應用材料 (AMAT) 2010 Q4 法說會逐字稿

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  • Operator

  • 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, momentum, strategic positions, operational improvements, products, market and industry outlooks and Q1 and fiscal 2011 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 November 17, 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 slide, which are available on the investor page of Applied's 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.

  • Michael Sullivan - VP of IR

  • Thank you, Carrie, and good afternoon.

  • Today we'll be discussing Applied's results for the fourth quarter and the 2010 fiscal year which ended on October 31.

  • Our earnings release was issued at 1:03 Pacific Time, and you can find a copy on Business Wire and on our website at appliedmaterials.com.

  • 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.

  • Mike Splinter will lead off the call with comments about the industry environment, as well as our performance and plans.

  • George will follow with his comments on our financial results for the quarter and the year, along with our expectations entering fiscal 2011.

  • We have a lot of ground to cover today, but we'll be sure to leave plenty of time for your questions.

  • And with that, I'd now like to turn the call over to Mike Splinter.

  • Mike Splinter - Chairman, CEO

  • Thanks, Mike, and good afternoon to everyone on the call today.

  • I'm pleased to report that Applied ended our fiscal year with an outstanding fourth quarter.

  • And we report that and enter 2011 with positive momentum.

  • In the fourth quarter, we grew revenues to $2.9 billion, generated $700 million in operating profit, and delivered earnings that exceeded the high end of our target.

  • Reflecting on the year as a whole, I'm pleased with the progress we've made against our strategic plan.

  • Our goals for 2010 were clear.

  • Capitalize on the recovery in our markets, gain share in our core businesses and achieve a new level of operating performance and profitability.

  • We delivered in all three of these areas.

  • We took advantage of the recovery in semiconductor and display equipment, with revenue growth and an expected two points of share gain in wafer fab equipment spending.

  • We took aggressive actions to restructure our solar business which enabled EES to achieve profitability in the fourth quarter.

  • In addition, we made operational improvements throughout the organization that make us more efficient.

  • These changes included opening new operation centers in Singapore and Taiwan that are already improving customer delivery and gross margins.

  • Before I comment on the upcoming year, I'd like to thank the entire Applied Materials team for their outstanding achievements during 2010.

  • While we are mindful of the fragile state of the global economy, we have a positive view of the markets we serve and expect the fundamental drivers of 2010 to remain in place next year.

  • We see demand for consumer electronics remaining strong, led by the emerging markets.

  • PC sales are projected to grow 5% to 10%, smartphones are forecast to approach 400 million units, LCD TVs reaching 215 million units and tablets are expected to grow to 50 million units or greater.

  • Tablets are also leading the transition to solid state storage, and as a result, we expect NAND bit growth to be in the range of 80% to 90% next year.

  • This is projected to support more than $6 billion of equipment spending, and NAND investment will likely surpass DRAM for the first time.

  • In semiconductor equipment, we see PCs as the biggest swing factor in our wafer fab equipment forecast for next year.

  • We also see continued strength in solar, where installations are on track to grow at 20% to 30% in 2011.

  • This growth is being driven by solid project returns, even as feed-in tariffs decline.

  • Let me now turn to each of our segments.

  • In semiconductor, we expect WFE spending to finish this calendar year in the range of $29 billion to $30 billion, which is above our previous view of $26 billion to $28 billion.

  • We anticipate next year's spending to be in line with 2010, plus or minus 10%.

  • Looking further ahead, we are now tracking 17 new fabs and fab expansion projects that represent about $60 billion of equipment spending over the next eight to 12 quarters.

  • We expect next year's foundry and logic spending to remain solid with an acceleration in NAND helping to offset a pause in DRAM investment.

  • NAND provides a number of market inflections that Applied can leverage to win further share.

  • These customers were the first to adopt double patterning which has enabled us to gain positional wins with our Mask and Brightfield inspection products.

  • Recent double patterning etch wins will also contribute to our anticipated share growth next year.

  • And as NAND makers transition to the 3X node, our flowable CVD solution will be a key enabler for their multi-level cell architectures.

  • SSG exits 2010 with momentum, and we are on track to increase share in every one of our served markets.

  • We expect to gain two points of share in overall WFE spending, which equates to roughly $600 million of revenue.

  • We are especially pleased with our traction in etch, where we won a number of strategic orders and expect four points of share gain this year.

  • In PVD, we're increasing our position across all applications, including copper barrier/seed, and we had key production wins in the rapid growing metal gate area.

  • In addition, CMP and Semitool achieved records -- revenue records in the fourth quarter.

  • Our share gains are being fueled by new product innovations, including 12 new products introduced over the past 12 months; and next year, we expect about 20% of our revenue to come from these products.

  • We are particularly excited about our leadership in the rapidly growing wafer level packaging market where we have won over two-thirds of the advanced packaging decisions this year.

  • In 2011, we anticipate wafer starts to increase by approximately 4% year-over-year and our global services business to grow faster than wafer starts.

  • We are earning a larger share of business in Asia, a region that has traditionally been a challenge for service penetration.

  • In display, we expect CapEx for 2010 to be 70 to 80 -- 75% to 80% higher than in 2009.

  • And in Q4, our display group delivered one of the best quarters in its history.

  • As the holiday season approaches, we are seeing weakness in end markets.

  • TV makers are cutting prices to reduce inventory levels, and we expect LCD CapEx to be down more than 20% next year.

