應用材料 (AMAT) 2010 Q1 法說會逐字稿

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  • Operator

  • Welcome to the Applied Materials fiscal 2010 first quarter 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.

  • As a reminder, this conference is being recorded today, February 17, 2010.

  • Please note that today's call will contain forward-looking statements which are all statements other than those of historical fact, including statements regarding Applied's performance, growth opportunities, cost reduction activities, strategic positions, markets, and Q2 and fiscal year 2010 outlooks, as well as industry outlooks.

  • 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 press release and in the Company's filings with the SEC.

  • Forward-looking statements are based on information as of February 17, 2010, 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 the financial highlight slides, which are on the investor page of our website at appliedmaterials.com.

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

  • Please go ahead, sir.

  • - IR

  • Thank you, Marcello, and good afternoon.

  • 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'll discuss the results for the first quarter which ended on January 31.

  • Our earnings release was issued at 1:05 Pacific time and you can find a copy on business wire and on our website, appliedmaterials.com.

  • Mike Splinter will be on the call with comments on the business environment and our strategies.

  • George will follow and discuss our financial performance for Q1, and our expectations for Q2 and the rest of the year.

  • We'll then open the call for your questions.

  • Before we begin, I have a quick calendar announcement.

  • Applied will hold its 2010 analyst meeting in New York City on the afternoon of March 30, local time.

  • We hope to see you at the meeting, and we'll have a live webcast and replay for anyone who won't be able to join us in person.

  • We'll be sure to provide you with further details about the event over the next few weeks.

  • And with that, I would like to hand the call over to Mike Splinter.

  • - CEO

  • Thanks, Mike, and welcome to today's call.

  • Applied generated strong growth in our first quarter, led by our Silicon Systems Group, which grew net sales by nearly 50%.

  • Our business momentum continues and we're raising our company-wide fiscal year sales outlook to growth of more than 50%.

  • We completed the acquisition of Semitool, giving us new growth opportunities in semiconductor equipment and leadership in advanced packaging.

  • We also took actions to improve our efficiency and bring the core of our operations closer to more of our customers.

  • The steep ramp in SSG challenged our manufacturing and field support operations, and I would like to thank our teams and suppliers for working especially hard to meet our customers' needs.

  • I'll now comment on each of our businesses.

  • We now expect SSG sales to more than double in fiscal 2010.

  • We've raised our wafer fab equipment spending projection to a range of $21billion to $23 billion for the calendar year, and we view 2010 as just the first year of a strong investment cycle.

  • Memory prices remain high, encouraging customers to invest in the next generation of technology.

  • In 2010, bit demand for memory is expected to outpace supply.

  • Foundries are investing aggressively for the transition to 32-nanometers and for capacity additions at 45.

  • We believe the next phase of investment will be driven by DRAM technology transitions, along with capacity expansions in both flash memory and foundry.

  • Customers are also discussing plans for new fabs, which should lead to increased equipment spending in 2011.

  • We expect this year to be -- to have strong competitive gains, with more than 2 points of share growth across SSG.

  • We expect Applied's etch sales to more than double in the calendar year, reflecting market growth, share gains, and favorable memory customer exposure.

  • Increased memory spending is also the catalyst for our bright field system, giving us the opportunity to gain 5 points of share in the nearly billion dollar wafer defect inspection market.

  • In radical inspection, we expanded our installed base with another strategic placement at a major foundry.

  • In CMP, our new reflexion GT is gaining traction, as it allows customers to greatly reduce the cost of consumables.

  • And our new Astra Laser Anneal system is enabling advanced transistors at 32-nanometers and beyond.

  • In PVD&CVD, we're on track to gain share leading edge where steps are being added in metal gate [silicides], gap fill and packaging.

  • We're very pleased with the progress of our Semitool acquisition.

  • We've been collaborating with Semitool in advanced packaging for years, allowing us to hit the ground running with a suite of products to serve a growing market, which is expected to reach nearly $800 million by 2012.

  • For example, we expect to have at least 25 charger PVD systems installed for packaging in 2010.

  • In AGS, the number of semiconductor tools under contract in Asia grew by 20% year-over-year, and we are focusing on additional service and spares growth in the region, which is expected to drive 75% of all new wafer capacity.

  • The display industry sees strong demand in LCD TVs, particularly in China.

  • High factory utilization of around 90% is leading customers to plan for new capacity.

  • We expect display equipment spending to grow by more than 60% over approximately the next 12 months.

  • Looking ahead, we expect Applied's orders to increase, driven by higher investments in Gen 8.5 capacity over the cycle.

  • We've ramped our manufacturing facility in Taiwan and maintained our system lead times, despite this transition.

  • Our Gen 10 CVD systems are now proven in production and we are ready to ramp this next generation of glass [sides].

