應用材料 (AMAT) 2010 Q3 法說會逐字稿

Good day, and welcome to Applied Materials' third quarter and fiscal 2010 earnings call.

Please note that today's call will contain forward-looking statements, which are all statements, other than those of historical facts, including statements regarding industry outlooks, customer spending, and Applied's opportunities, strategic position, operational initiatives, restructuring activities, and Q4 and fiscal 2010 forecasts.

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, including its most recent Form 10-Q.

Forward-looking statements are based on information as of August 18, 2010, and Applied assumes no obligation to update such statements.

Today's call also contains non-GAAP financial measures, both historical and forecasted.

Reconciliations of the GAAP and non-GAAP measures are contained in today's earnings release or in the financial highlights of Applied, which are available on the investor page of Applied's website at AMAT.com.

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

Please go ahead, sir.

Thank you, Carrie, 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 results for our third fiscal quarter which ended on August the 1st.

Our earnings release was issued at 1:05 Pacific Time and you can find a copy on Business Wire, on or our website at AMAT.com.

Mike Splinter will lead off the call with comments on the industry environment, along with our performance and plans.

George will follow with comments on our financial performance for the third quarter and our expectations for Q4.

We'll then open the call for your questions, and with that I'd like to hand the call over to Mike Splinter.

Thanks, Mike.

Applied delivered solid third quarter results, driven by our semiconductor, display, and crystalline silicon solar businesses.

Sales were up 10% and earnings per share were $0.03 above the range of our forecast.

During the quarter, we announced a clear path to profitability in our Energy and Environmental Solutions segment, which strengthens our Company's overall financial outlook, and we expect a strong finish to our fiscal year.

Turning to the industry environment, 2010 has been a very good year for electronic product sales, led by consumer demand in the BRIC countries.

In the second calendar quarter, our customers saw year-over-year growth across their end markets with LCD TV units up 43%, PC units up 20% and cell phones up 15%, led by SmartPhones.

We're mindful of the soft macroeconomic leading indicators and certainly of leading industry reports.

We'll stay close to our customers to anticipate any changes in their markets or investment plans.

Next, I'll cover each of our markets in more detail.

For the semiconductor industry, we maintain our WFE spending outlook of $26 billion to $28 billion, the midpoint of which represents growth of 110% for the year.

We now expect our equipment sales in SSG and AGS to be up more than 160% for our fiscal year.

The foundries are investing more aggressively than previously expected with significant new orders from a broader set of our customers.

Over the first three fiscal quarters, roughly 75% of our orders were concentrated in foundry and DRAM.

DRAM pricing is stable and availability has remained tight with bid supply and demand both growing at 50% to 60%.

NAND pricing fell about 5% this quarter and has been little changed all year with supply and demand both growing at 70% to 80%.

Overall, memory inventories remain relatively low.

We expect DRAM spending to moderate over the rest of the year, with growth in foundry, NAND, and logic expected to offset the decline.

We see NAND investments continuing well into 2011, as demand for flash storage outpaces supply.

Q3 was the fifth consecutive growth quarter for SSG and AGS, and today, we're monitoring 15 fabs and fab expansion projects that are projected to add $50 billion in new spending over the next 8 to 12 quarters.

In SSG, our focus on capturing new opportunities at key market inflections is paying off.

During the quarter, we won significant customer decisions in metal gate transistors, copper interconnects, and wafer level packaging.

We remain confident that we'll gain 2 points of WFE share for the year, driven by net positional wins across our portfolio, and favorable exposure to the increase in foundry spending.

Sales growth for the year is being lead by Etch, where we're tracking to 4 points of share gain, even as DRAM spending is expected to moderate in the second half of the year.

In inspection, we see shifts in the timing of key customer spending, and orders for brightfield and mask inspection are projected to be at record levels in Q4.

Our CMP business had a record sales quarter, with share growth led by reflection GT, wins at key foundry and memory customers.

Semitool booked record orders this quarter and won new copper interconnect positions at three major customers, with two wins at advanced nodes in foundry and another win at leading edge and memory.

Share gains at Applied and other leading equipment companies are in effect consolidating the industry, despite limited merger and acquisition activity.