  • However, we believe we can outperform this overall trend with continued share gains in PVD and revenue growth from touch panel and OLED products.

  • Touch panel equipment alone represents a $200 million market opportunity next year.

  • In EES, the fourth quarter was a tremendous end to a record year for our Baccini and PWS businesses.

  • Both businesses surpassed their previous peaks for quarterly revenues and orders, and we expect this record performance to be eclipsed in the first quarter of 2011.

  • Demand in the solar market remains extremely robust.

  • We now believe panel installations will reach 16 gigawatts for the calendar year and expect 2011 installations to be in the 19 to 21 gigawatt range.

  • The top panel manufacturers are running at full utilization and are still adding capacity.

  • Following a year that exceeded our expectations, we are projecting solar CapEx for 2011 to be approximately flat year-over-year in the range of 13 to 15 gigawatts with each gigawatt of capacity representing over $200 million of equipment opportunity for Applied Materials.

  • China and Taiwan drove three quarters of this year's crystalline silicon capacity addition and now constitute 65% of capacity worldwide.

  • Applied has higher market share in China than in the rest of the world, so this trend bodes well for our business.

  • In summary, the fourth quarter was a strong finish to an excellent year for Applied Materials.

  • We delivered on our objectives and gained market share.

  • We have reached profitability in our energy and environmental business and made operational improvements across the Company.

  • We increased our R&D spending to $1.1 billion and exit the year with a pipeline of innovative products.

  • This sets the stage for us to outperform our markets again in 2011.

  • We enter the new year with a strong balance sheet that allows us to fund our innovation, maintain strategic flexibility and return cash to stockholders.

  • Now, let me hand the call over to George, who will provide additional details about our performance and our outlook.

  • George?

  • George Davis - CFO

  • Thank you, Mike, and thanks to everyone for joining us today.

  • I also want to thank the employees of Applied Materials for their efforts to drive a very strong quarter and year for the Company.

  • After a most difficult 2009, our employees around the world rallied to meet the challenges of a 90% ramp in revenue while accelerating new product development, growing market share and improving the operating performance in all of our businesses.

  • Now, I'll start with a brief summary of our results for the fourth quarter.

  • Orders were up 11% over Q3, driven by solar and semi equipment demand.

  • This is our sixth consecutive growth quarter and our highest order level in almost 10 years.

  • It is worth noting that China accounted for 32% of the orders, led by our crystalline silicon customers.

  • Net sales grew 15%, well above our target range, with stronger than expected results in our solar, display and semiconductor equipment businesses.

  • A SunFab signoff of $225 million was the largest single contributor to higher than expected revenue growth in the quarter.

  • Non-GAAP gross margin was 42.5%, up eight points on higher revenue and the absence of the inventory charge taken last quarter.

  • The SunFab signoff lowered overall gross margin by two points.

  • Non-GAAP operating expenses of $516 million were favorable to our target range due to an accelerated reduction of EES thin film related spending and the favorable impact of some discrete items.

  • We expect non-GAAP operating expenses to be in a range of $500 million to $520 million per quarter during the first half of fiscal 2011, down from our recent quarterly run rate of between $530 million to $540 million.

  • Non-GAAP EPS was $0.36 per share, exceeding the high end of our range by $0.04.

  • The increase was driven primarily by higher net sales and lower spending.

  • The SunFab signoff contributed approximately $0.02 of incremental earnings per share.

  • Operating cash flow was $525 million, or 18% of sales.

  • During the quarter, we increased our buyback to $150 million and used $93 million to pay a dividend of $0.07 per share.

  • The Silicon Systems Group had order growth in the quarter of 9% and a book-to-bill ratio of 1.1.

  • Net sales increased 2% to $1.5 billion.

  • Foundry customers once again led investment with growth in logic offsetting a decline in DRAM spending.

  • We see this mix pattern continuing into the first half of 2011.

  • Operating margins were strong at 38%, which included some increased R&D investments.

  • In AGS, orders of $631 million reflected continuing demand for 200-millimeter systems.

  • Net sales were up 10%, in line with expectations, and operating margins continued to be impacted by supply chain issues around 200-millimeter systems.

  • The display group concluded a cyclical growth year for LCD equipment with its highest net sales quarter of the year at $281 million.

  • As we expected, display orders were down 27% in the quarter, signaling a period of reduced spending for LCD equipment as customers absorbed the 2010 capacity additions.

  • EES achieved record orders and revenues in the quarter.

  • The SunFab signoff and a 25% increase in crystalline silicon equipment were the primary drivers of higher sales.

  • EES now has $861 million in backlog, 85% of which is for crystalline silicon solar equipment.

  • EES became profitable in the quarter and achieved a 14% operating margin.

  • Next, I'll make a few comments about our 2010 fiscal year performance.

  • 2010 orders and revenue both grew substantially from last year, driven by a recovery in semiconductor and display equipment and continued growth in solar.

  • We delivered non-GAAP EPS of $0.88 per share, which is equivalent to $1.03 per share when excluding the EES inventory-related charges taken in Q2 and Q3.

  • For the fiscal year, Silicon Systems Group net sales were up 170%, adding $3.3 billion, and operating profit increased over 800%, reaching almost $1.9 billion.

  • AGS net sales improved 34% to $1.9 billion, in line with wafer starts, higher utilization rates and increased 200-millimeter equipment spending.

  • Display net sales rebounded in 2010, up almost 80% year-over-year to $899 million.