  • In solar, worldwide PV installations are expected to be up 50% year-over-year, with about half of this growth in European countries outside of Germany.

  • Module prices have absorbed the polysilicon price drops and we see price declines moderating ahead of the German FIT adjustment.

  • In China, the government has made solar a national priority, and Crystalline silicon solar manufacturers are responding by boosting capacity.

  • We expect 5 to 7 gigawatts of incremental capacity additions in China this year, which represents a near doubling from '09.

  • Globally, we see the possibility of up to 9 gigawatts of capacity additions.

  • Solar CapEx should exceed $4 billion this calendar year.

  • Factory utilization across the industry is reported to be around 50%, and today's aggressive capacity additions could lead to oversupply and a reduction in investment plans.

  • The strong solar capacity expansion in China has been a positive for our Crystalline silicon business.

  • We achieve sign-offs for our new Baccini Esatto technology in the quarter, as double printing became established at multiple customers.

  • And we expect our Baccini cell systems to gain 3 points of metalization share in 2010.

  • Turning to SunFab, we achieved sign-off at two new lines during the quarter, bringing the total to nine.

  • The price declines in Crystalline silicon modules have exerted margin pressure at some of our thin film customers.

  • In some cases, lowering their demand and factory utilization to very low levels.

  • We made further progress in driving some half module efficiency and cost reductions to help customers be more competitive.

  • Two customers announced large development projects this quarter and our customers now have 30-megawatts of modules installed, providing field performance data to demonstrate the capabilities of our technology.

  • I would like to comment briefly on the recent events in Korea.

  • As you know, several of our employees were charged with improperly using customer confidential information.

  • We are working with the Korean prosecutor and also conducting our own investigation in order to better understand the facts in this situation.

  • Applied has strict policies and procedures, designed to protect our customers' confidential information.

  • We are also committed to upholding high ethical standards in all of our business dealings.

  • And for more than 40 years, we have developed a history of outstanding intellectual property protection, which is at the heart of our Company's values.

  • The conduct described by the charges is not consistent with either our policies or the great work performed by Applied's talented and dedicated employees.

  • It is important to note that Applied Materials has not been charged in this case.

  • Our focus at this time is on being close to our customers, helping them meet a steep ramp, and ensuring that the strategic relationships and trust that we built over many years remains strong.

  • In closing, our goal is to lead the industry in our core semiconductor market, expand our opportunities in display and services, and drive new growth in energy and environmental solutions.

  • We are also significantly improving our efficiency and effectiveness to deliver outstanding profitability for the long-term.

  • I'll now hand the call over to George for more details on our financial results and targets.

  • George?

  • - CFO

  • Thank you, Mike.

  • And good afternoon to everyone joining us today.

  • Applied's financial performance improved in a strengthening business environment, with results in the upper end of our target range, led by strong operating performance in our Silicon Systems Group.

  • Applied's orders were up 33% sequentially, driven almost entirely by SSG.

  • Net sales increased 21% to $1.85 billion, with growth in all segments except display.

  • We reported non-GAAP net income of $179 million, or $0.13 per share.

  • Our GAAP results included restructuring and acquisition charges, along with investment impairments that together reduce earnings by $0.07 per share.

  • As a reminder, our non-GAAP results and guidance now include stock-based compensation.

  • Our backlog increased by $200 million to $2.9 billion, in line with order growth.

  • The net positive backlog adjustment of $79 million was driven primarily by the Semitool acquisition.

  • Please note that except for ending balances, the Semitool acquisition will be included in our results beginning in Q2, reported on a one-month lag through the end of this fiscal year.

  • The Company generated operating cash flow of $367 million, or 20% of sales.

  • We ended the quarter with cash and investments of $3.2 billion, a reduction from Q4 of just under $70 million, despite spending $323 million for Semitool and $80 million for dividends.

  • Turning to spending, operating expenses grew as expected, and included $24 million in acquisition and legal costs that were not in our November outlook.

  • Our non-GAAP operating expenses grew during the quarter by approximately $90 million, primarily due to the elimination of certain temporary savings impacting base and variable compensation, and the absence of approximately $20 million in favorable adjustments in our Q4 numbers.

  • During the quarter, we took restructuring charges of $104 million and realized $12 million in net savings from our longer-term cost initiatives.

  • In the balance of the year, we expect our operating expenses to be between $520 million and $540 million per quarter.

  • This run rate includes $25 million in quarterly spending for Semitool, the elimination of shutdowns, and incremental spending to support the steep business ramp, partially offset by ongoing cost initiatives.

  • We remain focused on our longer-term initiatives to enhance the Company's [managing] supply chain, to integrate our sales teams into the business units, and to improve our back office and IT infrastructure for more efficient transaction processing.

