, I mean – the price decline here, there is a normal price decline per year that always happens in memory, is there an assumption you’re making there. No, what I’m trying to say is – is there an expectation on pricing that you think these guys give that and rise their CapEx or is there a price level of which you think some of the CapEx numbers would be at risk if the pricing falls off a little more than we expect. Then on the foundries, yeah, you answered the question on the utilization…

I got, the volume right now, I think is more key in the popularity of the end products. Certainly right now as long as they get more density for a stable price, I think that for the various consumer products we’ll absorb all the flash that’s available. So, in total volume you will be, in total with total volume and memory catches up with the demand. I think we’re going to see a fairly stable pricing environment, unlike last year where, pricing in DRAMs dropped in the half in the first six months of the year. We still saw good trend on investment, I think we are going to be in a fairly stable pricing environment which creates a very positive investment in our landscape. Q – James Covello: Terrific, thanks so much.

Thanks Jim.

Your next question comes from Patrick Ho with Stifel Nicolaus.

First a housekeeping question, can you give a breakdown of the stock options in the OpEx line what was it between like G&A and R&D?

No, we’re going to, we’re providing that at sort of an aggregate level in the OpEx line. It was about 83% of the charge went to the OpEx line and about 17% of the charge went to the margin.

And that – is that something that can be relatively consistent going forward?

I think you can for example, that’s pretty consistent, we would expect it to stay in that range.

Okay great. And then just my one question, in terms of lead times have you noticed any considerable changes in lead times over the past few months and looking ahead over the next few quarters?

No, I mean Nancy talked earlier about our integration of order program and a strong work from our operations team to reduce cycle time. So we’re pretty much right on where we expect to be it, varies little bit by machine type but lead times are holding.

Thank you.

Your next question comes from Mike O'Brien with Bear Stearns.

Yeah I just wanted to go over little bit into the etch – etch side of the equation. You are pretty low – well I think you are pretty low levels now, so it’s just conductor aspect you’re expecting to see is, surge in order through this very strong growth in orders of net, that really from a low base. And what’s going to be the differentiation to be able to get that business back and when do you think you can get back some dielectric business? Thanks.

Actually its both conductor and dielectric etch. And, we said that orders and of course we expect revenue to follow to be the highest as been since 2000. The market has grown certainly since 2000 so in those areas, so we’re novel, we want to be. But we think that in both of those areas we have differentiation, we think that our enabler has really excellent dielectric etch characteristics for etching not only the difficult films like the hard mask films. But for etching, our Black Diamond II films and block we are optimizing that between our product groups it in fact can give us significant differentiation there. And then in our conductor and metal etch area, we believe that our match up of our stripping and etching technology provide the best productivity in yielding the industry.

These – the orders increases in business last year that you are gaining back or these already customs or you’re – is going to just ordering again?

Some of those.

Did you buy asset one way or the other?

Pardon me.

Did you buy asset one way or the other? I am just trying to understand if you are…

Mostly customers have reorders; certainly that’s the largest percentage of it.

Okay, thank you.

You bet.

Your next question comes from Robert Maire with Needham.

Let me give numbers by the way, if I look at the memory market there is been some pressure taken off at DRAM market by migration of capacity over to flash and we heard one of your sub-suppliers talk about tracking five 300 millimeter projects out of Taiwan and such. Do you expect that to continue or would we expect going forward that rather than migrating DRAM facilities over to flash production that will just focus on building new NAND flash capacity or how do you see the, I guess the balance of power between, between those two shaping up?

The biggest supplier is going to have the most flexibility, I think is the first name of the game probably number, number two is more focused strictly on flash, number three is got flexibility. And number four will be focused strictly on flash, so it’s kind of, kind of different by companies. So I think that the DRAM guys will have big flash investments are going to keep their flexibility as high as they possibly can and move to where the market is, it only sense.

And are you tracking a similar number of fabs or how many fabs do you think, are there being dealt for flash and to a DRAM.

Is the question before the end of the year?

For which equipment is being ordered in 06.

I don’t have a number like that. All the projects totaled that we track are, we are tracking over 50 projects around the world but those are all DRAM, flash, that’s the total, total number. I don’t have a good number for you.

And those are primarily 300 millimeter?