  • And during the year, we restructured EES to improve profitability and focus on our rapidly growing crystalline silicon business.

  • In 2010, Applied generated $1.7 billion in cash from operations after investing more than $1.1 billion in research and development.

  • We also bought back $350 million in shares, increased our dividend by 17% and ended the year with $3.9 billion in cash and investments.

  • Next, I'll turn to our revenue outlook for fiscal 2011.

  • We currently expect our overall net sales to be flat to modestly higher and within a range of plus or minus 10% year-over-year.

  • We expect SSG net sales to be up modestly in fiscal 2011, primarily due to share gains and within a range of plus or minus 10%.

  • While this moderate growth assumes an environment of flat wafer fab equipment investments, our wide range reflects the dependency on continued foundry spending and a second half ramp in NAND capacity additions.

  • We expect spending by DRAM customers to soften considerably during the year.

  • AGS net sales in fiscal 2011 are expected to be up in the range of 10% to 15% year-over-year.

  • We expect the primary drivers to be growth in spare parts and services resulting from wafer start additions.

  • We expect display net sales to be down between 20% and 25% versus 2010.

  • This reflects a down cycle in the first half of the year for LCD equipment investment, partially offset by higher investment to support equipment related to OLED and touch screen related devices.

  • Upside to our sales forecast is possible with an acceleration of the LCD build-out in China.

  • In EES, we expect 2011 net sales to be down in the range of 20% to 30%.

  • The major factor in the decreased outlook is the absence of any material revenue related to thin film solar.

  • We are entering fiscal 2011 with strong demand for crystalline silicon solar equipment in the first half of the year.

  • At this level, we expect EES to achieve above the post restructuring model of greater than 10% operating margin throughout the year.

  • We expect our effective tax rate to drop four to five points from our 2010 rate of 32.4% as a result of the continuing phase-in of our Asian supply chain.

  • Now I will cover our targets for the first quarter of 2011.

  • We expect SSG net sales to be approximately flat with risk and upside relatively balanced.

  • AGS net sales are expected to be up modestly, despite softening utilization rates.

  • In display, we believe net sales will be down approximately 40% as customers pause in line with end market softness.

  • The first half of fiscal 2011 is expected to be a relatively weak period for LCD investment.

  • We expect EES net sales to be down approximately 30% from Q4, which benefited from $225 million in SunFab revenue.

  • Sales of crystalline solar equipment are expected to be up more than 10% in the quarter, as the investment ramp continues in that market.

  • Overall, we expect our Q1 net sales to be down between 8% and 15%.

  • The absence of the large SunFab signoff has an 8% impact quarter-over-quarter, and the lower display outlook is about a 4% incremental impact.

  • We expect non-GAAP EPS to be in the range of $0.30 to $0.34.

  • In short, we see Q1 being a solid start to what we expect will be a strong fiscal year for Applied Materials.

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

  • Michael Sullivan - VP of IR

  • Thanks, George.

  • And to help us try and reach everyone on the call today, please ask just one question and no more than one brief follow-up.

  • Sheri, let's please begin.

  • Operator

  • (Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

  • And your first question comes from CJ Muse with Barclays Capital.

  • CJ Muse - Analyst

  • Yes, good afternoon.

  • Thank you for taking my question.

  • First off, the guide for fiscal 2011, very helpful.

  • So, thank you.

  • I guess within that, on the WFE plus or minus 10% for fiscal 2011, can you talk a little bit about what kind of expected linearity you see throughout the year?

  • Mike Splinter - Chairman, CEO

  • Well, I think we have pretty good visibility into Q1, CJ, but I think the things to look for, and I'll just tell you how we're looking at it, kind of the indicators we're looking at.

  • The first one really is PCs.

  • PCs still drive a huge amount of the DRAM capacity.

  • We kind of targeted our view of flat WFE at about a 7% growth in PCs and percent growth versus percent of WFE is almost a one-to-one kind of relationship.

  • So, if PCs were up in the 10% to 15% range, we would expect WFE to be up.

  • The other thing we're really looking closely at is tablets and -- because tablets and smart phones drive NAND spending.

  • We're kind of -- we're expecting 50 million tablets and 350 -- or 400 million smart phones.

  • That's kind of our flat scenario.

  • So, more than that would drive higher wafer fab equipment spending.

  • As George talked about, we think Q1 SSG will be pretty strong, modestly flat to up.

  • And so that kind of tells you how we see the start of the year, at least January start of the year in WFE.

  • CJ Muse - Analyst

  • Okay.

  • And as a quick follow-up, considering kind of the ranges you expect across divisions, what kind of gross margin profile should we expect relative to the 42% you printed in fiscal '10?

  • George Davis - CFO

  • I think the way to think about gross margin is we've obviously had a lot of noise in it, in both '08 -- or excuse me, '09, from just the environment and '10 from the restructuring of EES.

  • We said that we would have been up 2 points, so in the 44% plus range this quarter, if we had not had the SunFab signoff.

  • That's probably a reasonable starting point, and then it will be a mix effect from there on.

  • Operator

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

  • Atif Malik - Analyst

  • Hi, thanks for taking my question, and congratulations on the strong quarter.

  • My question's on the services side.

  • George, you guys are doing quite well in terms of operating margins on other segments and kind of exceeding your prior peak levels in 2007 but on services, you mentioned there's some supply chain issues on 200-millimeter.