  • These programs are still expected to deliver $450 million of annualized cost savings by the end of our fiscal quarter -- second fiscal quarter of 2011.

  • We expect these benefits to be back-end loaded due to the intensity of the ramp.

  • Beginning in Q1, we moved certain costs associated with sales and marketing and variable compensation adjustments into the operating segments.

  • This treatment provides a clearer picture of each segment's performance and a change reduced each segment's operating margin by 1 to 3 points in Q1.

  • Of course these changes have no impact on the Company's overall results.

  • A reconciliation is provided on our website.

  • Turning to the segments, Silicon Systems Group orders increased by 80% over Q4, with four customers accounting for over 65% of the total.

  • Net sales in the quarter grew 48%, well above our expectations of greater than 20%.

  • This is a very steep ramp from 2009 levels and our supply chain was challenged during the quarter to meet demand.

  • Our customers continue to expect short lead times and just over 70% of our sales were from orders received in the quarter.

  • SSG operating profit of $306 million was up nearly 6 points from Q4, reflecting strong flow-through and some offset due to higher compensation accruals and above normal logistics and expediting costs.

  • We see room for further margin improvement, as net sales increase.

  • In Applied Global Services, orders increased 41% off a low Q4 level and net sales were up 9% on higher fab utilization and increased wafer starts.

  • Operating margin declined 2 points to 15%, primarily due to low margin refurbished systems.

  • Display orders decreased slightly in Q1, but we expect momentum later in the year, as customers remain on track for new Gen 8.5 investments.

  • Net sales of $132 million were lower as anticipated, and operating margin was down modestly to 18.9%.

  • In EES, orders decreased 36%, primarily due to declines in thin film solar.

  • Orders for Crystalline silicon solar equipment more than tripled versus Q4 on strong demand for our wafering and sell products, particularly from China.

  • Net sales increased to $321 million, driven by two SunFab sign-offs.

  • Growth of 15% was close to our expectation of 20%.

  • While EES reported a modest loss this quarter, we are still targeting EES to be breakeven on a non-GAAP basis for the year, based on Crystalline silicon profitability and SunFab sign-offs in the latter part of our fiscal year.

  • Non-GAAP breakeven represents a $160 million improvement over 2009 and is one of the most important profit enhancement efforts for the Company in 2010.

  • Now, let me talk about our expectations for the balance of the fiscal year and for Q2.

  • While second half visibility remains limited, we are encouraged by strong demand across most of our customers' end markets.

  • As a result, we expect sales to be up by more than 50% in fiscal 2010, or by more than $2.5 billion over 2009.

  • We expect SSG sales to be up more than 100% in fiscal 2010, reflecting growth in capital spending, improved market share, and the addition of Semitool.

  • We expect AGS sales to be up in the range of 30% this fiscal year, in line with higher utilization rates and wafer starts.

  • We expect display sales to be up 30% year-over-year, in line with the industry ramp.

  • We also expect EES sales to be in the range of flat to plus or minus 10% for the fiscal year with upside potential if Crystalline silicon solar equipment demand remains strong in the second half.

  • Our tax rate for the full year is expected to be in the range of 31% to 33%.

  • Now I'll discuss our second quarter business environment.

  • We remain cautious with respect to forecasting orders, particularly due to limited visibility as a result of the high turns business in SSG.

  • Currently, our best estimate is that total Company orders will be up by more than 10% quarter-over-quarter.

  • SSG should continue to benefit from strong foundry and memory demand, and sales are expected to be up by more than 25% in the quarter.

  • AGS sales are expected to grow by more than 10%, reflecting a return to more normalized spending per wafer pass.

  • In display, the second quarter is shaping up to be one of the strongest -- excuse me, to be the strongest of the fiscal year, with sales projected to more than double Q1 levels.

  • EES sales are expected to decrease by more than 25%, as growth in Crystalline silicon solar equipment is more than offset by a near-term decline in thin film solar sales.

  • We expect the Company's overall net sales to be up by 15% to 25% in Q2.

  • We also expect our non-GAAP quarterly earnings to be between $0.17 and $0.22 per share, which equates to profits growing at more than twice the rate of sales.

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

  • - IR

  • Thanks, George.

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

  • Marcello, let's please begin.

  • Operator

  • (Operator Instructions).

  • Our first question comes from the line of Stephen Chin with UBS.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • Hi, Mike, hi, George.

  • Question on the silicon guidance for the April quarter.

  • It was suggested that Applied is still about 30% below the quarterly peak of silicon sales (inaudible) 2007 cycle.

  • What's your view on Applied's ability to surpass these key sales levels during this current up cycle, especially if it's driven by these foundry customers?

  • My follow-up question to that is similar on the silicon segment operating margin.