Yeah, you know 85% of our business is 300 all those 53 are 300 millimeter.

It just one thing relating to that in terms of the follow-up of 200 it seems 8-inch is kind of filled in there do you expect that to fall off to a lower number by the end of the year or some of the older calendar is going to keep that number up?

You know, I don’t really know its kind of been in this 10% to 15% range for a while eventually its going to fall off, I don’t know where its going to be, by the end of the year or not. If there is strong capacity pull this year, I don’t think it’s going to fall off because there is still space and a number of that foundries particularly in China where they can fill up a little capacity and the second tier foundries are still at 200 millimeters. So they could they could easily be, 10% or 15% of the business.

Great, thank you.

Your next question comes from Garyshueh with CIBC World Market.

Hi guys, can you hear me?

Yeah go ahead Gary.

Okay just a couple of questions to you, can you actually kind of walk us through what integration of order means for you? Now let in terms of kind of reducing cycle times but is there any impacted gross margin?

No the integrate order process Gary, is one that allows us to basically divide our manufacturing process in to lower level of sub units and so our sub marginal that can be put together in a more what I call generic form and then integrated with product customizations coming in later in the manufacturing process, it allows us to do a better inventory management. It allows us to bring the movement of the product to the factory for in a more efficient manner and we believe that through the cycle time improvement it gives, that allows us to get some margin improvement. So it’s a comprehensive strategy for really improving the cycle on the manufacturing.

So Nancy, I think that’s middle kind of optimistic about gross margin then as far as that are made integration order?

We are seeing benefit in the manufacturing in the gross margin area currently and so we expect to continue to reach those benefits as we go forward and bring more products through that. But I would say that it’s reflected in the margin model that we’ve already put in place.

Okay, one last question kind of larger reaching question here Mike. Annex in Taiwan and things are straightening up pretty well for DRAM in 2007. I am just wondering specific with DRAM can you kind of walk us through some products that will be kind of gain or increase you already started exposure in DRAM even stronger in ’07.

Sure, you know what we are doing in DRAM is pretty a kind of what we’re doing in flash we think that all of our CVD products was – first of all for shallow trench isolation. And then we are seeing the DRAM guys starting to adopt strain films for DRAM as well evidently improves the performance of the sale and as they move to more advanced lithography CMP starts to come in both for oxide and for those that are moving those had moved to copper of course get a whole new array of our products from PVD ECP to CMP. So we are seeing that happening as well and few of the DRAM manufactures.

Great thank you.

Your next question comes from Tim Schulze Melander with Morgan Stanley.

Hi, congratulations on a very strong set of numbers back. Two quick things just may be some modeling first, is the first you will see, seeing very strong FPD orders, Nancy could you just present a stand when you expect these reflect in to revenue. And then secondly, just following on the question on the flash memory order strength, Mike as you look at those projects where you won those bookings, can you just share with us when you would expect are that equipment to ship and when you would expect it to actually become productive, is it still going to be in ’06 or is it really that going to be an output of flash memory in ’07? Thank you.

I’ll comment on that panel business that, cycles are longer in the panel business, they tends to run on maybe outwards of 9 months where the product. As we have so many new generations of technology in the field that, it runs a little bit longer in the cycle time. So, for the new products out there it takes about three quarters.

Great. That would be the orders you just got in January would basically be sneaking in kind of the October-November timeframe?

Right, that’s the kind of timeframe associated with turning those into the revenues.

Great, thanks.

Mike.

On the Flash memory point, we already see our revenue going up in Q2, primarily because – more than primarily because of semiconductor systems. So, we should see some capacity that come online in the second half of the year, but most of these orders and the orders that we're going to give in the next quarter will really end-up being capacity in 2007.

Terrific, thanks very much.

Unit sales in 2007.

Your next question comes from Raj Seth with SG Cowen.

Hi thanks for taking the question. Mike, one of the features of this market over the last couple of years has been more incremental capacity additions. I am curious, if you think this is now a permanent feature of this market or do you think with more positive backdrop that you outlined that there is a willingness to make larger forward investment here.

Well, I think the foundation is incremental capacity investments. And we could see, if you look back 2005, the drop-off in 2005 ended up being at a higher level than back in 2003. So, that foundation is incremental capacity addition. I think, we are starting to see some companies really willing to make big investments, but it’s generally the big 5, the top 5 customers in the industry.