Over the past four quarters, total share at the top five equipment companies has grown from under 60% to nearly 70% of WFE.

In Services, AGS had substantial growth in 200-millimeter used equipment orders, with overall revenue growing in line with a modest uptick in fab utilization.

Moving to the LCD industry, TV shipments grew to 44 million units in the second quarter which benefited from World Cup demand.

Panelmakers ran at higher utilization levels in the quarter, and reported a weeks worth of excess inventory in retail and that's including in China, which had a seasonal decline of 18%.

The current outlook is for these inventories to be absorbed in Q3, and we now believe LCD equipment spending will be 75% to 80% higher for the year, which is above our previous forecast.

Applied is winning in CVD and Color Filter PVD, and we're competing very effectively for the new projects in China.

Our Pivot PVD is gaining traction and we now have 50% share in a leading customer.

We also see touch screens taking off in tablet PCs and SmartPhones, which is generating growth opportunities in PVD, and some modest new opportunities in web.

In the solar industry, worldwide panel installations are trending above 12 gigawatts for the year, driven by pull-ins related to the feed in tariff in Germany.

It's likely that Germany's growth will moderate in 2011 but we see panel demand increasing next year, with strength in Europe, China, Japan, and parts of the US.

Fab utilization has improved throughout the crystalline silicon supply chain, and panel ASPs remains stable, leading panelmakers reported sold out conditions through the end of the year, with visibility into the first half of 2011.

We believe crystalline silicon capacity additions will be in a range of 11 to 13 gigawatts for the year, which is up about 80%.

Crystalline silicon equipment spending is likely to double from last year to about $8 billion.

While early indications for 2011 are positive, we'll keep a close eye on equipment demand as this year's capacity is absorbed by the industry.

Over time, we expect ratable reductions in panel prices to continue resulting in a market that is less dependent on government support.

Applied had record profitability in crystalline silicon solar this quarter, led by the highest ever sales at Baccini Cell Systems.

Baccini is the platform of choice in China, which is driving 60% of the world's capacity additions this year.

We're pleased with our product road map, which we see driving further reductions in cost per watt over the next several years.

In summary, Q3 resulted in strong performance across our semiconductor, display, and crystalline silicon solar businesses, and we expect revenues to be higher in Q4.

The macro signals have become more cautious, yet the Summer is off in a time of concern for our customers.

We have not seen a pause in semiconductor capital investment and we expect a solid finish to our year.

I'm also confident that the structural improvements we've made in 2010 will improve Applied's financial performance across a range of business scenarios in 2011.

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

George?

Thank you, Mike, and good afternoon to everyone on the call.

Applied's results exceeded our revised earnings target range by $0.03 per share, reflecting strong performance across our businesses.

Orders grew 8% to $2.7 billion, resulting in the highest quarterly order level since the year 2000.

Our order outlook continues to appear strong.

Backlog increased nearly 5% to $3.1 billion.

Net sales grew 10%, surpassing the high end of our target, driven by better than expected crystalline silicon and semiconductor equipment sales.

GAAP gross margin was 34% for the quarter, and was negatively impacted by 10 margin points as a result of the EES inventory related charges.

Excluding those charges, gross margin would have been 44%.

Non-GAAP operating expenses were in line with our target at $538 million.

In the fourth quarter we expect to remain near the upper end of our $520 million to $540 million range as savings initiatives partially offset increases associated with the growth in the business.

Non-GAAP net income was $0.17 per share.

For the purposes of your models, our current results included $0.12 per share of inventory-related charges.

Adjusting for these effects, we would have achieved non-GAAP earnings of $0.29 per share against our original target range of $0.22 to $0.26 per share, a very strong quarter for our ongoing businesses.

Operating cash flow was $299 million or 12% of sales, reflecting increases in working capital to support the current business.

We used $100 million to buyback 7.9 million shares, and paid $94 million in dividends, including an increase in our quarterly dividend to $0.07 per share.

Cash and investments grew slightly to over $3.6 billion.

Year-to-date we have generated $1.2 billion of operating cash flow, which is approximately 18% of revenues.

I'll now comment on our operating segments.