  • Do you think Applied can surpass those operating margins in 2007?

  • And can you give us a comparable operating margin in 2007 and allocate some of these corporate overhead costs that measure Applied on?

  • Thanks.

  • - CEO

  • Thanks, Stephen.

  • That was a complex question.

  • But, okay.

  • I'll try to take the first part and George can take the second part.

  • On the -- I think we're at least on orders, will be closer to 80% than 70%.

  • But it's really hard to tell where the peak is going to be.

  • I think the peak would have to get something approaching $30 billion run rate in the WFE.

  • We really haven't thought that that's possible at this point, to surpass the Q2 levels of 2007.

  • That's where we are.

  • And it's just tough to have visibility into what's going to happen in the second half, as more investment broadens out from the small number of companies who are investing in semiconductor capacity today.

  • - CFO

  • Stephen, hi.

  • With respect to operating profit, we peaked out in Q3 '07 at a 39 -- just over 39%.

  • If you took 2 points off of that, at about 37%, that would have been the peak operating margin.

  • But generally, we were operating closer to the low to mid-30s, and I don't see any reason why we won't achieve those operating margins in this environment.

  • - Analyst

  • Great.

  • - IR

  • Thanks, Stephen, for your questions.

  • Marcello, may we please have the next?

  • Operator

  • Our next question is from the line of Jim Covello with Goldman Sachs.

  • Please go ahead with your question.

  • - Analyst

  • Great, guys.

  • Good afternoon.

  • Thanks so much for taking the question.

  • I'll start with flash.

  • Flash, 13% of SSG orders, what's the timing and trajectory that we would expect for a recovery in flash orders?

  • - CEO

  • Yes, Jim, flash, as you know, at 13% is well below where a run rate would be to sustain a bid growth, but we think it would be close to 100% or so.

  • We're expecting that flash is going to come back in the second half of the year as the major flash producers start to invest.

  • That first half, second half, we expect that when you look at it at the end of the year, flash will be close to 20% of the overall CapEx spending and wafer fab equipment spending.

  • - Analyst

  • Terrific.

  • For my follow-up, maybe for George, relative to the significant cost cuts that you guys made, are we seeing the full impact of those in the P&L in the April quarter?

  • Or is there still more impact in the back half -- in the calendar second quarter in the back half of the year as the cost cuts flow through?

  • Thanks.

  • - CFO

  • Thanks, Jim.

  • I think the April quarter is really where you'll see the full flow-through of any temporary cost reductions come back in.

  • We till have some normal holiday shutdown days in the first quarter.

  • Those all go out and then obviously with the ramp of the business being stronger than we had anticipated, there's some variable comp that comes along with that.

  • But that should be pretty much reflected in Q2.

  • - IR

  • Thanks, Jim.

  • Next question, please?

  • Operator

  • Yes, sir.

  • Our next question is from the line of C.J.

  • Muse with Barclays Capital.

  • Please go ahead with your question.

  • - Analyst

  • Good afternoon.

  • Thank you for taking my question.

  • First question on the cost cutting side, could you guide to gross margin and OpEx?

  • And then digging a little bit deeper, as part of the major restructuring you talked about, can you tell us what percentages those are and what percentage is in OpEx?

  • And cognizant of that $520 million to $540 million in OpEx you're targeting in the next couple of quarters, where would that number look like when all is done around that Q2, fiscal 2011 timeframe that you discussed earlier?

  • - CFO

  • Great.

  • Let me just start with what we've said.

  • We expect cost savings to be about $450 million.

  • About $250 million of that will be OpEx.

  • I would expect, again, the cost to be back-end loaded so at $250 million, that's roughly $60 million a quarter.

  • We said there was about $12 million a quarter already reflected in the -- in our first quarter so -- with that adjustment.

  • Our focus, as you know, in the near term is really managing to the ramp, but many of the programs that we have are longer term.

  • We're continuing work on those, including things like our Pan Asia supply chain, making the organizational adjustments we've had, such as moving sales into the business units.

  • All of these things are continuing, but some of the impacts will be pushed out as we've got all hands on deck to manage the ramp.

  • - Analyst

  • And as a follow-up, on the Crystalline silicon side, can you talk about that business a little bit on a stand-alone basis?

  • What percentage of EES revenues would that be in fiscal 2010 and what margin trajectory do you see through the fiscal year?

  • - CFO

  • It has been -- it was -- it has been about half of the order -- or excuse me, the revenue and order profile for EES for the last couple of years.

  • In terms of -- it's probably a reasonable assumption for 2010 as well.

  • It could be a little bit higher if you did a significant ramp in the -- the ramp continues in the second half in China for Crystalline silicon.

  • From an operating margin standpoint, it's well into the double digits now and it's been a solid business for us.

  • - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Our next question is from the line of Atif Malik with Morgan Stanley.

  • Please go ahead with your question.

  • - Analyst

  • Thanks for taking my questions.

  • I asked this question last time as well.

  • On the foundry intensity, we're seeing pretty high levels of foundry intensity.

  • Last year, the foundry intensity was about 45%, so just your thoughts on foundry spending sustainability in second half.

  • I understand the memory can pick up in second half.

  • - CEO

  • Yes, I think that right now the foundry spending has really localized, primarily to one company.

  • What we're expecting to see in the second half is broader investment from the rest of the members of the foundry community.

  • I think the leading foundries already announced how much they are going to spend for the year, so you can see it's front half loaded.

  • - Analyst

  • Okay, and a quick follow-up.

  • What are the lead times on your wire (inaudible) ACD wafering business right now?

  • - CFO

  • It's inside two quarters.

  • - Analyst

  • Okay.

  • Thanks.

  • - IR

  • Thanks.

  • Operator

  • Our next question is from the line of Satya Kumar with Credit Suisse.

  • Please go ahead with your question.

  • - Analyst

  • Thanks.

  • Mostly on silicon guidance, if I take the 25% revenue growth you gave in the April quarter, 100% year-on-year growth, I think you are actually talking about a 50% revenue decline from the April quarter level into July and October.

  • Is that how you're seeing the year play out in silicon?

  • - CEO

  • Satya, I think the way we would describe the second half of the year in the semiconductor business is -- and you realize there's pretty limited visibility here in the second half at this point.

  • But what we're thinking is it's flat to plus or minus 10% in the second half.

  • If we have strong flash memory investment and we see the rest of the foundry guys coming into the game, we could see plus 10%.

  • If we don't see that, we can get minus 10%.

  • I think that's probably what we're thinking right now.

  • - Analyst

  • Okay.

  • In terms of the solar, a quick follow-up.

  • You mentioned there is currently a stabilization in silicon pricing ahead of [terminus] FID cuts, but margins are being pressured for your SunFab customers.

  • Supposing we get further (inaudible) pressures in Crystalline silicon after the terminus cuts, would that not cause even more margin pressures on SunFab customers in the quarter?

  • When will the SunFab customers become more competitive in Crystalline silicon?

  • - CEO

  • We've been -- certainly if you look at variable costs, they are already competitive, and they are getting more competitive as we work with them to enhance the performance of the factories, which the factories are really running quite well.

  • I think -- but the bigger point on Crystalline silicon, if the capacity comes on the way we think it is, this is going to -- there's going to be a lot of pressure on pricing in the second half until more demand is created.

  • We're still looking for demand to be created at a higher level in the US and China and in India, maybe in the second half and into 2011.

  • - IR

  • Thanks, Satya.

  • Operator

  • Our next question is from the line of Gary Hsueh with Oppenheimer.

  • Please go ahead with your question.

  • - Analyst

  • This is Wayne in for Gary.

  • You commented on supply chain constraint and combined with your recent hiring of executives for the supply chain management.

  • Want to get your opinion on what impact of the supply chain constrained on your costs and operating expenses, in terms of over time, higher cost of goods and also the lead time strategy?

  • - CFO

  • Sure.

  • The major impact that we have from the supply chain difficulties this quarter was seen in higher expediting costs.

  • And really the costs of logistics in general were above normal.

  • We're seeing improvements in the supply chain in the second quarter.

  • I think we'll still have a little bit of work -- workout to do.

  • But the -- there's no connection really between our decision to hire an external party and the challenges we're having here.

  • As you know, we're, we're going to be building up our capability in Singapore to strengthen our Pan Asia supply chain, and the recent hires in connection with that activity.

  • - CEO

  • And you guys will get a chance to meet Joe at the analyst meeting at the end of March.

  • I think you'll like him.

  • He's got a great background and a great hire for us.

  • - Analyst

  • Okay.

  • Thank you.

  • - IR

  • Did we fully answer your question?

  • Operator

  • Our next question is from the line of Chris Blansett with JPMorgan.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • My question is related to the share gain you indicated earlier.

  • I wanted to understand how much the mix of demographics of your silicon system customers is playing into this at this time.

  • - CEO

  • Yes.

  • Generally we try to shape that out of the share gain before we talk about the share gain itself.

  • Because if you just look at the last few years, there's been a huge change in overall revenue and buying patterns in the silicon segment.

  • When we talk about share gain, we're really talking about innate gain at fab customers with winning applications in the various areas.

  • That's general.

  • Do you have a specific question, Chris, about a certain -- one of the product lines?

  • - Analyst

  • I was just trying to dig a little more deeper, specifically into the etch business.

  • There's different types of etch which some investors are aware of and where you think you are doing better versus where you've been in the past.

