應用材料 (AMAT) 2011 Q2 法說會逐字稿

Welcome to the Applied Materials earnings conference call.

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

Afterwards, you will be invited to participating in a question-and-answer session.

As a reminder, this conference is being recorded today, May 24, 2011.

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, planned acquisition, industry outlook, customer spending, market position, and Q3 and fiscal year 2011 business outlooks.

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

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

Forward-looking statements are based on information as of May 24, 2011, and the Company assumes no obligation to update such statements.

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

Reconciliations of the non-GAAP measures to GAAP measures are contained in today's earnings release or in the financial highlight slides which are on the Investor page of our website at AppliedMaterials.com.

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

Please go ahead sir.

Thank you.

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 will discuss the results for our second quarter which ended on May 1.

05 Pacific time and you can find a copy on our websites, AppliedMaterials.com.

Also on the website is our quarterly financial highlights presentation which provides additional details.

Mike Splinter will lead off today's call with comments on the business environment, along with our results and strategies.

Next, George will discuss our financial performance in Q2 and our expectations for Q3 and the rest of the year.

We'll then open the call for your questions.

Before we begin, I have a quick calendar announcement.

Applied will hold an investor and media briefing at the SEMICON West Trade Show in San Francisco on Tuesday morning, July 12, Pacific time.

We hope to see many of you at the event and will have a live webcast and replay for anyone won't be able to join us in person.

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

With that, I would like to hand the call over to Mike Splinter.

Thanks Mike.

Good afternoon to everyone on the call today.

I am pleased to report that, for the first half of our fiscal year, Applied delivered record revenue and earnings.

Our second fiscal quarter was one of the strongest financial performances in our history.

We posted revenue of $2.9 billion and operating margin of 24%.

Our earnings were at the high end of our target range, and we generated $704 million in operating cash flow.

Our solar business had an exceptionally strong quarter.

With net sales of $637 million, EES set new records for revenue and profitability.

Overall, I am very pleased with our execution, results, and progress towards our strategic goals.

Shortly after the close of the quarter, we announced our intention to acquire Varian Semiconductor for a net price of $4.3 billion.

We believe this represents our best and largest acquisition opportunity in the semiconductor equipment space.

Varian adds a critical component, enabling us to provide customers with a full product portfolio for transistor fabrication and material modification.

Keeping Moore's Law on track has become a multifaceted challenge requiring new materials, new chip architectures, and new approaches to transistor formation.

By combining the strengths of Applied and Varian, our teams will work hand-in-hand with customers to accelerate the industry's technology roadmap.

We are excited about the opportunities this will deliver for our customers, shareholders, and employees.

Let me spend a few moments on the state of the economy and outlook for our markets.

In recent months, we have seen a combination of events that are affecting the short-term economic outlook.

Rising inflation in emerging markets and reduced consumer confidence have created an environment that necessitates caution.

Unrest in the Middle East has resulted in uncertainty about energy prices and fuel costs.

In addition, the economic impact of the tragic events in Japan is still not fully understood.

These cumulative headwinds have recently led some of our semiconductor and display customers to push out near-term orders.

Although we are mindful of these economic factors, we believe that the fundamental drivers within the electronics sector remains strong.

Our customers have a firm foundation for a multi-year investment cycle based on the growing role of emerging market consumers, a global appetite for high-performance mobile products, and the infrastructure buildout to support these trends.

Let me now provide an update for each of our segments.

In Semiconductors, PC unit shipments in the first quarter were weaker than seasonal expectations, down 10% sequentially.

Although we believe DRAM prices bottomed out in the fourth calendar quarter, prices remain soft.

DRAM capital investment remains low and limited to technology convergence.

Tablet sales for the past three months were around 6 million units due to supply constraints for the leading product and slow adoption for new entrants.

As a result, our orders from a number of DRAM and foundry customers were weaker than expected.

We still view 2011 as a strong year for WFE investment and expect spending in the range of $31 billion to $34 billion.

Capacity expansions are moving forward and most importantly the longer-term outlook for WFE remains strong.

Industry fundamentals remain solid with the top spenders reaffirming or increasing their capital investments.

