應用材料 (AMAT) 2009 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Welcome to the Applied Materials fiscal 2009 second quarter conference call.

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

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

  • As a reminder, this conference is being recorded today, May 12th, 2009.

  • Please note that today's call will contain forward-looking statements, which are all statements other than those of historical fact including statements regarding the economic and industry outlooks as well as Applied's performance, operating efficiencies, cost reductions, products, strategy [of] position, R&D, and future guidance.

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

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

  • Forward-looking statements are based on information as of May 12th, 2009 and the company assumes no obligation to update such statements.

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

  • Reconciliations of the non-GAAP measures to GAAP measures are contained in today's earnings release or in our financial highlights slide, which are on the Investor page of our website at www.appliedmaterials.com.

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

  • Please go ahead, sir.

  • - VP of IR

  • Thank you, Kara, and good afternoon and welcome to our call, everyone.

  • Joining me today are Mike Splinter, our Chairman and CEO; George Davis, our Chief Financial Officer; and Joe Sweeney, our General Counsel and Corporate Secretary.

  • Today we will discuss the results for our second quarter of fiscal 2009, which ended on April 26.

  • Our earnings release was issued at 1:05 Pacific time today and you can find a copy of it on Business Wire and on our website at appliedmaterials.com.

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

  • George will follow with a discussion of our financial performance for the second quarter and our expectations for the third quarter.

  • After these remarks from Mike and George, we'll open the call for questions, and with that I'd like to turn the call over to Mike Splinter.

  • - Chairman & CEO

  • Thanks, Mike.

  • And thanks to everyone for joining us on the call this afternoon.

  • As we anticipated in February, weak demand drove revenue to the lowest levels we've seen since 2002.

  • We focused on the goals we outlined for you last quarter and were able to preserve our balance sheet, make significant investments in our future, and deliver clear progress on the cost reduction goals we committed to last November.

  • The global macroeconomic environment is weak, although the US economy is showing signs that its rate of decline may be slowing.

  • The market in China is responding to stimulus, driving demand for mobile handsets and infrastructure as well as personal computers and TVs.

  • As a result, factory utilization is rising in semiconductor and display and customer confidence is growing.

  • DRAM prices have increased about 30% since the beginning of the year, largely driven by a 15% to 20% bit output reduction.

  • Still, the economy remains a challenge, and a meaningful improvement in the equipment sector depends on a sustainable recovery in our customers' end markets that can keep factories full and encourage new capital investments.

  • In the meantime, we're making substantial investments in our technology and expanding our core markets, growing our position in solar energy, and deepening our customer relationships.

  • We are also driving new business processes and operating efficiencies to serve us well now and in the eventual recovery.

  • Our employees are engaged in delivering on these objectives across the company, and I appreciate their efforts and the results they're producing.

  • Now I'd like to give you some insights into each of our business segments.

  • In silicon, end market demand appears to be rising off the bottom, but it's still at very low levels.

  • In logic, our customers report shrinking inventory levels and stronger order flows.

  • Foundry utilization is moving higher from levels below 50% in calendar Q1 to a projected level of nearly 70% by the end of Q2.

  • And memory prices have strengthened since the beginning of the year, though they are still too low to generate profits for most customers.

  • We now expect wafer fab equipment spending to be between $8 billion and $11 billion in calendar 2009, and reaching the upper end of that range, would require a sustained pickup in the second half.

  • Our leading edge customers are driving the order book as the focus is on technology buys designed to move capacity to the next node.

  • In Taiwan, we anticipate investments by companies who are adopting static DRAM technology, giving us gains in Epi, DPN, etch, and PVD.

  • Many customers are working hard to get positioned to invest in the next generation, but their timetable is still unclear, and the few capacity purchases we're seeing are happening on a short lead time basis.

  • The semiconductor outlook today is for improved business in our third fiscal quarter, bearing in mind that visibility into Q4 is still limited.

  • Technology transitions in semiconductors are creating opportunities for Applied's technology solutions.

  • As logic moves to the 32-nanometers, we're expanding the market for our selected Epi and metal gauge systems for advanced transistors.

  • As DRAM and NAND transitions to copper interconnects, they're growing in PVD liner barrier applications.

  • And as customers adopt immersion lithography, we're gaining share in mask inspection, bright field inspection, and advanced patterning films.

  • and as customers adopt a.

  • In ATS, while our spares business has been tracking with low factory utilization, our services business has been more resilient.

  • With recovery and customer utilization rates, we are now seeing our spares business improve and are fielding a higher number of requests for 200 millimeter technology upgrades.

  • We're pleased to have Applied service agreements in place at all of the SunFab solar lines now in production.

  • In display, while the global TV market is expected to be flat this year, LCD TV demand is forecast to grow by over 10% to comprise 55% of the 2009 market.

  • Low TV prices are driving demand and utilization rates higher, but our customers are still working to regain profitability.

  • We maintain our view that display capital spending will be down by more than 50% in 2009, with our revenue expected to bottom in Q3.

  • We do anticipate an [order] recovery in Gen 8.5 before the end of the year, with a broader recovery arriving in 2010.

  • We already have a number of Gen 10 systems in the startup mode as well.

  • Turning to solar, the capping of subsidies in Spain was the inflection point in the market.

  • This, coupled with the economic and credit situation, is clearly weighing on the industry's momentum.