  • And given the shift that's occurring in the etch market with the metal etch market continuing (inaudible) strengthen and dialects are growing, just maybe some color commentary around that.

  • - CEO

  • Sure.

  • We have significantly more exposure in the memory area.

  • That's I think well chronicled.

  • But we've been increasing our applications as well in the memory area, both in flash and in DRAM.

  • In particular, strength in those -- in the flash areas of double patterning, where we've done an awful lot of work with customers and have been able to gain applications there, as well as in high aspect contacts and those applications in DRAMs which are becoming increasingly more prevalent.

  • Those are more die electric -- both are die electric oriented.

  • We're even starting to see some traction at some of the factories, which in the past logic has really been our weak point in it.

  • - Analyst

  • All right.

  • That's good.

  • Thank you.

  • Appreciate it.

  • Operator

  • Our next question is from the line of Steve O'Rourke with Deutsche Bank.

  • Please go ahead with your question.

  • - Analyst

  • Thank you.

  • Good afternoon.

  • Couple questions.

  • First, there's been some -- reportedly some substantial share loss in PVD at one of your significant customers.

  • Could you just comment on your positioning with PVD and how you feel that is?

  • And second question, turns business and the silicon business, very high in Q1.

  • Is this the new normal with respect to orders in terms of the quarter?

  • - CEO

  • On PVD, I just would say the following.

  • First of all, I think primarily what you're aiming at here is copper barrier seed, which is in the memory area which is about 30% of the market and 30% of that market.

  • It's a less than 10%.

  • I don't think there's been any real share shifts.

  • There are shared positions there, where we go back and forth.

  • But when you look at the new applications where the market is growing, beyond memory, we're quite strong already in the conversion to copper and in memory; that's one aspect.

  • But in metal gate silicides, that's a new application, multiple steps in logic.

  • And then as well as in packaging, where I mentioned that we have a significant buying pattern for our charger PPD system.

  • We think that we'll end up gaining share in that space in the end of the year.

  • - CFO

  • And Steve, on the turns business and the new normal, what I would say is that we've seen certainly a push from all of our customers to shorten our cycle times.

  • And it's one of the reasons why we've gone to much more modular manufacturing approach and worked very hard to strengthen our supply chain.

  • I would also say that foundry customers just by the nature of their end markets and the windows that they have to hit those markets are probably the shortest cycle customers that we have.

  • I think you have a little bit of the foundry effect.

  • I do think short cycle is certainly a new normal.

  • I would say we're at the -- given the mix of foundry right now, we're at the shorter end of that short cycle.

  • That's probably too many cycles.

  • - Analyst

  • Thank you.

  • That's helpful.

  • - IR

  • Thanks, Steve.

  • Operator

  • Our next question is from the line of Mehdi Hosseini with Friedman, Billings, Ramsey.

  • Please go ahead with your question.

  • - Analyst

  • Yes.

  • Thanks for taking my question.

  • Mike, going back to earlier commentary about the overall size of the wafer fab equipment market, can you please clarify, did you say that in order for you to exceed the prior peak of SSG revenue, the market has to be $30 billion or $33 billion?

  • And are you also assuming that your market share is not going to be a factor in exceeding the prior peak?

  • Could you please provide some clarification?

  • And I have a follow-up.

  • - CEO

  • Sure, Mehdi.

  • What I said was it would have to approach $30 billion, which assumes we're going to be able to grow faster than WFE, because obviously the last peak was quite a bit above that number.

  • I don't want to go down into all the details, but you can assume that we've made those assumptions.

  • But for right now, our projection for this year is $21 billion to $23 billion for wafer fab equipment spending.

  • - Analyst

  • Okay.

  • When do you expect the micro processor segment of the market to come back?

  • There's a lot of talk about share loss in etch and PVD.

  • Can you update us what's going on in the micro processor segment and when would you expect that segment of the market to come back?

  • - CEO

  • I think as you know, micro processors are on a note of technology that's generally ahead of the rest of the industry.

  • And they invest big in the odd years and order in late in the even years.

  • That's what I'm expecting to continue.

  • We're very encouraged by the growth in the PC market.

  • We thought that -- we think overall the PC market's going to grow 10% to 15% this year.

  • If you saw HP's results earlier today, they said they had 26% increase in PC shipments.

  • That's gigantic.

  • I would think that if that continues, capacity additions have to follow pretty quickly.

  • - IR

  • Thank you, Mehdi.

  • Operator

  • Our next question is from the line of Patrick Ho with Stifel Nicolaus.

  • Please go ahead with your question.

  • - Analyst

  • Thanks a lot.

  • Two questions.

  • First, what do you see in maybe qualitative or even a quantitative basis, in terms of the customer mix for your semi orders in Q2?