Yeah, are you seeing now as you – I think have in previous cycles, a real broadening of participation or is it so pretty much the usual suspects that are driving the business?

No, actually it’s getting quite broad, it really is. As, when you look up and down, the top 25 or 30 semiconductor companies are starting to see them, much more interested in investing at this point. And in part that’s why we think we are still in the early phases of the cycle, because people are just starting to think this through and getting and starting to make some investments, some of the big guys are making big investments, little guys are making little investments but in the end it gets down to products and technology that we are offering for all the semiconductor companies.

Thanks.

Your next question comes from Stephen Chin with UBS.

Great thank you, hi Mike. In terms of the orders by geography, I guess, I was little surprised to see that bookings from Japan were down sequentially. I guess, the question is, why we think that was and what was your expectation be in terms of the orders by geography next quarter?

Yeah, Japan is kind of been in the low over the last two quarters after having a very strong 2005. And we think in the next quarter, they are going to rebound substantially.

Okay, and if I could sneak a second one in, it sounded like, Mike you are implying in one of your assets that some of the gross margin improvement was due to the services division. Can you give us an idea, how material of an impact that had this quarter and is this improvement sustainable?

No, that was not my point. My point was that we are showing higher gross margin with an increase – with the service being – service business being a larger portion of our overall business. As we’ve said in the past, our service gross margin is substantially lower than our equipment gross margin that’s why we’ve been trying to focus everybody on operating margin and result. But my point was that, we are showing gross margin improvement even though our low margin – lower margin service business is a bigger part of the overall business.

Okay thank you.

Your next question comes from Brett Hodess with Merrill Lynch.

Questions, first if the foundry business picks up given you historically high share there and what not, does that have a favorable impact relative to some of the other segments on margins or is it, there was really no difference in profitability as you see the dip at market?

I am not sure, I really understand your question, Brett.

Are the foundry customers’ better margin customers since you typically had very high share there? A – Nancy Handel: I think that, the gross margin that we get across all of our customers is in similar areas, its not –look at it as a customer specific kind of discussion.

Okay, and then secondly on the operating expenses, it looks like about 2/3rds of the growth was, stock compensation sequentially sold it. The absolute level grew very little and the quarter level if you will grew very well, can we continue to see very slow growth in the core SG&A and R&D levels? A – Nancy Handel: Well, I think, if you look at the aggregate what I said in my prepared remarks was that our operating expenses, if you look at, if you take out the stock-based compensation, we are now ,I think, it was $27 million.

Right.

That was primarily in the area of variable comp. So, if you look at it associated with that level of expense, we’re going to work very diligently to hold expenses in that area. Now we have a few things coming in and out, we announced our real estate restructuring and we get some savings associated with our buildings and that we announced our building, restructuring we announced. We also have investment going on in our, as we’ve mentioned previously, our enterprise transition to MY SAP. So we’ve got some flows in and out in the OpEx line but it might go up slightly but we generally try to hold it in this range.

Thank you.

Your next question comes from Steven Pelayo with Soleil Securities.

Great, Nancy, when I turn to apples-to-apples in the fourth quarter ’05, fiscal 4Q, the October quarters you have options impact in there. And so when I have the 50 bits more to your gross margin line if you exclude the options in your January just reported quarter. What kind of incremental gross margins about 62% drop there? And so now, I am going to focus on GAAP going forward, apples-to-apples here. Do you think that kind of incremental drop though was still possible here especially the mix shift for the semi side on the gross margin line. If so that, as you approaching maybe 47% gross margins at the mid point of your revenue guidance next quarter?

I think your math is pretty good, I mean we certainly expect to be able to improve our gross margins as our revenue increases. And we’ve gotten some very good efficiencies here that were passing through in terms of drop through, go through from the incremental revenue. So, your math is pretty good.

Okay, great, thank you.

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

Thanks for taking my call. Two questions, if wafer fab equipment is up 15% to 20% in ’06, how much Applied revenue grow. And secondly can you give us an update on your ion implant business, particularly high current there is a fair amount of weather that is out there about market share shifts?