  • So, as we see your sales growing 10% to 15% next year, can you help us understand where the operating margins for that business could be next year?

  • George Davis - CFO

  • Sure.

  • We obviously -- we improved somewhat this quarter over the previous quarter, but we're still well behind where we want to be in terms of our operating model for the second half of 2011.

  • We're still, though, working with a cold supply chain and incurring relatively significant additional costs to support our customers.

  • So, we think it's going to take another quarter or two to get through this issue, and then you should start seeing 3 to 4 points or more of operating margin pick-up with the same level of revenue.

  • Atif Malik - Analyst

  • Thanks, and then a quick follow-up.

  • On the $600 million revenue that you expect from 2 percentage points of share gain in the silicon segment, can you help us understand how much of that is being NAND driven as the devices move to below -- to ex-nanometer and Applied benefit from its deposition, product portfolio there?

  • So, how much of the $600 million are from NAND contribution?

  • Mike Splinter - Chairman, CEO

  • That's a pretty hard question to answer.

  • I think the way we're looking at this is in the scenario, because you can do a million scenarios, but we're -- as I said, we're expecting flash to be about $6 billion, let's say, out of the 30.

  • So, DRAM's almost the same.

  • We're expecting foundry to be up a bit.

  • So, our specific share in flash is off our average WFE share but our specific share in foundry is above our WFE share, so these things kind of balance out overall.

  • George Davis - CFO

  • Also, the 2% related to 2010, and so that reflects the mix of business that we saw, which was lighter in NAND overall than what we would expect to see in 2011.

  • Mike Splinter - Chairman, CEO

  • But we do expect to gain more than a point of share versus WFE in 2011, which would be 2 points, more than 2 points in our markets.

  • Michael Sullivan - VP of IR

  • Thanks, Atif.

  • Operator

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

  • Jim Covello - Analyst

  • Hi, guys.

  • Thanks so much for taking the question.

  • I appreciate it.

  • So, when you talk about NAND ramping in the second half of next year, can you talk a little bit about the dynamic there of do you think the existing NAND capacity can satisfy the early part of the tablet ramp as we go through next year?

  • And then it's incremental tablets are driving that incremental NAND spend?

  • Or if you could talk about the dynamics behind that.

  • That would be great.

  • Mike Splinter - Chairman, CEO

  • We just think second half will be greater than first half.

  • It's not that there isn't investment in the first half, but in particular, we think we'll see the major part of a major factory in Japan ramping up in the second half.

  • So, that's really the major effect there.

  • But other additions will happen as a matter of course in the first half of the year.

  • In 2010, flash spending was $4 billion, so we'll certainly see that kind of run rate pretty much continue and grow through the year.

  • Jim Covello - Analyst

  • I see.

  • And so could you see orders ramping over the next few quarters and then it's the shipments that ramp in the latter part of next year, is that the idea?

  • Mike Splinter - Chairman, CEO

  • Yes, that's the idea.

  • Operator

  • Your next question comes from Satya Kumar with Credit Suisse.

  • Satya Kumar - Analyst

  • Yes, hi.

  • Thanks for taking my question.

  • Just a quick question on the solar side.

  • You've seen a significant ramp in orders from Q1 to Q4 for solar, and you're talking about a 12 to 14 gigawatt new capacity additions for the whole year.

  • If I look at Q4 alone, is it fair to say that on a run rate basis the new capacity additions are approaching the 18 to 20 gigawatt run rate?

  • Mike Splinter - Chairman, CEO

  • I think that's fair, yes.

  • Satya Kumar - Analyst

  • Now --

  • Mike Splinter - Chairman, CEO

  • On a run rate basis.

  • Satya Kumar - Analyst

  • Yes, yes.

  • In the last conference call I think you were sounding a little bit more cautious on the sustainability of this type of new capacity additions, but it appears that you're looking at a similar capacity addition run rate for fiscal 2011.

  • I was wondering what trends you're seeing in the customer base that makes you believe that this trend can continue?

  • I think you even mentioned that fiscal Q1 looks better than fiscal Q4.

  • Mike Splinter - Chairman, CEO

  • Well, that's obviously the number one trend, that our customers have confidence to continue to invest, and invest strongly in capacity.

  • And many of the bigger guys are fully loaded and sold out for some extended period of time.

  • So, they're adding capacity and haven't slowed down a bit.

  • As a retrospective, as I thought about how I felt a year ago, I was -- the situation was kind of the same.

  • Business was strong, it was continuing to go up, and I think we haven't seen the peak yet in solar.

  • And despite feed-in tariffs continuing to go down, they seem to just spur more investment as the pricing continues to get driven down.

  • I don't think -- I think pricing for modules and installation is going to continue to go down, which will continue to make it look like a very solid investment.

  • Satya Kumar - Analyst

  • Thanks.

  • Michael Sullivan - VP of IR

  • Thanks, Satya.

  • Operator

  • Your next question comes from Stephen Chin with UBS.

  • Stephen Chin - Analyst

  • Hi, Mike and George.

  • Nice quarter.

  • Just a question on the January quarter, silicon sales guidance.

  • I think you said it would be flat to up slightly sequentially.

  • My question is that the silicon backlog was up another 21% sequentially in this October quarter, so you might argue that the January sales guidance could be conservative.

  • Is it conservative just on maybe less turns business than the silicon systems business in the January quarter?

  • Mike Splinter - Chairman, CEO

  • I think clearly, we've seen a fair amount of turns business, but you can get pushes and pulls.