  • And related to that, can you describe what you could see in terms of the sustainability of DRAM orders at least over the next few quarters?

  • What would drive DRAM orders to be more sustainable than some of the perceptions out there that it would be first half loaded?

  • - CEO

  • Thanks, Patrick.

  • The word I think I would use to describe orders, not only in Q1, but Q2, is concentrated.

  • They are quite concentrated -- both revenue and orders are still quite concentrated at a very small number of companies.

  • On the sustainability of DRAM, I just think that depends in big part on how the cell phone and PC markets go.

  • Right now, we don't see enough capacity to meet 60% bit growth if it gets that high.

  • We've been updating our analysis there and our estimates from -- I think earlier in the last call, we said 35 to 40.

  • We're now in the 55 to 60.

  • But DRAM is undersupplied right now and we don't see that getting ahead of demand for the next few quarters.

  • - IR

  • Thanks, Patrick.

  • Operator

  • Our next question is from the line of Edwin Mok with Needham & Company.

  • Please go ahead with your question.

  • - Analyst

  • Thanks for taking my question.

  • First question regarding the silicon side of the business.

  • Mike, you mentioned that you thought you would see signs that some customer might have new fabs.

  • Any color you can add to that?

  • Is that more for 2011 timeframe?

  • And in which area in terms of memory versus foundry versus DRAM are you looking at -- are you think customer looking to add new fabs?

  • - CEO

  • Yes, we're looking at nine new fabs that customers are talking about -- we think are coming close to announcements, so mainly they get announced over the next couple of quarters.

  • Almost all of these are for 2011 capacity.

  • There's one that could still be up in 2010, late 2010.

  • That wouldn't be a flash fab, but a couple of these are DRAM fabs.

  • Several of them are foundry factories.

  • Other than naming everyone, I think that's about as far as I'll go.

  • - Analyst

  • That was great color.

  • Thanks.

  • And just one more question regarding the flat panel display area.

  • You mentioned that you expect equipment spending to be up 60% this year, yet you're guiding for revenue to be up 30%.

  • How do you reconcile between that and I understand that you have a new PVD product in that area, too.

  • Can you give some color on that?

  • - CFO

  • Sure, Edwin.

  • It's a good question.

  • The 60% is calendar year forecast.

  • As you know, we have a fiscal year that misses two of those months.

  • We expect the shipment and revenue activity to be strong both in '09 -- excuse me, in 2010 and the first part of 2011.

  • And I think any difference between the market forecast and our revenue forecast is really just revenue timing.

  • - IR

  • Thanks, Edwin.

  • Operator

  • Our next question is from the line of Gus Richard with Piper Jaffray.

  • Please go ahead with your question.

  • - Analyst

  • Yes.

  • Just in terms of the broadening out of spend, a lot of people have difficulty below 40-nanometers.

  • Lot of people won't have clean space, a lot of people don't have money.

  • In those constraints, how do you see those getting relieved over the next year or so?

  • - CEO

  • Most people have technology partners today, so I think the places where there's real limitations or fundamental limitations on technology are very few.

  • There can always be yield problems and product problems, those things, but I don't think that's fundamental.

  • And I think the money issues that had plagued a big part of the industry last year when profits were low in 2008, are slowly being relieved as prices stay high, particularly in memory.

  • And we look at this profitability very, very closely because we do think ability to take on [debted] customers is very important factor.

  • It would have to give access to capital.

  • And then I do think, of course, there is the question of litho cell availability.

  • I think that's also a thing we also watch closely because of the cost of that element of the equipment supply.

  • - Analyst

  • Okay.

  • And then just as my follow-on, given the tightness of advanced litho systems in the world today, does that present an opportunity for Applied in stuff lined double patterning?

  • Are you seeing that gain traction with your customers?

  • Or do you have any thoughts there?

  • - CEO

  • Yes.

  • I think we are seeing pretty much everybody trying some level of double patterning, different levels in production.

  • The flash guys clearly have mastered this technique in production these days and we are working very, very closely.

  • Our share in that space is quite good because of how much knowledge we gained early on in that technology.

  • - IR

  • Thanks, Gus.

  • Operator

  • Our next question is from the line of Krish Sankar with Banc of America, Merrill Lynch.

  • Please go ahead with your question.

  • - Analyst

  • Thank you.

  • Mike, I just wanted to follow up on the $21 billion to $22 billion wafer fab spending this year, how low do you think wafer fab spending can go before we hit a roadblock of new fabs or filling out empty shelves?

  • The follow-up on the cost reduction, (inaudible) the $50 million reduction giving product to your Semitool acquisition, so with the Semitool acquisition, could you update us on what the new goal would be for the cost reduction?

  • - CEO

  • Hi, Krish.

  • We don't see any space issues to $23 billion.