  • Polysilicon contract pricing was lower this period, averaging $60 to $70 per kilogram, while module prices dropped, but to a lesser degree.

  • Overall, PV equipment spending is likely to be greater than $3 billion in 2009 and down 50%, while module installations are expected to fall by less than 20% this year.

  • In crystalline silicon, our business held up well in this environment.

  • To increase panel efficiency, a number of our customers are adding process steps that are resulting in new opportunities for our Baccini cell systems.

  • We also see demand for equipment that can lower production cost, and we launched the MaxEdge Wire Saw which enables material cost savings of up to $0.18 per watt beyond those gained from lower polysilicon prices.

  • In thin film solar, we passed a number of important SunFab milestones.

  • Green Energy Technology was our fourth customer to sign off on a SunFab and the first in Taiwan.

  • Their factory ramp was also our fastest to date.

  • Sunfilm of Germany became our fifth customer to achieve signup and the first SunFab utilizing our tandem junction technology, which boost conversion efficiency by about 30% over single junction.

  • Looking back over the past six months, we signed off five factories in four countries, bringing a new level of scale to solar.

  • Total SunFab capacity has reached 200 megawatts and our customers have produced more than 0.25 million panels.

  • We have demonstrated module efficiency beyond 9% in the lab, and we're on track to have 10% efficiency in production in 2010 with production costs under $1 per watt.

  • We are making substantial R&D investments to drive our progress in thin film well beyond these targets and to broaden our crystalline silicon portfolio as well.

  • Looking ahead, we have a number of active SunFab opportunities that we plan to turn into contracts in upcoming months.

  • In the US policy arena, we're working on a variety of measures including a progressive national renewable electricity standard with a dedicated carve-out for distributed generation that benefits solar.

  • We see this policy as key to growing the renewable energy market.

  • To summarize, Applied is focused on our long-term success and opportunities, investing in our semiconductor display and PV segments to strengthen our number one position in each.

  • We're managing well in a tough environment, preserving our financial strength, and generating new operating efficiencies.

  • And while we're encouraged by some positive signs in demand and factory utilization, the economic outlook remains weak and visibility is limited.

  • Now I'll pass the call over to George Davis, who will discuss our financial results and expectations.

  • George?

  • - CFO

  • Thank you, Mike, and good afternoon to everyone.

  • On our last call, we said Q2 would be a tough quarter and that we would be intently focused on managing our cash and our cost structure.

  • It was a tough quarter as revenue fell 24% to just over $1 billion and orders declined to $649 million, reflecting a level of demand the company has not experienced for more than a decade.

  • It was also a period of excellent cash flow performance, with cash from operations well above our cash flow breakeven model.

  • We have taken the challenge to preserve our cash position and balance sheet strength while maintaining a high level of investment in products and technology.

  • Consistent with that challenge, we remain on track to exceed our cost reduction targets across the Company.

  • For the quarter, our GAAP loss was $255 million or $0.19 per share.

  • Our non-GAAP loss was $136 million or $0.10 per share.

  • In our GAAP results, the company took pretax charges totaling $166 million in response to the weak industry environment.

  • These charges impacted our earnings by $0.09 per share, and included equity investment impairments of $77 million related to our holdings in Sokudo and other strategic investments, inventory write-downs of $47 million across our business in response to lower demand, restructuring and asset impairment charges of $27 million associated with our cost reduction plan, and bad debt provisions of $15 million due to the further impact of customer solvency issues.

  • The Company's reported gross margin for the quarter was 15%, which was down 14 points versus Q1 due to lower revenue, mix effects, factory underabsorption and inventory write-downs.

  • Revenue and mix effects accounted for 11 points of the reduction, as low margin SunFab revenue increased while higher margin SSG revenue decreased.

  • Operating expenses versus Q1 were down 24% on a GAAP basis, and down 9% or $36 million on an ongoing basis.

  • Ongoing operating expenses down 18% or $86 million relative to Q4 2008.

  • These reductions reflect the impact of our $400 million cost reduction program as well as ongoing short-term cost reductions through shutdowns, pay cuts, and reductions in variable pay.

  • These short-term initiatives are additive to our cost reduction program.

  • We will exceed our $400 million target by at least $60 million or 15% based on actions identified to date and expect that amount to be fully reflected in our Q4 run rate.

  • Approximately two-thirds of the cost reductions will be in operating expenses.

  • We continue to explore ways to improve our operating excellence.

  • As of the end of Q2, we have reduced our headcount by 1,600 regular full-time employees and over 300 temporary employees versus Q4 2008.

  • Current actions will result in total reductions of approximately 2,300 employees by fiscal year end.

  • The company generated $84 million in cash from operations or 8% of revenue.

  • Free cash flow was 3% of revenue, with our capital spending remaining at low levels.

  • Our cash and investments balance of $3.1 billion is essentially unchanged from Q1.

  • Our operating cash flow breakeven objective is targeted at $1 billion in quarterly revenue once our cost reduction program is fully implemented.

  • In Q2, we operated ahead of this objective, thanks to extraordinary efforts on working capital management by our employees.

  • Our backlog ended the quarter at $3.2 billion.

  • Backlog adjustments totaled $527 million, and included $202 million in cancellations and financial debookings of $307 million.

  • The cancellations were mostly attributable to SSG customers.