Silicon Systems Group orders grew 8% with all applications higher, except DRAM.

We expect to see strong bookings again in our fourth quarter, with foundry and logic orders leading the mix.

Semitool had excellent performance, with record orders and the business was accretive to our results.

SSG net sales grew 3% sequentially, and are up 191% year on year.

Operating margins improved to over 36% in the quarter.

AGS orders grew over 23%, led by strong demand for 200-millimeter refurbished equipment.

Operating margin decreased modestly due to ramp challenges, but we expect improvement in the fourth quarter as our supply chain works through materials constraints to deliver on increasing 200-millimeter systems demand.

For the fiscal year, we still expect AGS revenue to be 35% above 2009.

Display results were once again solid, even as orders and revenue declined with expectations.

Orders of $242 million were down 6% and net sales were down 20% at $216 million.

Display operating margins remained healthy at just under 30%, as we realized the benefits of our shift to the Taiwan manufacturing center.

During the quarter, we shipped more than 90% of our large area deposition equipment from the Tainan facility.

For the fiscal year, we now believe display net sales will improve to more than 70% relative to 2009.

In our Energy and Environmental Solutions segment, orders remained at high levels and revenue more than doubled, reflecting the very strong demand for equipment from our crystalline solar customers.

Orders of $353 million were down 7%, but still represent the third highest booking quarter for EES despite the absence of any thin film orders.

Net sales were $387 million, an increase of 133%.

Our Baccini business was particularly robust as net sales from that group were more than 75% above the previous high achieved in the fourth quarter of 2008.

We also recognized revenue on a single junction SunFab line.

Our thin film solar backlog ended the period at about $300 million, with two more factory sign offs expected over the next two quarters.

The $405 million EES restructuring charge consisted of inventory-related charges of approximately $250 million and severance and asset impairment charges of $155 million.

The inventory-related charges were reported in cost of sales and had a 10 point impact on overall gross margin.

The other charges were reported in operating expenses net of a $20 million favorable adjustment to the restructuring plan announced last November.

We expect the benefits of the EES restructuring to be reflected in the segment's results over the next three quarters.

EES will maintain a modest investment in advance thin film technology, while upgrades in services for existing SunFab customers will be managed through AGS.

Next, I'll share our outlook for the fourth quarter.

We anticipate another strong quarter, despite some caution around the potential impact of the softening macroeconomic conditions.

We expect Silicon Systems Group net sales to be in line with the third quarter, and we see preliminary indications from customers that SSG will grow in our first quarter of fiscal 2011.

AGS net sales are expected to be up more than 10%, largely due to increased shipments of refurbished equipment and growth in wafer starts.

In Display, we believe net sales will be up approximately 20%, in line with strong second half investment by display customers.

We expect EES net sales to be down 10% to 20% but still reflective of strong crystalline solar equipment demand.

Upside to this number is possible if we achieve customer acceptance for a major SunFab factory in China during the quarter.

Overall, we expect the Company's net sales in our Fourth Quarter to be flat to up 5%.

We expect our non-GAAP quarterly earnings per share to be between $0.28 and $0.32 per share.

With these fourth quarter targets, we also have a clearer picture of our full year performance.

We expect revenue to be in the range of $9.2 billion to $9.3 billion for the fiscal year, up over 80% versus 2009.

With non-GAAP net income in the range of $0.80 to $0.84 per share.

Adjusting your models to remove the year-to-date EES inventory-related charges would reflect fiscal year 2010 performance of between $0.96 and $1 per share.

So in summary, we see a very strong finish to an excellent fiscal year.

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

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.

Carrie, let's begin.

(Operator Instructions).

Your first question comes from James Covello from Goldman Sachs.

Great.

Good afternoon guys.

Thanks so much for taking the question.

Congratulations on the good results.

If I could ask one question on NAND and one question on DRAM.

So starting on NAND, it still represents a relatively small percentage of the overall orders and you guys suggested that you thought you saw some acceleration there.

I mean, how much -- of the new fabs that have been announced, are you starting to see indications for all of those fabs, some of those fabs and kind of how do you think those layer in over the next couple of quarters?