The leaders in logic and foundry are accelerating their plans for the 28 and 22 nanometer nodes and increasing their investments in leading-edge technology.

In addition, low-power, feature-rich mobile devices are driving an increase in process complexity and capital intensity.

This trend is good for Applied with the complexity being added in areas where we are particularly strong.

This foundry's move from 45 to 22 nanometers for advanced logic devices, the number of process steps addressable by Applied tools increases by more than 30%.

Our product momentum in SSG remains strong.

We launched four new products in Q2 and overall we are on track to gain at least one more point of 300 millimeter WFE share this year.

Our Process Diagnostics and Control Group booked record orders this quarter.

We are seeing broad adoption of our Aera Mask inspection tool for in-fab use with repeat orders at DRAM and NAND customers, as well as improved traction in foundry.

In the advanced transistor area, we are seeing new [epitaxy] and CMP steps being added, combined with growth in PVD and CVD gate formation steps.

In services, we are seeing a minor reduction in semiconductor utilization rates, combined with wafer starts that are relatively flat as capacity installed over the past six months is being absorbed.

AGS delivered a strong Q2, increasing their revenue by 8% quarter-on-quarter, led by growth in semiconductor services.

AGS profitability is recovering as a result of improvements in our 200 millimeter equipment performance.

In Display, TV shipments in the first calendar quarter increased 14% year-on-year, reaching 46 million units.

This growth is below the level needed to increase capacity investments.

Consequently, we are seeing some customers delay the buildout of their new factories.

Plans remain in place for all leading display customers to build factories in China over the next two years.

However, we are seeing equipment orders being pushed out of the fourth fiscal quarter to the first half of 2012.

These delays in large area TFT investments are being largely offset by demand for small and medium area panels for tablets and smartphones.

Investments in touch panel and low temperature polysilicon for OLED and high-resolution LCDs is increasing.

We now expect to generate over $300 million of revenue from these new applications in fiscal 2011.

We are strengthening our market share position and our product portfolio in these areas.

This quarter, we released a new high-productivity PVD system for touch panels and a new gen 5.5 CVD system for low-temperature polysilicon applications.

In solar, panel demand for the first quarter was sluggish, following 8 gigawatts of installation in the fourth quarter.

Suspension and review of the Feed-In tariff in Italy, which is currently the world's second-largest market for PV, resulted in uncertainty and inventory buildup in Europe.

While resolution of the Italian Feed-In tariff is a positive for the industry, the related delays moors our full-year forecast for installation to a range of 18 to 22 gigawatts.

For EES, this was an outstanding quarter with both PWS and Baccini setting new records for revenue and profitability.

Our wafering and cell customers are adding capacity as we see the leaders scale their factories for peak demand.

We shipped over 6 gigawatts of nameplate screenprint capacity in the quarter primarily to customers in China as competition for higher efficiency at lower cost intensifies.

PWS is gaining market share secured by several large orders from key customers, underlining the B5's position as an industry's benchmark wire saw.

Orders and backlog remain healthy and although we expect to see lower shipments in Q3, it will be another strong quarter for EES.

We are monitoring capacity digestion and will manage our supply chain accordingly.

In summary, Q2 represented another very strong quarter for Applied Materials.

Our strategic plans to gain share on our core businesses and grow our new businesses while driving greater efficiency and profitability remain firmly on track.

In spite of near-term challenges and the macro environment, we believe 2011 will be an excellent year across all of our businesses.

Now, let me hand the call over to George Davis for more comments on our performance and outlook.

George?

Thank you Mike.

Good afternoon and thank you all for joining us today.

We exceeded our target for net sales in the second quarter and delivered earnings per share at the high end of the range.

During the quarter, we also raised our dividend by 14% to $0.08 per share and generated operating cash flow of more than $700 million.

These results demonstrate the positive impact of our operations and cost initiatives over the past few years, the strength of our products in the marketplace, and the relatively strong market conditions experienced in the quarter, even as some customers began to adjust their spending plans in light of the economic challenges Mike discussed.

I'll now compare our results to last quarter.

Orders rose 7% to $3.2 billion, led by growth in display and silicon.

Our book-to-bill ratio for the quarter was 1.1.