  • Debookings reflect orders that have not been cancelled, but are expected to be realized outside of our 12 month bookings window.

  • Over half of the debookings were in our services segment due to lower fab utilization rates, with the balance coming from silicon and display.

  • At quarter end, the EES segment represented 37% of our backlog, silicon was 23%, services was 22%, and display was 18%.

  • Within EES, thin film makes up slightly more than half of the backlog, with crystalline silicon accounting for slightly less than half and the balance from glass and web.

  • Now I will review our segment results.

  • Silicon Systems orders of $259 million were slightly above Q1 levels, increasing 5% but coming off a low base.

  • SSG order composition was foundries, 34%; logic and other, 32%; and DRAM and flash at 17% each.

  • SSG revenue of $260 million was down over 50% from Q1, roughly in line with our expectations.

  • Approximately 60% of that revenue came from three customers who are advancing their plants to move to new technology nodes.

  • SSG reported an operating loss of $96 million or 37% of sales.

  • Adjusting for the impact of inventory charges, SSG's gross margin would have been just under 38%, reflecting our strong variable cost model for manufacturing operations.

  • In AGS, orders declined 24% from Q1, in line with low fab utilization levels and customer cost control initiatives.

  • Q2 revenue was down 7% versus last quarter, and operating profit was just below breakeven.

  • Revenues continue to be impacted by low demand for refurbished equipment and systems upgrades that add to capacity.

  • The spares run rate showed improvement in the second half of Q2 and we expect to see revenue trend upwards for AGS in Q3.

  • Display orders fell to $13 million in Q2, a clear bottom as utilization rates are now improving and customers are increasing their focus on the second round of Gen 8.5 orders.

  • Revenue declined to $84 million, a 44% reduction from Q1.

  • Our display group has managed its variable operating model extremely well, and as a result, operating profits were just above breakeven for the quarter.

  • At EES, orders were $141 million, a decrease of 56% from Q1 due to lower SunFab and crystalline silicon solar orders.

  • EES revenue was up 22% from Q1.

  • Revenue was higher than expected due to an additional signoff at one of our SunFab lines and receipt of our first performance bonus from one of the factories in production.

  • EES operating profit declined to negative 26% of revenue, reflecting the impact of negative SunFab margins, inventory write-downs, and mergers and acquisitions charges carried in that segment.

  • SunFab profitability will improve on subsequent lines as we shorten startup cycle times and performance bonuses are earned on certain of the SunFab factories that have already passed final acceptance tests.

  • Now, moving on to our outlook for Q3.

  • The macroeconomic environment impacting our customers remains difficult and uncertain.

  • We see low levels of revenues, with spending concentrated in a few customers.

  • In this environment, a change in just one customer's plans can lead to large impacts on our performance against forecast.

  • As a result, our guidance for fiscal Q3 will reflect a broad range.

  • First, I will highlight our expectations for the segments before providing our company targets.

  • For SSG, we expect revenue to be flat to up 40%, with one or two customers driving the variability.

  • For services, we expect that a gradual pickup in spares run rates will increase revenue by more than 5%.

  • For display, fiscal Q3 revenue should drop by approximately 50% from Q2, marking the bottom for fiscal 2009.

  • For EES, reductions in the number of SunFab signoffs and a continued slowing in crystalline silicon equipment should cause revenue to decline by at least 30%.

  • Combining these segment expectations, we expect overall revenue for the company in Q3 to be in the range of flat to down 15%.

  • We expect a loss per share in the range of $0.06 to $0.14 depending on revenue and mix.

  • While we are not making a specific forecast for orders, we currently expect Q3 to be higher, primarily due to increases in orders in SSG and AGS.

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

  • - VP of IR

  • Thanks, George.

  • And to help us reach as many of you as we can, please ask just one question, and no more than one follow-up.

  • Kara, let's please begin with the first question.

  • Operator

  • (Operator Instructions).

  • Your first question comes from the line of Brett Hodess with Banc of America.

  • - Analyst

  • Good afternoon.

  • I'm wondering if you can go into a little bit more detail on the very broad range in the silicon area.

  • Obviously it's only one or two customers, but are those customers' plans still really in high flux at this point?

  • And what would cause them to be on the positive side or the negative side of that, from your standpoint at this stage?

  • - Chairman & CEO

  • Well, Brett, I think this is a very dynamic environment, so as George characterized, one or two customers could make all the difference in the world.

  • And the shift in the end market over the next couple months could cause customers not to take shipments or to cancel orders.

  • Those things can happen very dynamically in this environment.

  • You could remember back just a couple of quarters when orders started to go down with the realization of the global economic crisis.

  • They can go up that fast as well.

  • But I just think it's very dynamic right now.

  • - CFO

  • Brett, I also think that we're seeing an increase in the amount of turns business in the quarter, and so the uncertainty that is associated with that is higher than we might see in more normal times.

  • And the other piece is we're just starting from such a low base that when you see a wide range like that, part of it is just where we're starting from.

  • - Analyst

  • Thank you.

  • - Chairman & CEO

  • Thanks, Brett.

  • - VP of IR

  • Kara, next question, please?

  • Operator

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

  • - Analyst

  • Great.

  • Thank you so much for taking the question.

  • I guess the question I would have is relative to the memory segment in the back half of this year, what do you thinks the benchmarks are going to be for your customers to start to add some additional capacity?