  • I don't think that there are space issues for some significant amount above that.

  • Usually factory managers and companies are quite imaginative about how to create space, if they need it for capacity.

  • And it's -- I don't think we know how to do a calculation that says exactly how much space there is and how much money it would take to fill that space.

  • But it's not at $23 billion.

  • - CFO

  • And Krish, in terms of the cost reduction, the $450 million program is really about long-term structural change for the Company.

  • It's not meant to capture all activities in the Company.

  • For Semitool, what we've said, it will be cash accretive in year one and GAAP accretive in year two.

  • And we have synergy programs that support that, but we have not disclosed that.

  • - IR

  • Thanks, Krish.

  • Operator

  • Our next question is from the line of Mahesh Sanganeria with RBC Capital Markets.

  • Please go ahead with your question.

  • - Analyst

  • Thank you.

  • First question on flat panel.

  • You're looking for a strong shipment for the end of the year, but your orders are pretty low, [130].

  • Is it safe to assume that you should have a pretty significant order growth on (inaudible) over the next quarter?

  • - CFO

  • Yes, we're expecting healthy order growth next quarter.

  • - CEO

  • That's George Davis speak there.

  • - CFO

  • As you know, we don't guide to orders in individual segments, but display is certainly one of the areas along with silicon that we're expecting positive improvement.

  • - Analyst

  • And the second one on your yearly revenue for silicon systems, of the 100%, is that including the Semitool acquisition?

  • Because you said something in your prepared statements -- something 100% increase and $2.5 billion (inaudible).

  • - CFO

  • Those are different things.

  • The 100% does include the effect of Semitool.

  • Remember, we'll have three quarters of Semitool in the year, and it includes really all of the factors, whether it be share gain, growth in the market, and we said more than 100%.

  • That's for the full year.

  • The $2.5 billion is really just the simple math of saying that we're going to be up more than 50% year-over-year, so that's 50% on top of the $5 billion last year.

  • That's where the $2.5 billion came from.

  • - Analyst

  • Okay.

  • All right.

  • Thank you.

  • - CEO

  • Thanks, Mahesh.

  • - IR

  • And I would like to see if we have time for one more question, please.

  • Operator

  • Our last question is from the line of [Jagadish Eearre with Areed Research].

  • Please go ahead with your question.

  • - Analyst

  • Thanks, George.

  • Thanks, Mike, for taking the question.

  • Two questions.

  • The first question, I don't know, Mike, whether you called out on your silicon market share.

  • I just wanted to find out what is your market share?

  • What will be your market share by end of 2010, in terms of your [served relative market] for 2010 and what do you think it will project out, please?

  • - CEO

  • Sure.

  • We really don't give out the specific market share versus our [SAM, Jagadish].

  • I think I can suffice it to say that we think we're going to gain 2 points this year over last year.

  • And we pretty much agree with the third party's assessment of our position from last year.

  • - Analyst

  • Okay.

  • Just one follow-up question.

  • Mike, given the situation on the SunFab, I was just wondering whether -- are they going to (inaudible) your strategy in terms of solar?

  • Has there been some change in your customer outlook given the new entrance and particularly (inaudible) which have higher efficiencies?

  • I just wanted to find out whether we have any thoughts on that.

  • Any color would be great.

  • Thanks.

  • - CEO

  • Sure.

  • Obviously, as I said in prepared remarks, SunFab customers have been challenged in this current environment.

  • The utilization of the SunFab factories is at the same level of the entire industry; some fully loaded, some lowly loaded.

  • But fundamentally, this technology -- we believe in the technology.

  • And if we didn't believe in the technology, we would make some big changes.

  • But right now what we're focused on it meeting our commitments to customers.

  • I think that that's a very important aspect of what we're doing with SunFab.

  • These products are really aimed at a market that's really just starting and that's utility scale solar.

  • When you look at the temperature coefficient, when you look at the incident light, when you look at ambient particles in the air versus the efficiency of these panels, installation costs are huge advantages over other technologies for -- and plus of course, the size of the panels.

  • There's big advantages in this field.

  • Now, the field -- utility scale solar has to develop.

  • It's still very nascent market.

  • It's a very small percentage of the total.

  • As you know, most of the market is roof top and that's where we've been having a lot of success with our Crystalline silicon products as well.

  • We're still very excited about the overall market.

  • We think it's good for long-term growth and we think we know how to make money in the equipment business and that's really fundamentally where we are.

  • - Analyst

  • Great.

  • Thank you.

  • - IR

  • Thank you for your question.

  • We would like to thank everyone for joining us this afternoon.

  • A replay of this call and our earnings presentation will be available on our website today, beginning at 5:00 Pacific Time until March 3.

  • Thank you for your continued interest in Applied Materials.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.