Our backlog increased 10% to $3.9 billion.

We are seeing some modest aging, but we expect about 80% of the backlog to turn in the second half of our fiscal year.

Net sales increased 7% to $2.9 billion with higher than expected sales in all segments except our Silicon Systems Group.

Non-GAAP gross margin of 41.9% was nearly 1 point lower, driven primarily at a higher mix of EES net sales.

Non-GAAP operating expenses were $513 million and would have been $528 million, excluding a nonrecurring benefit.

We expect our third-quarter OpEx to again be about $530 million with a range of plus or minus $10 million.

Our non-GAAP effective tax rate was in line with our full-year expectations at 27.9%.

Operating cash flow was very strong at $704 million, or 25% of sales.

Cash flow benefited from higher revenue levels, strong working capital management, and the front end loaded payment structures for our solar shipments.

We returned $211 million to stockholders, repurchasing 8 million shares for $118 million and paying dividends of $93 million.

Cash and investments ended the quarter at $4.6 billion, up $480 million.

We intend to fund the Varian acquisition with cash on hand in addition to short and long-term debt.

The market for debt issuance remains attractive and we may put long-term financing in place before the acquisition closes.

We estimate the quarterly interest expense of funding the acquisition before the close to be about $0.01 per share, and this potential impact is included in our third-quarter guidance.

After the close, our near-term balance sheet focus will be to reduce short-term debt.

On the regulatory front, the Varian transaction will require reviews in the US as well as China, Taiwan, Israel, Germany and Korea.

Most of the jurisdictions have an initial review or waiting period of approximately 30 days.

The transaction must also be approved by Varian stockholders.

Now I'll cover our operating segments.

Silicon Systems Group quarters grew 7%, led by our Logic and Flash customers.

Foundry orders declined but still represented almost 50% of the order book.

SSG net sales were 3% lower, driven by push-outs in foundry and a decline in Logic that were partially offset by increased sales to DRAM and Flash customers.

We now believe the second half will be softer than we expected at the investor and analyst meeting in March with SSG net sales likely to be approximately flat with the first half.

SSG operating margins declined primarily as a result of higher operating expenses related to research and development around advanced transistors and from higher field resources.

AGS orders grew 9%, led by higher demand for 200 millimeter equipment.

Net sales increased more than expected, rising 8%.

200 millimeter equipment deliveries and costs improved, driving the segment non-GAAP operating margin higher by approximately 4 points to 19%.

However, the GAAP operating margin was flat sequentially due to a write-off related to an asset sale.

During the quarter, AGS agreed to divest its parts cleaning business which had quarterly net sales of about $15 million.

The pending sale triggered a $24 million impairment charge for intangible assets which is excluded from non-GAAP performance.

AGS is making good progress toward the plan to achieve operating model performance in the fourth fiscal quarter.

Display orders increased 80% with over 70% of the total orders coming from new applications in touch panels, OLED, and advanced mobile displays.

Net sales were 7% higher with over half of the sales occurring in China.

Operating margins in the quarter increased slightly on the higher revenue.

We believe the LCD, LCD TV display cycle bottomed in the first half of our fiscal year, and we expect our sales to strengthen during the second half.

In EES, orders declined by 8% from the record level seen in the first quarter.

The slow pace of module installation in the first half of the year has led customers to examine the need for further capacity additions.

We are seeing softening demand as our customers adjust their spending plans.

EES net sales were above expectations, rising 34% to a record $637 million.

The non-GAAP operating margin was again very strong at 26%, reflecting the benefit of higher sales.

China represented 76% of our solar equipment sales.

For the first six months of our fiscal year, EES operating profits were up by about $500 million year-over-year.

This increase reflects the benefits of the restructuring actions we took in the third quarter of last year, as well as strong customer demand for our Baccini screen printing systems and our PWS wire saws.

Next, let me talk about our business outlook.

In general, our forecast for the second half of the year has moderated from our previous view of an increase in revenue led by semiconductor equipment demand.

We still expect to achieve record levels of revenue and non-GAAP earnings per share for our fiscal year.

However, our earlier forecast of achieving more than $11 billion in revenue and $1.50 in non-GAAP earnings per share will require our fourth quarter to be sequentially higher than our projections for the third quarter.