  • Is it a certain profitability level?

  • Is it a certain price?

  • What do you think about that?

  • Tying in with that, which I think is the same question -- what about the issue of latent capacity in the memory segment that everyone is worried about trumping the robust price increases that we're seeing?

  • Thank you so much.

  • - Chairman & CEO

  • Jim, I think the real thing that's going to push capacity in the second half of the year is adoption of DDR3.

  • At least that's going to be one of the major factors.

  • Those products have to be on leading edge or near leading edge capacity.

  • And most of what we might think of as latent capacity -- there's been a lot of capacity taken offline that's not coming back on 200 millimeter.

  • But to the degree that there is latent capacity, most of it's on older generation technologies, and I don't think can produce at the right cost or really the right level of technology.

  • So -- but I think the fundamental for memory guys is, is demand really going to pick up?

  • Is there going to be strength in PCs and cell phone demand?

  • I think that's really what's going to drive them.

  • - Analyst

  • Thank you so much.

  • - VP of IR

  • Thanks, Jim.

  • Operator

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

  • - Analyst

  • Hey, great.

  • Thanks.

  • Hi, Mike.

  • Hi, George.

  • A question on the solar business.

  • I didn't hear you talk about any upgrades for tandem solar equipment now that you have your first signoff.

  • You didn't call our solar as potentially seeing order growth.

  • So what is your outlook for orders for upgrades to the tandem equipment now that you have your first signoff.

  • - Chairman & CEO

  • Well, I'll -- what I would say about that is every single junction customer would be considering tandem junction upgrade, and I think that just depends on the individual timing for each of them and how their factory is running, the degree of success they're having in the marketplace.

  • But clearly, eventually all those factories have to move to tandem junction and we're not making a specific forecast by factory.

  • So I don't know what you want to add to that, George.

  • - CFO

  • No, I think that's right.

  • And we are expecting to continue to see customers sign off factories for the remainder of the year.

  • We're very pleased with the overall momentum that we're seeing there and the year is 2009 for us is really playing out pretty much as we saw it when we started booking at the end of last year.

  • So we're very pleased with the overall performance.

  • Obviously as we said, 2009 was going to be our year to absorb the learning curve and we're certainly going through that, but we're pleased with what we're seeing otherwise.

  • - VP of IR

  • Any follow-up or are you good?

  • Kara, can we take our next question.

  • Operator

  • Next question comes from the line of Satya Kumar with Credit Suisse.

  • - Analyst

  • Hi, thanks.

  • What was the magnitude of the inventory write-downs and M&A charges in the EES group.

  • And the follow-up on that, given the learnings that you've had with lowering the startup times in some fabs, what is now the clean breakeven target for the EES division?

  • - CFO

  • The EES inventory impact was about 60% of the overall inventory write-down and it related to some excess inventory with OEM suppliers.

  • In terms of the bad debt, that was not -- there was no bad debt impact on EES in the quarter.

  • In terms of breakeven, we haven't guided to a new breakeven level.

  • Obviously, we expect thin film to improve substantially from these levels.

  • We'll start to see that, quite frankly, in the latter half of this year.

  • And crystalline silicon is already effectively operating breakeven or higher, depending on the individual quarter, once you pull out the M&A charges.

  • - VP of IR

  • Thanks, Satya.

  • Operator

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

  • - Analyst

  • Hi, couple things.

  • First of all, what sort of pipeline do you have left in terms of thin film orders?

  • By my numbers, it seems like you've recognized roughly $750 million worth of SunFab orders, so it seems like maybe you have $100 million to $200 million more left in that pipeline.

  • So that's the first question.

  • And then the second question is, if the financing environment doesn't get better for your customers in the solar business, what contingency plans do you have to basically keep that business growing if your customers can't get money?

  • Thanks.

  • - CFO

  • Maybe I can jump in first and come at it from maybe a slightly different angle than you did.

  • But to date, we have shipped nine full factories and we have five that are signed off.

  • We have five lines that are in the process of being shipped or will be shipped.

  • And so if you look across the -- and to date we've had one signoff in fiscal year 2008.

  • We've had four more signoffs in 2009.

  • My expectation is we'll probably have at least three signoffs, I think three's a good estimate -- three additional signoffs before the end of this fiscal year.

  • When you think about from a revenue perspective -- and we have about 25% of the expected revenue from these fully secured projects has been revenue through Q2.

  • So we've got a substantial amount of additional activity.

  • Not only in terms of factories to sign off, but bonus performance opportunities on our existing factories.

  • So there's no question that obviously we would like to see the pipeline grow from where it is today, but I think the reasons for that pulling back and the financing market situation are well understood.

  • - Chairman & CEO

  • Are you done?

  • - CFO

  • Yes.

  • - Chairman & CEO

  • I would just add two things, Tim.

  • For us, I think the two big things we need to do is continue to drive the performance of SunFab up and continue on the pretty dramatic learning curve we've been experiencing over the last six months.

  • And then the other thing is to work downstream to help increase the market size and the market opportunity.

  • And whether that's working with utilities or the government to set the right policies, those things are absolutely critical to expand the market.

  • - Analyst

  • I guess, Mike, I was just wondering whether you would throw money at your customers and you would self-finance any deals?

  • Thanks.

  • - CFO

  • No.

  • We've said all along that we view that customers should be able to secure their own financing, if they have the right end market strategy.