Is it a significant portion of the orders in the coming quarter or are they more metered out over the next several quarters?

Thanks, Jim.

First of all on NAND, we think in 2010 it will end up being roughly 20% or a little bit less than 20% of orders.

We see two major fabs that are going to start really giving orders and then delivering revenue in earnest in the next couple of quarters, so we think that this is going to start moving quite quickly here in the fourth calendar quarter and into the first calendar quarter of 2011.

That's helpful, thank you.

If I could just ask my follow-up on DRAM.

You mentioned you expect a moderation in DRAM spending over the remainder of the year, is that something you previously didn't expect or was that consistent with your previous expectations?

That was very consistent with what we thought would happen.

A lot of the investment in Taiwan has been technology conversion from trends to stack, and then the bigger DRAM guys have been spending on capacity for a while, so this is pretty much just the cycle of how they plan their investments, and I think we've been aware of that for some time.

Your next question comes from Stephen Chin with UBS.

Great, thanks.

Hi, Mike and George.

Just a question on the silicon backlog, which looked like it grew another 13% sequentially this quarter.

Could you share with us any color on what that increase was reflective of?

Is that also reflective of maybe larger NAND fab showing up in backlog?

DRAM and foundry were still the strongest contributors to our order book this quarter, so as Mike said, we really expect NAND to start to pick up in the fourth quarter and beyond and DRAM to maybe back off from being quite so significant a component.

Stephen, did you have any follow-ups?

Your next question comes from Chris Blansett with JPMorgan.

Chris, can you hear us?

I apologize.

Okay, no problem.

We thought we lost you there for a second, Chris.

I did too.

I was going to ask about the manufacturing transition that's going on out in Asia and how we should expect this to progress over say the next 12 months, obviously trying to get a feel for how you think gross margins and tax rates are going to trend over that time period.

Sure, we've got two major initiatives.

One is the large area manufacturing, which is moving from Europe and the US to Taiwan.

That has been under way for some time, and as I said, we're now shipping over 90% of our large area tools out of Taiwan.

We expect over time three to four gross margin points benefit for display from that move.

They aren't getting all of that right now because they've got a lot of their supply chain is still Europe-based and they are in the process of converting that.

In Singapore we're in the early days of our ramp of the Singapore facility, which will be combined with Austin to handle all of the shipments for our semiconductor equipment business.

We expect that to continue over time.

We've said out by 2012 we would expect 50% of our shipments to be coming out of Singapore, but combined with the activities in those facilities, we also have a major supply chain initiative, given the location of our customers in Asia, we really are putting a lot of effort into a Pan Asia supply chain expansion and that's where you'll start to see the impact on the tax rate as more activity flows through our Singapore hub and we'll talk about that in the fourth quarter call when we give the outlook for next year but we would expect to see a noticeable improvement in our tax rate in 2011.

And then I guess there was a little bit of news flow that you may need to hire a little bit in Austin, Texas to kind of meet the near term demand trends, but this doesn't really change the timeline for moving manufacturing to Asia?

No, Austin is going to be an important part of our manufacturing activities for many years, and so we have had a pattern for several years of temporary fluctuation in workforce as the peaks and valleys of the cycle take place, so I would say we certainly -- this has been an extremely strong ramp for sure, but we're used to hiring and working with a very talented temporary workforce in Austin.

Your next question comes from CJ Muse with Barclays Capital.

Good afternoon.

Thanks for taking my question, in your prepared remarks, you expressed outlook for strong bookings (inaudible - audio difficulties) I was hoping you could in total and then individually with your segment how we should think about the moving parts there?

CJ, I think you're asking about bookings.

You were cutting out.

Let me just, we haven't guided on bookings.

We -- quite frankly we see a pretty strong bookings outlook across our businesses again in semicap equipment, we don't expect a fall off at all there and as I said, we expect, right now, Q1 is looking stronger than -- from a shipment standpoint than Q4 which bodes well for orders.

In crystalline, obviously we had an extremely strong quarter already in the third quarter, but again, we're continuing to see strong orders and if they come off a little bit it's coming off of records for those -- for our two businesses there.