  • Certainly, we're seeing with where DRAM pricing is, you've got the holiday season coming up, you've got a lot of factors that can cause customers to move things around.

  • We think with the visibility that we have today, we're comfortable with the flat.

  • That's why we said we see the risk and reward balanced for the quarter.

  • There's certainly scenarios where it could be up.

  • But you could -- there's a pretty concentrated group of customers, so it could also be down as somebody pushes out.

  • Right now, we feel good about the forecast.

  • Stephen Chin - Analyst

  • Maybe I could ask a different question on the EES operating margin.

  • I was wondering, George, maybe you could share any color on what the normalized operating margin of just the crystalline systems business might be since it looks like you're executing well there.

  • And if you don't want to share the number, is it closer to the silicon margins or is it closer to the display margins?

  • Just trying to get a sense of what this could look like going forward once the SunFab revenue recognition stops.

  • George Davis - CFO

  • Yes, well what we've said is, we gave a model in July that gave an indication of what it looks like post, and the model was intentionally conservative coming out.

  • So, we've said better than 10% operating margins at $1 billion, $250 million quarter run rate.

  • And obviously, we had a pretty strong quarter this quarter.

  • I think we can do better than the operating model, and we'll continue to watch that through the year.

  • As you know, this business can be volatile and right now, it looks very strong in the first half of the year.

  • And so we'll just have to see how the second half of the year -- but we feel very good overall.

  • And if you kind of compare year-over-year where we had a significant loss in the EES area, we're going to have a high confidence on a profit this year.

  • That's going to be a big swing year-over-year for us.

  • Operator

  • Your next question comes from Krish Sankar with Bank of America.

  • Krish Sankar - Analyst

  • Yes, thanks for taking my question.

  • Mike, you said that you expect NAND CapEx to be back half loaded.

  • What is your view on how the foundry CapEx would trend through 2011?

  • And I also had a follow-up.

  • Mike Splinter - Chairman, CEO

  • Yes, so we think foundry is going to be pretty strong throughout the year, leading the way on, even up in the first part of the year here a bit.

  • But we think it will be up overall, slightly over 2010 and pretty even through the year as the various players fill up their fabs.

  • Krish Sankar - Analyst

  • And then a question for George.

  • Given your fiscal year 2011 guidance, and keeping the composition of the revenues what you said, what do you think would be the OpEx run rate exiting 2011?

  • Thank you.

  • George Davis - CFO

  • Well, what we've said is we're going to -- first half of the year we think the OpEx run rate will be somewhere between $500 million and $520 million.

  • I think we'll just have to see how the second half plays out.

  • We've got a fairly strong variable model, as you know.

  • If we see strength in the second half of the year, then I think that's probably a good continuing estimate.

  • But it will get a little bit of help just because we'll continue to have -- finish up the restructuring of EES over that time period.

  • And if for some reason the year is down, we'll be able to take OpEx down a little bit with it.

  • Operator

  • Your next question comes from Peter Kim with Deutsche Bank.

  • Peter Kim - Analyst

  • Hi.

  • Thanks for taking my questions.

  • So, the first thing I wanted to ask about was the EES portion.

  • In the crystalline silicon, do you expect the crystalline silicon sales in fiscal 2011 to be, just the silicon segment alone, will be up year-over-year or slightly down?

  • George Davis - CFO

  • For just the crystalline sales?

  • Peter Kim - Analyst

  • That's correct.

  • George Davis - CFO

  • We believe they'll be up.

  • Peter Kim - Analyst

  • Up year-over-year.

  • And you'd expect that to operate at near 10% to 14% operating margins?

  • George Davis - CFO

  • Yes, definitely better than 10%.

  • Peter Kim - Analyst

  • Okay.

  • And with regards to the 200-millimeter, it's definitely been very strong for you in the past couple quarters.

  • I was wondering how long you think that trend could continue?

  • Do you expect that demand for 200-millimeter refurb to continue to improve year-over-year, or do you expect that at some point that 200-millimeter capacity could start to slow down?

  • Mike Splinter - Chairman, CEO

  • We think right now we're in a bit of a surge on 200-millimeter capacity because there was so much taken off in 2009.

  • And devices for MEMS, for power transistors, for solar panels in electric cars, for analog devices, for things like display drivers all need 200-millimeter.

  • So, we think that the market will peak here sometime in 2011 and then come back down to some steady state rate that's maybe off the peak we'll see in the next few quarters by 10% or 20%, something on that order.

  • Peter Kim - Analyst

  • Thank you.

  • Operator

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

  • Gary Hsueh - Analyst

  • Great.

  • Thanks for taking my question.

  • Mike, I understand that heading into 2011 there's a lot of uncertainties and flat year-over-year kind of spending environment, the noncommittal sort of forecast for 2011.

  • But if you took your SSG kind of guidance for Q1 and let's say flat-lined it throughout the year, you're looking at a fiscal 2011 that's up well above 10%, let's say more around 15%.

  • So, I'm just wondering, where do you think the potential pitfalls are in terms of the SSG business either near term or in the back half of 2011?

  • And my second question is if we're looking at a NAND heavy spending environment in 2011, I'm wondering if you could take a quick stab at how well you guys could outperform in the market in SSG, given increasing market share as you pointed out and maybe just natural market share being higher for some of these NAND manufacturers.

  • Mike Splinter - Chairman, CEO

  • Okay.