  • And we don't believe that we add anything by playing the role of a bank.

  • - VP of IR

  • Thanks, Tim.

  • Kara, back to you.

  • Operator

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

  • - Analyst

  • Hi, thanks for taking my question.

  • Good job on cash generation.

  • George, assuming that you hit the high end of the revenue guidance flat and given what you said about Q3 orders from SSG and AGS could be higher, is it fair to assume that your revenues will be higher in Q3, given your backlog mix?

  • - CFO

  • As we said, we thought revenues would be flat to down for the quarter.

  • Let me make sure I understand.

  • Are there specific revenues you're interested in?

  • Obviously SSG we believe will be up and AGS we believe to be up, but overall, because of the falloff in display and then the absence of as many SunFab signoffs will be down in the other segments.

  • - Analyst

  • What I meant to say was the quarter after July, will your revenues be higher given your order mix in the July quarter?

  • - CFO

  • Oh, Q4.

  • Well, we're not going to guide to Q4, but it's a positive trend, for sure.

  • - Analyst

  • Sure.

  • And just a quick follow-up.

  • It's pretty clear that your solar technology is viable, given the customers have paid you the revenue.

  • The question on economics, when do you think the company will be able to come up with some endorsement by system installers and [main degraders] that have bought these panels from your customers and endorsed your map on $1 per watt and the balance [of system cost].

  • Are we looking in the next two to six months or is it longer?

  • - Chairman & CEO

  • Well, hopefully it's not any longer than that.

  • You know, these are still the early days of the panels getting out into the fields, so we have to -- and today, most of the panels are quarter size panels that are moving out into the field.

  • So this is going to take a little bit of time to really get the volume out there, the reliability data and the trust going.

  • But we're working hard in that area.

  • - VP of IR

  • Thanks, Atif.

  • Operator

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

  • - Analyst

  • Thank you.

  • Good afternoon.

  • There was some pretty significant cancellations, debookings this quarter.

  • How well scrubbed is backlog and how much risk is there to backlog looking forward by business?

  • - CFO

  • I think you've seen over the last two quarters a lot of backlog adjustments.

  • We had fairly significant in crystalline silicon in the first quarter.

  • And we've seen in the cancellation side really the effects of certain semiconductor customers just changing their plans based on a change in their strategy.

  • So that led to a cancellation.

  • The debookings were really -- for the first time, we've seen debookings in our services area of any material size.

  • And that makes up about half of it and it really reflects what we've seen over the last two quarters in terms of a big drop in run rate of the factories, our customers' factories.

  • We expect, quite frankly, that there will be some recovery there over the next two quarters.

  • But even as you can see with the order outlook, people are still cautious on the services side, and I think that's just potential upside over the next two quarters.

  • - Analyst

  • And if I could ask one follow-up.

  • In your prepared remarks you gave a range for wafer fab equipment and said the high end of that range would require a sustained pickup in the second half of the year.

  • Do you have a building sense of confidence that that can happen?

  • - Chairman & CEO

  • Well, I think as George said, there are some positive trends, But, boy, it's pretty tough to be over-confident in this environment where economies are still very, very weak.

  • We've certainly seen some pickup in China.

  • Will that be sustained over the summer?

  • I think it's very hard to tell at this point.

  • So are we happy that utilization is up and customers are gaining some confidence?

  • Yes.

  • But all the buys so far are technology buys.

  • I think we would have to see a little bit of capacity buy before the end of the year to get to a number like $11 billion.

  • - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of CJ Muse with Barclays Capital.

  • - Analyst

  • Good afternoon.

  • Thank you for taking my question.

  • One question to clarify.

  • What were the M&A charges for EES and when do those run off?

  • And then my primary question is in terms of your EPS guide, what range should we assume for gross margin tax rate and losses, if any, for the JV?

  • Any help on those three fronts would be very helpful, particularly given the higher tax rate and the benefit there in the last quarter.

  • - CFO

  • CJ, let me -- that was a very, very good job of asking four questions, but I'll go through them pretty quickly here.

  • First off, on EES M&A charges they're running about $20 million a quarter, again, about $15 million of that in cost of sales.

  • That will continue to decrease over the next couple of years as it is lower this year than last year.

  • In terms of our EPS guidance, again, as we've said, we're going to have a better mix outlook so that will be favorable to gross margin.

  • So you could see we had -- depending on where revenue comes out with the mix, we said it cost us 11 points last quarter.

  • So something between where we were today and 11 points is probably possible just on revenue and mix.

  • In terms of the tax rate, I would just hold it constant at this point.

  • There's -- in this environment, predictability is a little bit challenging.

  • All right?

  • - Analyst

  • Thank you.

  • - VP of IR

  • Thanks.

  • Operator

  • Your next question comes from the line of Chris Blansett with JPMorgan.

  • - Analyst

  • Thanks for taking my question.

  • It was really to the solar side of the business, and you have a large number of crystalline silicon customers.

  • Wasn't sure if you could give us an update on their utilization rates and what you think their ability to raise capital is at this time?

  • - Chairman & CEO

  • Well, I'm not sure I can give you a very detailed update.

  • The big -- I think what we see so far is a lot of the little companies around the world and China in particular have begun failing just because they can't sell their product.

  • But the bigger companies are still able to finance and still able to add capacity.