In AGS, refurbished equipment is providing a nice boost in the order outlook there, we expect that to continue into the fourth quarter so across-the-board, we're seeing a very strong continuing order interest across our businesses.

Very helpful and if I could ask a follow-up if you could hear me, last month or so, we saw weakness in the LCD (inaudible - audio difficulties) of panel pricing coming down and utilization getting cut, particularly in Japan and Taiwan.

And I'm wondering if that's impacting your service business at all or whether you've seen any softening in your outlook for orders one, two or three quarters out from China and Taiwan?

Right, in the LCD business, they've been really quite cognizant of the inventory growth and really are taking actions to get that inventory absorbed.

Most of the inventory is not an LED kind of backlit panel, so it's important for them to move that inventory quickly and take actions, but we really haven't seen a meaningful fall off in service there or any realigning or rescheduling of deliveries, or factory start ups, in particular, there's some factories going into China now which look like they are going to just stay on schedule if not pull in a bit.

Thank you.

I might just add-on that point that we're hearing some increased discussion now about Gen 10 and Gen 11 which I think overall long term confidence in that market is positive.

Great.

Your next question comes from Krish Sankar with Banc of America.

Yes, thanks for taking my question.

Mike, I kind of had a big picture question.

If you assume the macro deteriorates from here onwards, which customer segment of yours will be the first to scale back buying equipment?

Do you think it's going to be foundry, DRAM, NAND or logic and I had a follow-up too.

That's a pretty good question, Krish.

It's hard to know exactly, but you take a look at what's going on right now in the product area and there's a lot of exciting products that are selling into the Asian economies, emerging economies around the world, the SmartPhones, the Droid phones, iPad, new computers and LED TVs, so if there really is a consumer pullback, it will be some of those companies that are really committed to those consumer products, and I think you probably see it in memory first, because they are just so tied to all those different products and then in the non-microprocessor MPU companies so then you start to see the commitment to have issues in foundries, but so far, utilization still quite high there, and no investment pullbacks yet.

Got it.

Thanks, Mike, that's very helpful, and then you kind of mentioned that the DRAM CapEx is going to slowdown through the rest of the year.

Do you have any view or early read on what DRAM CapEx would be in calendar 2011?

Thanks a lot.

We're really not ready to project 2011 yet and as an overall number for WFE or for CapEx other than to think that the percentages are going to stay relatively the same, if not move up a little bit.

WFE this year is still at 9% of semiconductor revenue, and CapEx is at a little over 14% versus semiconductor revenue, so these are still relatively low levels compared to historics, so we don't think there's overcapacity at this point and still think if the macro-economics hold in there, 2011 will be a very strong year.

Your next question comes from Peter Kim with Deutsche Bank.

Yes, thanks for taking my question.

The first question is with regards to the balance, there's the $300 million in backlog for thin films.

I was wondering how long do you think it will be before you can flush that through the system and when they do flow through your income statement, what kind of operating margins will they run at?

Sure.

We expect over the next two quarters to sign off those factories.

One of the factories should have positive operating margins, the other one is basically a zero margin deal, so the largest has a positive operating margin.

Okay, and then for the follow-up, with regards to your customer concentration, I was wondering, specifically on the foundries, have you grown foundries orders on a broader base of customers, or is this still being carried pretty much by a narrow focus of customers?

The number of customers has actually increased as all foundries now are adding capacity, certainly the top five or six foundries are all adding capacity at this point, and actually picking up for the number one foundry, who's spent a lot of their capacity early on.

Your next question comes from Gary Hsueh with Oppenheimer.

Hi, thanks for taking my question and congrats on a solid quarter.

Quick question here, I've been following the NAND flash manufacturers and they've been clearly much more bullish here in terms of getting into 2011 thinking about 100% plus day growth again in 2011, and most manufactures are talking about much better than seasonal forecasts for NAND flash this early out already in Q1, so have you started to see any reacceleration or pull ins of NAND flash equipment and particularly for new fabs and just thinking about an offset, I'm just wondering, in terms of the offset relative to maybe a digestion period in terms of tool or equipment orders from foundries, how much of an offset do you think the NAND flash manufacturers could be?