Sure, we think that we will grow substantially faster than the WFE market and we’ll grow faster than the WFE market because we are expanding our stand and expanding our share. I’m not going to give you a specific number there but I think you can figure it out from what we’ve already said but we think that projection will continue to grow throughout the year. Our ion implant business has been relatively flat and so that’s about as exciting as it is. And well this transition, we only have a high current business by, we are or we are not participating in any other segment of the implant business at the current time. That’s the transition from single wafer to or from patch to single wafer. We haven’t really gain share in this transition which is not exactly where we want to be.

Next question operator.

Your next question comes from William Lu with Piper Jaffray.

Yeah, hi thank you. I’ve got a clarification in the question. Early in the call, I think even Michael and Nancy said the flat panels reach a new water mark at later on this year. Is that a high water mark on a quarterly basis or is that high water mark in terms of 2006 or 2005?

Bill, that will be on a quarterly basis, what we are – what I said – what we said was orders will be down to for the next two quarters and then start to pick up in the second half of the year. I think that’s pretty consistent with overall industry and what the price surge is saying these days. And then by our fourth quarter, we should have a record quarter.

So, what’s the overall outlook in for flat panel type of spending year-over-year?

We are pretty much in line with display search and they are saying just kind of 0% to 10%.

Okay, great and then just a question, I seem to be hearing more and more stuff about how there is a need for better manufacturing in the silicon arena. Is that something you guys like you give into. Can you just talk about – more about that if you do, what are the concessions that you might receive?

We don’t have really anything to say about that at this time.

Okay, thank you.

Your next question comes from Shekhar Pramanick with Moors & Cabot.

Hi good afternoon, question for Mike. You kind of talked about etch management changes, is it a new higher. And the second, recently you had a pretty high profile wind say like processor guy, you were existing there, but you are doing non-critical etch now, suddenly you are doing all critical etches. And what’s really changed in the dielectric etch that precipitated that And then I have one more another question.

Well, Tom St. Dennis came in joined us a few months back, 4 or 5 months back now. He is a really been revamping the organization there and still in some new purpose to momentum. And the difference that the customer that you are talking about was ,we, our technical performance was outstanding and been able to perform the various critical etches, so that’s – it was just technical differentiation.

On to adding another key etch aggregative or how added in most recent times?

Yes, we’ve added several people, I am not discussing any other – any other people besides Tom.

All right, my other question was on flat panel, we have been waiting for some much bigger products such as DVD and etches for some time. But we haven’t heard it yet, is it still a kind of a developmental stage or should we be seeing it more in the near future?

When we are ready to announce a product it will be ready for high volume production. So, I think you should take that as my commitment both to the industry that when we are going to introduce the product, its really going to be ready to ramp and be ready to serve the needs of the customers to drive cost down and technology improvement.

Katrina, we’ve got time for one more question and then we’ll make our closing remarks. So, if you could take the last question please?

Your next question comes from Stuart Muter with RBC Capital Markets.

Yeah thanks for taking my question. And question for Mike on the UVision product, earlier in your prepared remarks, you said that, you have shipped the parts for about a dozen or so customers, have you received multi-system orders from some of these customers?

Yes we have, I am sorry I didn’t mention that during my remarks, I must have forgot but yes we've received multiple orders and we were -- we’ve taken revenue from number of machines already and we are on target for our year-end goals. To give you an idea for our target for the year, we’ve surpassed 15% of our target for the year in the first quarter. So, with this machine ramping during the year, we are pretty confident we are going to get there.

Thank you.

Well, we would like to thank everyone for listening to our first quarter 2006 earnings announcement. Webcast of this call is available on our website and will remain posted there until March 1st. Applied Materials will hold its annual meeting of stockholders on Wednesday, March 22, 2006 starting at 11 am Pacific Time at Applied Materials Building One, located at, 3050 Bowers Avenue, Santa Clara, California. Our live webcast of the meeting will be available on our website and will remain posted there through April 5th. For further information regarding the annual meeting please refer to the proxy statement which will be mailed to stockholders, is posted on our website on or about February 21st. As a remainder, if you would like to receive our fiscal 2006 filings electronically you can sign up on our website. Thank you for your interest in Applied Materials and this concludes our call.

This concludes today’s conference call you may now disconnect.