  • We gave you an estimate that revenue -- or that spending, capital spending would be down about 50% year-over-year.

  • But the big players can still get money and still finance their capacity.

  • - Analyst

  • I guess the second question -- you related to the technology buys in the semiconductor industry.

  • You indicated in the upfront statements that some of your solar customers are buying equipment in the same bent as a technology purchase.

  • Could you give a little more detail on that and what it is giving them at this time?

  • - Chairman & CEO

  • You can relate yield in semiconductors with efficiency in solar.

  • There's very, very high motivation always to improve the yield in semiconductors.

  • There's equally as high motivation to improve efficiency in solar.

  • Of course, all of those things have to net out to be cost reductions in the end product.

  • But there is lots of interest in different kinds of capability, lowering the resistance of metal lines, improving contact capability on solar.

  • These things that do help with the overall efficiency of the cells are very much in demand because it can improve existing capacity as well as make new capacity more salable.

  • - VP of IR

  • Thank you, Chris.

  • Operator

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

  • - Analyst

  • Thanks a lot.

  • First question, in terms of the memory marketplace, with the Taiwan sector consolidated, finally I guess sorting itself out, how does that impact you guys as we look to the next upturn in terms of capacity buys?

  • - Chairman & CEO

  • Well, okay, so there's been the two camps -- very different technologies.

  • And obviously the one that I alluded to in my prepared remarks of converting the stacked cell.

  • I think we feel like we do very well in that segment and should gain in a number of different places including Epi and DPN and PVD and etch as I outlined.

  • In the other segment, there's no real convergence, so things -- market shares are static.

  • But as we get back to capacity buys, it will be a net positive for us.

  • - Analyst

  • Okay.

  • Great.

  • And a follow-up question, in terms of the solar ramp especially in the SunFab side of things, when do you believe the learning curve costs -- when will that end, and when revenues do pick up it will flow to the bottom line?

  • When do you see that type of model hitting for the SunFab business?

  • - CFO

  • Patrick, we said that we thought that would -- that we needed to get through 2009 and my view really hasn't changed on that.

  • Certainly by the end of our fiscal year, we'll see stronger profitability on the lines being signed off.

  • We certainly see very attractive profitability on the bonuses as they're signed off.

  • So we're very close to that time period.

  • - VP of IR

  • Thanks, Patrick.

  • Operator

  • Your next question comes from the line of Gary Hsueh with Oppenheimer and Company.

  • - Analyst

  • Hi, this is Wenge for Gary.

  • In terms of solar business, could you provide a breakdown in terms of orders and revenues between crystalline and thin film business?

  • - CFO

  • We haven't been giving out the specifics in that regard.

  • I can tell you that if you look at the order run rates, again, we had a -- the bulk of our orders for this year were in Q1 for thin film.

  • We've had constant -- we've had what I would call a steady state order booked for crystalline silicon really throughout the year.

  • So you can see a lot of the volatility in the order rate for EES is really the order book for thin film.

  • - Analyst

  • Okay.

  • Just a quick follow-up.

  • With the recent silicon orders from foundries and memory, could you give a quick comment on your progress in gaining market share in the silicon space?

  • - Chairman & CEO

  • I think I just gave you a bit of that in the DRAM space but also in the DRAM space -- as most of the manufacturers move to copper, we will gain in PVD.

  • We're also gaining in contact etch and some damascene etches that multiple DRAM guys in Asia.

  • In logic, it's really going to be focused around high K and also around better lithography -- immersion lithography inspection, both mask inspection and in-fab inspection.

  • We think we're going to see progress in all those areas.

  • - VP of IR

  • Thanks.

  • Operator

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

  • - Analyst

  • Thanks for taking my question.

  • I want to go back to your earlier comment talking about production cuts of your thin film modules coming down to less that $1.

  • Can you please help me understand what minimum capacity would that require and would you be more flexible with your customers in terms of material or component supply?

  • - Chairman & CEO

  • Okay.

  • So that quota, 10% and $1 is meant to be essentially a one line number.

  • We feel that if we have a multiple line factory, we would actually do better than that, so that's -- in a tandem junction, something approaching 80 megawatts, single line performance.

  • So I think that pretty much takes care of that question.

  • On flexibility, does this mean an open standard mix and match equipment on the line?

  • Is that what you're asking?

  • - Analyst

  • Yes, more flexibility in terms of helping your customers to reduce costs at a faster rate as crystalline or other thin film technology prices continue to come down.

  • - Chairman & CEO

  • Well, I don't know that those two are mutually exclusive.

  • We're working really hard and really fast and putting every dollar of our R&D in thin film to help drive down the overall cost per module.

  • So if anybody in the SunFab market has good ideas to help reduce cost, of course we're open to that.

  • We want to promote the learning to be as fast as possible.

  • So all of the SunFab customers have engineers, have people that are working on cost reduction and --

  • - Analyst

  • Still have to be certified by Applied Materials, right?

  • Those vendors?

  • - Chairman & CEO

  • Well, certainly before FAT they do.

  • We have to ensure that we can deliver what we promised, of course.

  • - Analyst

  • Okay.

  • - VP of IR

  • Thanks.

  • Operator

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

  • - Analyst

  • Thanks for taking my question.

  • My first question is on display side.

  • Mike, you said that you expect a broader recovery in 2010.