Well, we would agree with you on outlook on 100% bit growth, growing bit growth certainly over the 70% to 80% that we saw in 2010.

A lot of it depends on how strong tablet PC or tablet category is in 2011 but if it meets even midpoint of projections, it's going to drive a lot of flash memory.

As I said, we see the two big fabs that are coming on in flash memory.

We think that those will move very quickly and if they can pull in start ups, will pull in start ups.

Okay and just a follow-up question here.

I don't think you guys have gotten enough credit on market share execution.

Could you just say how well your market share execution has gone, particularly in the NAND flash segment and how that sets you up in terms of driving orders and revenue a few quarters out?

Thank you.

Sure, thanks, Gary.

Well, first of all, maybe we can just kind of take an overall view and kind of the way we look at our calculation, if we think that WFE is in the $26 billion $28 billion and we look at what our revenue will be in calendar 2010, we're quite sure that we will gain at least 2 points of share just doing that math.

We're quite -- of course bigger foundry spending is good for Applied Materials because of our exposure in EPI and annealing and transistor and metallization levels, but really where we're gaining in our lower share products like inspection and Etch is particularly both in DRAM and in Flash but we see significant gains at major flash manufacturers, particularly in Etch and we're quite excited about those going forward.

Your next question comes from Atif Malik with Morgan Stanley.

Hi, thanks for taking my questions, this is Mike Chu for Atif.

Just a question on, given the macro, have you started to see any push outs during the quarter and if so, what segments might those come from?

No real push outs, Mike, during the quarter.

As we said, we're very mindful of the macroeconomic news and really watching that carefully, but we're trying to spend as much time with customers to understand what they're thinking about and their supply chain and their investment plans for the upcoming quarters but right now nobody is backing off.

And a follow-up, could you just provide an update if you can on the LED side?

Well, we're still working on a product.

We're quite happy with the technical progress that we're making with the customers that we're working on, but we haven't introduced this product yet.

We will but I think we'll save all of the details for that time.

All right, thank you.

Your next question comes from Satya Kumar with Credit Suisse.

Hi, this is [Bijushu Ronin] calling in place of Satya.

Congratulations on a very good quarter.

So Mike, you're not ready to give your view on 2011.

Maybe you can do an early view on 2012 maybe?

I'm really not ready to talk about 2012 but I do like the positioning, early positioning, when I look at 28-nanometers which will be pretty much a dominant technology and logic, ramping in 2012, I really like the positional share wins that we have there, not only in Etch and in inspection but also in those products that are exposed to transistors.

Transistors are just going to get a lot more complicated so we're excited about that in silicon.

We think solar crystalline silicon, solar in particular is going to continue to expand at a rapid pace as prices come down and display is going to continue to invest at 8% or 9% of overall revenue, so we like our expanding position there.

Our PVD system is very, very beneficial for customers in their cost of ownership, so we think we have expanding position there as well.

Thank you, Mike.

I had one more follow-up question.

During Semicon, you had mentioned you're working with more than 15 TSV customers and you're qualified in three different customers.

Can you provide us any update on the TSV customer status as well as the total opportunities in that space in 2011, and you had mentioned that the Semitool revenue was accretive so I wanted to find out if it is both in plating as well as clean?

Sure.

I'll let George handle the Semitool and I'll just comment a bit on wafer level packaging and TSV in particular.

This is still an emerging area but it's one of those areas where we think we have by far the strongest offering in the industry.

We're working with quite a number of customers, we've had some big wins during this -- very exciting wins during this quarter in TSV.

In 2011 it's still not going to be a very big market.

We'll talk more about that when we get to 2011 but this is going to be the way people package semiconductors over the long haul, so this market is going to grow very, very fast over the next few years.

And then on the Semitool, the accretive is based on their total business which includes both plating and cleans.

Your next question comes from Tim Arcuri with Citi.

Hi.

This is Wenge Yang for Tim.

A couple of questions.

First regarding the crystalline solar, we've seen capacity ramp for several quarters and while the module makers are very excited about the current demand, they are also very nervous.

Could you provide some color on what's the outlook for continuous ramp?

Is there any sign that could take a pause in the near term and I have a quick follow-up.