  • So (laughter) -- That's a smart question.

  • George Davis - CFO

  • That's really good.

  • Mike Splinter - Chairman, CEO

  • Thanks, Gary.

  • Gary Hsueh - Analyst

  • You can call it the follow-up.

  • Mike Splinter - Chairman, CEO

  • Okay.

  • So yes, if the entire year was like Q1, it would be up quite a bit more than 10%.

  • It's just we're in a bit of an uncertain environment, and the big deal in my mind on this, the big pitfall or potential upside is all around DRAM and PC-related demand.

  • So, we feel like relative to -- we feel we're pretty much on the industry consensus between 5% and 10% in our estimate, but there's obviously been a lot of discussion of bigger numbers from people who know this business well, like Intel and AMD.

  • But -- so if WFE stays at strong as it is at the beginning of the year, we'll have a stronger year.

  • But the market is volatile, and it's hard to predict within 10%, I think.

  • But those are the -- that's the key area and potential pitfall.

  • Our estimate on our share growth is based on both foundry and NAND going up kind of together.

  • We're excited in particular about etch gains in flash memory.

  • That should be a big positive for us.

  • Deposition gains, of course, as double patterning becomes a bigger part of the process, and we just -- one of the areas in 2010 that positively surprised us, I think from the beginning of the year, was our CMP position.

  • We won a lot of share back in CMP.

  • We have a great new product there, Reflexion GT, that improves productivity is being adopted.

  • And of course, I did want to say that rare earth element constraints in the market are not going to slow down CMP, at least we don't think so.

  • But anyway, that's kind of the picture.

  • I'm not sure I answered all your questions, but maybe you do have a quick follow-up.

  • Operator

  • Your next question comes from Patrick --

  • Mike Splinter - Chairman, CEO

  • I guess not.

  • Operator

  • From Patrick Ho with Stifel Nicolaus.

  • Patrick Ho - Analyst

  • Thanks a lot.

  • Mike, following off that last question about the market share gains, you mentioned double patterning as being one of the key application drivers for these share wins.

  • Can you just comment broadly what other process changes or other applications that have helped you gain share, both this year and into next year?

  • Mike Splinter - Chairman, CEO

  • Yes.

  • I'd say, really three things.

  • One is the conversion to Metal Gate at the logic and foundry companies.

  • This has helped our PVD business substantially.

  • The second one is conversion to copper in the memory companies, Semitool has done very well in that market.

  • Certainly won more than their standard share by a wide margin.

  • And then the third area is the movement toward wafer level packaging where we've been able to put together a suite of products there that really help customers see how the integration of the various processes go together, and we're quite bullish.

  • We kind of added up all the wins in that space over the year, and there were some -- we won basically over 60% of those decisions in our markets, and I think there were some 65 decisions across the industry that we counted up this year.

  • So that one -- while that market isn't big yet, it really I think's a harbinger for positive future for our SSG products.

  • Patrick Ho - Analyst

  • Great.

  • And my follow-up question is kind of longer term and bigger picture.

  • Your flowable CVD product, I think you mentioned when the product was introduced, it's something that's targeting the 2X nanometer and below, and it's a $400 million opportunity.

  • Is that something that's still 2012 and beyond where you're targeting, or do you see any kind of accelerations or pull-ins into 2011 as you work with your customers?

  • Mike Splinter - Chairman, CEO

  • We really think it's the secret to really small, narrow STI and to multi-cell performance in flash.

  • So, we're starting to see more and more interest in that product.

  • Customers have had to do some extremely difficult integration schemes with spin-on and deposition -- CVD depositions to fill those narrow gaps.

  • With this product, you can get away from a lot of that complexity and cost.

  • So, we have a lot of interest there.

  • It's too early to say it's a big pull-in into 2011, but we certainly see it being an important product, certainly for DRAM for flash and getting into logic as well.

  • Michael Sullivan - VP of IR

  • Thanks, Patrick.

  • Operator

  • Your next question comes from Timothy Arcuri with Citi.

  • Timothy Arcuri - Analyst

  • Hi, Mike, a couple of things.

  • First of all, if I look at your SSG business, you overbooked what you revenued in July and you overbooked what you revenued in October as well.

  • So, if revenue is flat in January, it would seem to imply that bookings in sort of SSG are going to be down something like 20%.

  • Is that sort of the right math?

  • And then I had a follow-up.

  • Mike Splinter - Chairman, CEO

  • No, I don't think we're thinking that at all.

  • No, so --

  • George Davis - CFO

  • No, I think it really reflects the combination of starting with a very low backlog and a high turns business.

  • Mike Splinter - Chairman, CEO

  • Yes, I think our order pattern has dramatically changed from history, Tim, and to read too much into how the -- what's in the bookings backlog for SSG is more about who's ordering than the order magnitude itself.

  • Timothy Arcuri - Analyst

  • Okay.

  • So, just on that point, so Mike, are you saying that customers are ordering -- placing orders now for deliveries like in the second half of next year?

  • Is that what you're saying?

  • Mike Splinter - Chairman, CEO

  • Other way around.

  • Timothy Arcuri - Analyst

  • Well --

  • Mike Splinter - Chairman, CEO

  • Ordering now for deliveries in this quarter.

  • Timothy Arcuri - Analyst

  • Okay.

  • So if that was the case, then your bookings should sort of more closely match your shipments, right?