  • Do you anticipate customers start coming back with orders in the calendar second half of this year or do you think it's more like middle of 2010?

  • How do we look at that?

  • - Chairman & CEO

  • Well, we think the orders progress will start in the second half of 2010 because we just believe that LCD TVs continue to take share in the overall TV market.

  • And as the economy improves and the TV market grows a bit, I think capacity will be strained.

  • So as soon as that happens, we're going to see orders and we think those capacity orders will be for Gen 8.5 initially.

  • And then in 2010, we think we'll see the progression moving to Gen 10.

  • - Analyst

  • Let me just clarify.

  • That was second half of 2009 or 2010?

  • - Chairman & CEO

  • Second half of 2009.

  • I'm sorry.

  • I said 2010, thinking ahead, I guess.

  • - Analyst

  • Great.

  • And then my follow-up question is on crystalline silicon solar wafer business.

  • Recently there was some talk about some of your competitors winning business in China.

  • I was just wondering if you can talk about your competitive position in your Baccini line and also in your wafer solar line.

  • How do you guys view that and do you see increased competition in those areas?

  • - Chairman & CEO

  • I'm not sure I caught the end of the question.

  • On Baccini, and then you said something else.

  • - CFO

  • And on the wafer side.

  • - Chairman & CEO

  • And on the wafering side.

  • I think we're very pleased with where Baccini is in the performance of the products and next generation road map that we have for those products and the progress they're making in China.

  • In the wafering systems, I think it's a little bit more challenging.

  • Our share isn't as high there.

  • So the competition between us and the prime competitor is more on a case by case basis, who has the most value.

  • But I like where we're going.

  • As I said, we just introduced our new product this quarter and it really drives cost down, so we think we're going to make a lot of progress with this product.

  • - VP of IR

  • Okay.

  • Thanks, Edwin.

  • - Analyst

  • Great, thanks.

  • Operator

  • Your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

  • - Analyst

  • Thank you.

  • Want to get some clarification on the orders.

  • Maybe some color on what we are looking into for the July quarter.

  • First on the services, the orders are down 60% year-over-year.

  • The way I'm looking at your revenues are still running at like 100% plus per month.

  • Was it that February was unusually low and you are back up to 100% plus run rate in terms of orders for the services?

  • - CFO

  • I'm not sure I can tie out to the numbers you just used.

  • I can tie out to the year-over-year numbers.

  • I think the order rate that we saw in Q2 is reflective of caution.

  • And quite frankly we think there's upside to that going forward in the second half of the year as we see sustained increases in utilization rates from the very low levels that we're coming off of.

  • So I think it may be a better conversation to take a look at service orders after this coming quarter, and I think that they'll be -- as the outlook on the end of the year is there, customers will have more confidence in their utilization rates and their spares requirements.

  • - VP of IR

  • Did you have a follow-up?

  • - Analyst

  • Yes.

  • Just quickly on the -- again, on the order rates for silicon system group, your wafer fab equipment expectation of $8 billion to $11 billion.

  • For last two quarters, you were running at $1 billion a year rate, and if you take your market share at 20%.

  • So that's $5 billion run rate.

  • So are you looking at couple of hundred percent change in the orders in the second half or the next quarter to get you the $8 billion even?

  • - Chairman & CEO

  • Okay.

  • So off of this low base that we had in Q2, you could have almost any number, whether the number is -- you look at crazy numbers at this point.

  • Our orders from foundry were up like 700% this quarter.

  • But when you're talking from such low bases, it almost doesn't make any sense.

  • I think the fundamental here is that as we said, to get to $11 billion, you've got to have some sustained growth.

  • And we're really -- that $11 billion is in the calendar year, not in our fiscal year.

  • So you can add a couple of months onto the end of that.

  • But you've got to see a sustained growth quarter-over-quarter through the end of the year.

  • - VP of IR

  • Thanks, Mahesh.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from the line of Daniel Berenbaum with Auriga USA.

  • - Analyst

  • Hi, this is [Jay Liu] for Dan.

  • Could you give us update on your strategies for the solar business, especially what cost per watt requirements do you get from customers?

  • How are you going to meet them?

  • Then I'm going to have a follow-up.

  • - Chairman & CEO

  • I assume you're talking about the thin film solar business?

  • - Analyst

  • Yes.

  • - Chairman & CEO

  • Sure.

  • So the idea is to both -- to attack on all fronts, of course, but to improve productivity, glass sheets per hour and to drive efficiency to 10% and beyond.

  • And then to look at every material and component that makes up the cost per watt and continually try to reduce that over the next 12 months.

  • But certainly we have to be in that range of product out to -- for contracts to sign in the next year or so.

  • - Analyst

  • Okay.

  • Are there any commitments to customers if you don't meet their requirements on SunFab solar lines?

  • Are there any penalties if you don't meet the specs?

  • - CFO

  • I'll take that question.

  • The contracts have performance requirements that -- all the contracts have some minimum performance requirements and it's -- and in many cases it has a performance type matrix so that we share in the upside with the customer.

  • And we actually, as I said earlier, we got our first payment under such a performance bonus in Q2.

  • So yes, there are minimum requirements.

  • We're clearly getting the signoffs when we said we would, which means we're meeting those minimum requirements.

  • We're confident that we'll continue to be able to do that and actually we expect to exceed those minimum requirements and perform against the bonus potential on a number of these facilities.