I would just say that the major solar cell manufactures are -- their factories are fully loaded.

They are not meeting demand today.

I can't say that about all the rest of the customers but if you take the top 10 or 15, they're all full and ramping pretty much as fast as they can.

There's, as you know, a lot of contract arrangements being made now that helped the top tier guys with their capacity, so we just see very strong orders yet and full factories and no step back from that at the current time.

In fact a lot of the discussions now about even 2011 are strong, but as I said, there's 11 to 13 gigawatts of capacity being put in.

That's a heck of a lot of capacity but we haven't seen signs of pull back at this point.

Okay, just a quick follow-up for George.

With the organization change, a lot of things moving, could you provide some new guidance on your OpEx in the coming quarters?

Thank you.

So we've been operating at about $520 million to $540 million in OpEx over the past few quarters.

Really the outlook next year will determine whether it's up or down and we've got, we've made good progress on our cost reduction programs throughout the Company.

We're about half way through the $200 million to $250 million in OpEx reductions.

We'll continue to see that reflected in the numbers and then it will just determine whether or not the business is up or flat to determine where overall OpEx comes out but we're very pleased with the progress we've made on our cost structure.

Your next question comes from Patrick Ho with Stifel Nicolaus.

Thanks a lot.

First off, I think last quarter you mentioned that you saw a relatively high level of turns business and you thought that that could be the norm going forward.

Can you just comment on what you saw this quarter and whether you expect that to continue like you said last quarter?

We do.

We think it will continue and in particular, foundry customers tend to be some of the shortest cycle customers in terms of order profile, so it's gotten a little bit better but it's -- we still will expect to see a lot of dialogue early in the quarter.

Great, and my follow-up in terms of the growth at the Baccini business, can you characterize whether the strength is coming primarily from share gains in new customers or is this strength coming from I guess the capacity buys returning from your existing customer base?

We think that -- the answer is both, Patrick.

We think that during this year, we will gain something approaching 10 points in cell systems at Baccini, but there is huge expansion in China where we're both gaining share and we see such a large level of expansion.

Remember my comment early on was that there's 80% growth year-over-year in the crystalline silicon spending, so some of that is share gain, some of that is the incumbent customers spending a lot more.

Today we have something over 80 customers in China, so there are a lot of new customers this year that represent that gain in share.

Your next question comes from Edwin Mok with Needham Company.

Thanks, first question is for George.

If I look at your midpoint or guidance, it's implied you have a lower gross margin in the current quarter.

Is that just conservatism on your part or what are the moving parts there?

No, I think we gave some characterization on the guidance, we think it will be another strong quarter for SSG and display will be picking up, AGS will be picking up, so we should see strong flow through in the quarter, so I can't reconcile your gross margin estimate but we think we'll see a good flow through this quarter.

Okay, and then just follow-up question on the silicon side.

If I look at your logic order, it was actually a sizeable increase sequentially in the fiscal third quarter and I guess your comment is that it will be stronger in the coming quarter as well.

I was wondering how concentrated are those orders and I follow all of the logic customers moving more towards foundry model.

How do you reconcile that?

Well, we do think that logic orders will be up substantially.

They were up substantially Q3 over Q2 and will be up substantially in Q4 over Q3.

The number of standalone logic companies are down but there is an increased number of them that are ordering in Q4, but you can imagine still there's the largest of those logic customers as the main part of that increase.

Your next question comes from Mahesh Sanganeria with RBC Capital Market.

Thank you for taking the question.

The question on the 200-millimeter tool and if you can provide some color on how to model that, you had $100 million -- AGS orders grew $100 million, that is not typical and your revenue is also growing in line with that, so the key questions I have is where are you seeing the strength from?

Is it analog fabs or China foundry or the logic fabs, and how sustainable that is?

And another question, you said something about margin, operating margin getting hit because of 200-millimeter ramp.

If you can clarify that because I would think that these 200-millimeter tools will be very high margin, probably more than your silicon system group margin, because it's probably onesies and twosies, so that will be helpful.

Thanks.

Why don't I cover the financial end of this.

The financial impact was really a lot of work around getting tools out that were still required some additional parts from the supply chain.