  • George Davis - CFO

  • I think you're also -- but you've been ramping revenue significantly coming out of '09, and you've had the turns business combined, and it's highly concentrated in a couple of customers.

  • The turns business is effectively a process by where with a few customers, they don't lock down the POs.

  • But you've had a lot of dialogue, a lot of scheduling, a lot of product configuration.

  • It's just that the way the process -- you don't close the traditional order until the quarter in which they ship.

  • So it's -- and as you know, we've been far more concentrated -- have had a far more concentrated customer base, and so you get some of these patterns that you're looking for.

  • Timothy Arcuri - Analyst

  • George, can I ask a quick one, follow-up?

  • George Davis - CFO

  • Sure.

  • Timothy Arcuri - Analyst

  • Just on the model in AGS, before you had said something like 24% to 26% operating margin at the $2 billion revenue run rate.

  • And it seems like you're 4 to 500 basis points below that model.

  • Is that just sort of a catch-up that we'll see next year?

  • Or is there something going on in AGS that's causing you to be shy of that model?

  • George Davis - CFO

  • As we've said, we're shy of where we should be against the model because of the 200-millimeter shipment issues that we're having, really all out of the supply chain.

  • So agree, we're operating at least 3 to 4 points, maybe 3 points today below where I'd like to see us, and then that widens out a little bit by the end of next year where we said we would have flown through a lot of the kind of transformational restructuring activities in AGS, so you would see the full model in place.

  • We're not at the -- we're not at our -- we're not at the second half of 2011 yet, where we said all those models would be in place.

  • But we're not where we would like to be right now there, and we're working on that .

  • Operator

  • Your next question comes from Edwin Mok with Needham.

  • Edwin Mok - Analyst

  • Thanks for taking my question.

  • So just kind of a follow-up question on your orders that you print.

  • I noticed that the orders from the kind of the logics/other customer has gone to a pretty high level, probably one of the highest historically.

  • Can I ask why that's the case?

  • Is that tied to more 200 millimeter, or is there some specific customer ordering?

  • George Davis - CFO

  • Primarily one large logic customer that's placing a number of orders, yes.

  • Edwin Mok - Analyst

  • Okay.

  • Alright, okay.

  • Then I have a follow-up question on your display business.

  • You mentioned that you guys have a new product, PVD product, you mentioned share gain in that area.

  • Baking into your full year guidance of display down 20% to 25% is roughly in line with what you said, end market.

  • Are you kind of think that there is limited room to gain further share on PVD, or is that -- am I reading too much into that guidance versus your own business?

  • George Davis - CFO

  • I think you're reading too much into the guidance.

  • We think display will be down, the market will be down more than 20%, and we were talking specifically about our guidance for 2011, the 20% to 25%.

  • So, I wouldn't read into it.

  • We think we've got a good PVD product.

  • It's going to continue to gain share and we would expect to hold share in our other major products at a minimum.

  • Mike Splinter - Chairman, CEO

  • And we have opportunity ahead with touch panels and OLEDs as another positive trend there.

  • We're just reacting to the weak TV market that we've been seeing recently.

  • Michael Sullivan - VP of IR

  • Thanks, Edwin.

  • Operator

  • Your next question comes from Mehdi Hosseini with Susquehanna International.

  • Mehdi Hosseini - Analyst

  • Yes.

  • Thanks for taking my question.

  • Mike, I'm a little bit confused.

  • In your prepared remarks, you said NAND spending is going to be about $6 billion or even higher than that.

  • And then that's going to be higher than DRAM CapEx next year?

  • Mike Splinter - Chairman, CEO

  • Yes, potentially, it will be higher than DRAM CapEx, which we think will be off a bit from where it is, just slightly lower than flash.

  • Mehdi Hosseini - Analyst

  • So, if DRAM is going to be less than $6 billion, and you're suggesting that WFE is going to be flat, then where will the $5 billion, $6 billion, $10 billion decline in DRAM spending going to be offset from?

  • Mike Splinter - Chairman, CEO

  • Okay.

  • I'll just give you the numbers we're working with so we avoid the confusion.

  • We think DRAM spent $8.5 billion in 2010.

  • We think it will be down to roughly $6 billion.

  • NAND spent $4 billion in 2010, and it will be up to over $6 billion.

  • So those two on a gross basis pretty much balance out.

  • And then we think foundry will be up, to give us flat overall margins.

  • Mehdi Hosseini - Analyst

  • Very helpful.

  • And then just as a follow-up.

  • When are we going to hear any update on LED front?

  • Mike Splinter - Chairman, CEO

  • We're working with some key customers, and we're getting increased interest.

  • But they're starting to really see the uniqueness of our product, and when we're -- when the product has met all of its requirements, we'll introduce it.

  • But not until then.

  • Mehdi Hosseini - Analyst

  • Should I assume that this is a strategy for use to make sure that the product acceptance penetration is in full force before coming out public?

  • It's somewhat contrast to what happened to thin film.

  • Or is that a reflection of maybe some challenges or longer than expected acceptance?

  • Mike Splinter - Chairman, CEO

  • I think we just want to make sure that the product is the product that we want.

  • These products are complex, and the process has to meet the requirements that customers have and provide uniqueness to garner its value in the marketplace.

  • So, I wouldn't read a whole lot into it besides that.

  • Mehdi Hosseini - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from Bryan Lee with JPMorgan.

  • Bryan Lee - Analyst

  • Hi, guys.

  • Just a couple quick things from me.