  • - VP of IR

  • Thanks for your questions.

  • - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Raj Seth with Cowen and Company.

  • - Analyst

  • Thanks.

  • Question for you, Mike, on memory.

  • If I assume that there wasn't a lot of slack capacity in memory and I know that's probably not realistic short-term, I'm curious if there's a level of bit growth that would require aggregate capacity to be added in the context of pending shrinks.

  • I guess I'm coming from a perspective that shrinks buy you some unit growth and some bit growth.

  • I'm curious if you could provide a little perspective on what that might be.

  • - Chairman & CEO

  • Sure.

  • I think there's two things at work here.

  • One is the conversion to DDR3 and then there's just the market growth.

  • So I think the conversion of capacity to the next generation node will largely be taken up in moving to DDR3.

  • And then the bit growth has to -- we think has to be greater than 30% or so, in the closer to 40% to 45% level to really drive new capacity.

  • - Analyst

  • Thanks.

  • That's helpful.

  • And one other one for George.

  • George, can you talk a little bit about your R&D priorities?

  • I'm sure you can't get too specific, but perhaps within SSG, where you're focused?

  • And solar versus silicon, can you talk a little bit about where your priorities are, short-term?

  • - CFO

  • Raj, the priorities are really independent of each of the segments.

  • We take a look at the opportunities in each area and then go after them from that perspective.

  • So it really lines up with where we want to compete.

  • We said in the Silicon Systems group, we want to grow share -- in addition to our strong positions that we already have, we want to grow share in etch and in inspection and metrology.

  • So we increased our R&D efforts in those areas in the last couple years and we're continuing to invest aggressively there.

  • Mike talked about in solar, we're continuing to move, and crystalline silicon are next generation products for both Baccini and PWS [forward].

  • Those are priorities for us.

  • Thin film solar, there's nothing more important in our mind that driving the efficiency road map ahead and staying on track.

  • We're on track now.

  • We've had very good results in the lab that suggests we're certainly on track for 9% for this year and on our way to 10% for next year.

  • In display, our focus on R&D is really on not only next generation products for our existing positions in CVD and color filter, but the competitive entry into PVD through our pivot tool, and that's a strong area of focus for us.

  • So those are -- that's a recap.

  • And we spent a lot of time over the last two years prioritizing and prioritizing again the projects that we look at in house, which has allowed us to really fully fund the strategic opportunities that we see without having to compromise our business model.

  • - Analyst

  • On the solar side, how much are you spending as a percentage of the total R&D spend, if you can?

  • - CFO

  • We haven't broken that out that way.

  • But it's probably 25% to one-third, in that ballpark.

  • - Analyst

  • Okay.

  • - VP of IR

  • Raj, thank you for your questions.

  • Kara, I think we have time for two more questions and then we'll give our concluding remarks, please.

  • Operator

  • Yes, sir.

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

  • - Analyst

  • Just a quick one.

  • If I look at the margin in the solar business that you've actually shown the last four quarters, it looks like basically you're spending about $1.4 billion total expenses in that business over the last four quarters or so.

  • And I'm wondering, out of that number, how much of that is related to the thin film business?

  • So if, just to help us decide here, if you were to segment those two businesses, how much of that total expense number relates to thin film versus crystalline?

  • Thanks.

  • - CFO

  • I can't tie out to the numbers that you have there.

  • I think your numbers are high, Tim.

  • What I would say also, you have to take into account the fact that we had a -- last year we had about $120 million in M&A charges that were in those numbers as well.

  • Clearly, we're committing R&D dollars there and we're going through the startup of these factories.

  • But those costs are really being captured as we sign off the factories.

  • So I think your numbers are high and we can -- if you want to, again, call the IR team, I'm sure they would be happy to walk you through some of those assumptions in a little more detail.

  • - VP of IR

  • Thanks, Tim.

  • Kara, to you.

  • Operator

  • Your final question comes from the line of CJ Muse with Barclays Capital.

  • - Analyst

  • Thank you.

  • One more question, George.

  • On the display side, you talked about seeing potential orders in the second half of the calendar year starting to come in.

  • You've got basically Phase II I guess Gen 8 and the Sharp Gen 10 Phase III potentially coming.

  • Could you talk a little bit about what you think the magnitude is looking to the second half and first half of 2010, and what orders could look like relative to the strong level of CapEx we saw in 2007?

  • - CFO

  • That's a good question.

  • I wish we had the visibility to give you a clear answer on that.

  • And it might be a fair criticism to say calling the bottom when orders are at $13 million is not too brave, but we certainly -- we do see a pickup.

  • Clearly the conversations that we're having with our customers at all levels suggest that they're readying for capacity additions at Gen 8.5, but again they've just come off a very difficult period.

  • They had a big pickup in factory utilizations in the second quarter.

  • Demand quite frankly looks pretty good for panels, but at very low prices.

  • So I think they're going to have to have confidence in the Christmas season at the end of the year before we see commitments that would be material orders in the second half of this year.

  • - VP of IR

  • Great.

  • Thank you, CJ.

  • And Kara, with that, we would like to just thank everyone for joining us on the call this afternoon.

  • A replay of this call and supporting slide package will be available on our website today beginning at 5:00 Pacific time, and we'll keep it posted there until May the 27th.

  • Thank you for your continued interest in Applied Materials.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.