The supply chain for 200-millimeter was much colder than the 300-millimeter supply chain and was not prepared for a very strong and immediate increase in demand for tools so firing that back up led to what I would describe as underabsorption of our manufacturing in the quarter and that impacted margin.

200-millimeter is a good business for us, I won't comment on the specifics of the margins but it will be positive to AGSs margins for the quarter, and if you look at the order book, the lion's share of the, what I would call the non-kind of linear growth that you would expect out of wafer fab -- or excuse me, out of wafer starts is 100% explained by the orders for 200-millimeter equipment and maybe Mike, you want to talk a little bit about the location of who's demanding 200-millimeter equipment?

Sure.

What we're seeing from the demand aspect is, it's pretty broad based in this segment from analog, automotive, foundry, and MEMS growing capacity.

The sustainability of which is pretty good.

I think especially when you look at the analog and automotive parts, those parts aren't going to go off 200-millimeter.

MEMS is just getting on to 200-millimeter, so we think that this market is going to see some certainly some significant growth in the next couple of quarters and then stabilize at a high and sustainable level.

Just a quick follow-up, if you can.

I mean the business had been improving overall for a while, and I'm just wondering what was the cause for this step up and if you can give us some indication of what is a normalized run rate for 200-millimeter and are we looking at the new run rate going forward?

I don't think we really have a normalized run rate coming after 2008 really.

The demand dropped off so significantly, it's not clear whether we're seeing a start of a new normalized run rate or just catch up for underinvestment in 2009 and some requirements for 2010.

We're certainly seeing, as Mike said new customers, new customer groups looking at it but we don't have a normalized run rate for you, thank you.

Okay, thank you.

Your next question comes from Jagadish Iyer with Arete Research.

Thanks for taking my question.

Two questions.

First question is the first time you guys gave out kind of visibility into the January quarter for the silicon segment, how do you see the other three segments tracking?

No good deed goes unpunished.

Really, we wanted to give an indication because we were -- the order pattern if you saw kind of a flattening out quarter-over-quarter, it might not be clear that we're starting to see indications of upward shipments in Q1 so we just wanted to give a little bit more visibility into that because we had it.

Display as we've said, we expect spending to continue to be strong.

It can be lumpy though and so orders and revenue get to be a little lumpy, so we don't go out two quarters and try and give a forecast there.

We'll give you a better indication on that coming and AGS will be a function of the continuing demand for 200-millimeter.

Okay, and a follow-up question is what are your lead times in your crystalline and silicon equipment?

Are they stretching or are they coming down and is there any, can you quantify in terms of share gains how much will you be able to gain in '11 in your crystalline silicon segment?

Thank you.

Overall lead times have stabilized, our manufacturing capability has really dramatically improved over the last few quarters.

Just the testimony to revenue in this last quarter from both our PWS and from Baccini Cell Systems is -- kind of gives you an indicator that we're delivering and delivering to the needs of those customers.

I'm not going to project any share gain.

We had a big goal for 2010.

The teams met that goal, so we'll give them a new goal in 2011, and talk to you about that maybe at the next call.

Your next question comes from Robert Pickover with CREF.

My questions have been answered, thank you.

Thanks, Robert.

If we have one more question I think we have time for that still.

Your last question comes from Krish Sankar with Banc of America.

Thanks for taking the follow-up.

Question for George.

George, you seem to be running at about a $540 million OpEx run rate quarterly.

If you flatline your sales and the mix of your sales with a different groups, at what point do you think the cost reduction activities would kick in?

I think if we stay flat you'll start to see the cost reduction, you'll see the cost reductions roll in.

Would it be like in Q1, Q2?

Yes, I think part of it will certainly be reflected by the EES actions that we're taking which are in over the next three quarters, as we said before.

Got it.

Thanks.

Thanks, Krish.

Okay, with that we would like to thank everybody for joining us on the call this afternoon.

Our earnings slide package is now available on the website and a replay of this call will be available by 5:00 PM Pacific time.

Both will remain available until September the 1st.

Thank you for your continued interest in Applied Materials.

This concludes today's conference call.

You may now disconnect.