  • I guess last quarter you provided guidance for the quarter but also some qualitative color around SSG shipments being up in fiscal Q1 versus Q4.

  • Do you have that same level of visibility today to provide the same sort of qualitative color for fiscal Q2 relative to Q1?

  • George Davis - CFO

  • No, I think we're -- we had just such a very strong indication on a couple of projects where it was just very clear that we would be -- we would have a strong Q1, that we went out and gave that picture.

  • Also, we felt at the time there was some confusion about whether we would be experiencing an immediate dropoff, and we just didn't see that.

  • So we're -- we don't have a -- I'd say that we have -- it's not a function of having no visibility for our fiscal Q2, but we're just going to stick with the Q1 guidance.

  • Bryan Lee - Analyst

  • Okay.

  • And then as a follow-up, I guess, on the operating margin for EES, I know you talked about the 2 point impact to the overall gross margin from the SunFab signoff.

  • What would operating margin for EES have been in the quarter if we exclude the impact of SunFab?

  • George Davis - CFO

  • We haven't broken that out, but we -- the margin would have clearly been up relative to the 14% reported.

  • It was a very strong quarter overall, and so again, we're not breaking out the individual operating margins at that level.

  • But we, again, we would expect another similarly strong quarter next quarter.

  • Operator

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

  • Mahesh Sanganeria - Analyst

  • Thank you.

  • George, you talked about $300 million and $0.10 revenue, and you said you recognized 225, some $0.02 fabs.

  • Is there some more -- is that 74 -- $75 million more that you need to recognize in January quarter?

  • George Davis - CFO

  • No, in the -- we have one remaining SunFab factory that's not signed off.

  • It's very small, relatively speaking.

  • We are talking to some of our existing SunFab customers about equipment to upgrade certain of the facilities, but we haven't forecasted any of those projects at this point.

  • Mahesh Sanganeria - Analyst

  • And quickly, if I take your yearly guidance for EES and the order you just reported, it looks like that it will be pretty meaningfully declining first because of impact of SunFab.

  • But even crystalline looks like you need to decline a lot to get to your down 25%.

  • And that would imply, if I keep backlog flattish, that will imply orders decline for 50% next quarter.

  • George Davis - CFO

  • I think you probably have too low a number for Sun -- for thin film related revenue, which is about $500 million last year.

  • So, if you make that adjustment, you'll see that at the low end it's kind of flat, and then it comes up from there.

  • Michael Sullivan - VP of IR

  • Thanks, Mahesh.

  • And Carrie, I think we have time for about two more questions, please.

  • Operator

  • Your next question comes from Jagadish Iyer with Arete Research.

  • Jagadish Iyer - Analyst

  • Yes, thanks for taking my question.

  • Two questions.

  • First, I wanted to find out -- you talked about the wafer level packaging.

  • I just wanted to understand how much has been the contribution this year from these particular share gains or wins, and what is your best estimate for 2011, please?

  • And I have a follow-up.

  • Mike Splinter - Chairman, CEO

  • You mean on the -- versus wafer fab equipment?

  • Jagadish Iyer - Analyst

  • No, just on the overall contribution to the revenues for silicon systems in terms of wafer level.

  • Mike Splinter - Chairman, CEO

  • In 2010, very small.

  • So, in 2011 I -- it'll have to take a peak, but it will be well over $100 million or more in 2011.

  • Could be as high as $300 million, depending on who ramps volume first.

  • Jagadish Iyer - Analyst

  • Okay.

  • And I have a quick follow-up.

  • Mike, this is the first time you talked about a little bit on the OLED equipment.

  • Can you give us some color on what the offering is and how this market can grow potentially, please.

  • Thank you.

  • Mike Splinter - Chairman, CEO

  • Well traditionally, OLED has been for smaller form factor screens for smart phones, cell phones and that kind of -- those kind of applications.

  • So, most of the factories are Gen 4 or Gen 5.

  • So, we're seeing a number of -- quite a few orders of upgrades of factories in that space.

  • The one -- there's one major panel manufacturer that's making a much larger factory for OLEDs for TVs.

  • So, that's really the beginning of getting the large size glass on to OLEDs.

  • So, that's the exciting -- that's the big exciting opportunity, along with some other upgrade businesses to the smaller size factories.

  • Operator

  • Your last question comes from Krish Sankar with Bank of America.

  • Krish Sankar - Analyst

  • Yes, thanks for the follow-up.

  • Just a quick question.

  • You said 85% of your EES backlog was crystalline silicon.

  • What is the remaining $125 million?

  • What is the composition of that?

  • Thank you.

  • George Davis - CFO

  • Sure.

  • We've got web-related -- you remember in this segment we also have our web business, and we've had a fair amount of interest for roll-to-roll coating related -- actually both the packaging, which has been the traditional, and then also, now increasingly for touch screen applications for what we would call our smart web products.

  • We also have some, again, a minor backlog related to one small SunFab factory to sign off, and that covers 90% of what we're talking about.

  • Krish Sankar - Analyst

  • Thank you.

  • Michael Sullivan - VP of IR

  • Great.

  • Thanks, Krish, thanks, thanks, Carrie, and we would like to thank everyone for joining us this afternoon.

  • Our earnings slide package is now available on our website, and a replay of this call is going to be available by about 5PM Pacific time.

  • Both of these items are going to remain available until December the first.

  • We would like to thank you for your continued interest in Applied Materials.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.