Achieving this outcome will depend on our customers seeing evidence of strengthening consumer demand over the next few months.

I'll now share our outlook for the third quarter.

In the Silicon Systems Group, we expect net sales to be flat to down 7%, reflecting a pullback in foundry spending.

In AGS, we expect revenue to be in the range of flat to down 5%.

In Display, we believe net sales will be up by more than 25%.

In EES, we expect net sales to be down by 15% to 25% as customers digest the capacity additions of the past several quarters.

We expect our overall net sales to be down in the range of 3% to 10%, or about $2.6 billion to $2.8 billion.

We expect our third-quarter non-GAAP earnings to be between $0.31 and $0.37 per share.

As a reminder, this range includes about $0.01 per share in potential interest expense related to financing the Varian acquisition before the close.

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.

Let's please begin.

(Operator Instructions).

Atif Malik, Morgan Stanley.

Thanks for taking my question.

George, in order for you to meet the prior full-year outlook, you said the demand has to improve and 4Q has to be up over 3Q.

Which segments are important to be able for you to meet the prior forecast in 4Q?

Is it going to be the silicon business that has to inflect that?

Yes.

We always expected EES to be a little bit soft in the fourth quarter, so we are really dependent on a return to growth in SSG.

Okay.

Then just to follow-up on the foundry side, you've seen the diversions at 65 nanometer utilization, and leading-edge [40] and 28 nanometer utilization there.

More recently there has been some chatter that the demand for the month of June has started to improve for foundries and utilization of leading edge and that overall utilizing is going to improve.

Are the discussions with foundries pretty fluid at this point, and that's why -- that explains the range of the guidance?

The discussions are pretty much along the lines that you just pointed out.

65 nanometer has been weak.

There is some projection that it's going to come back and be more fully utilized the next few months.

But they are being cautious about that and focusing their investment on expanding capacity at the most advanced node, virtually at every foundry.

But the three big foundries that have technology at 32 nanometers are really the ones -- and below are really the ones pushing forward today.

Thanks.

CJ Muse, Barclays Capital.

Good afternoon.

Thank you for taking my question.

I guess I was hoping to I guess dig a little bit deeper on the silicon side.

You talked about silicon revenues in the second half looking like the first half.

Given the guidance down, I guess it would imply that you do expect silicon revenues up in Q4.

So I guess the question is am I interpreting that right?

Is that what your backlog is telling you today?

Yes, I think you are interpreting it correctly.

In order for us to be flat, we have to be up modestly in SSG in the fourth quarter.

It's one of the reasons why we haven't walked away from the '11 and $1.50.

It's certainly far more at risk than previously, but we think there is still a chance that you will see an increase in spending in our fourth fiscal quarter.

Our view on wafer fab equipment spending has always been that first quarter and fourth quarter would be the biggest quarters on wafer fab equipment spending with lower investment in Q2 and Q3 of the calendar year.

So that's kind of the way our fiscal year plays out.

We have to have a pretty solid October to reach those numbers.

That's helpful.

Real quickly on LCD, can you share with us your view for CapEx including LTPS and touch panels?

What your outlook is for calendar '11 and if you have an early view on calendar '12?

We think that, in calendar '11, when you sum it all up, including touch panels and low temperature polysilicon, it would be down about 10% or 15%.

We think again in 2012 those areas are going to be -- the touch panel and high-performance displays are going to be very strong and grow.

I think the big question is how quickly the China investments are going to take place.

If they go through in the first half of 2012, we're going to see a very strong 2012 in Display, and should be certainly a record for us.

Thank you.

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question.

I have two.

Mike, your comments on the second half being flat -- if you just (inaudible) your fiscal second half was similar to the calendar second half, would your confidence level be higher?

Is it basically a matter of timing or do you feel like the customers have still not come back to the table yet?

I'm sorry, your voice cut out a little bit in the middle of that.

Could you repeat that question again?

I'm sorry.

Sorry about that.

If you had to assume that your fiscal second half was similar to the calendar second half, would you feel more confident in your SSG business in the calendar second half?

In other words, are customers indicating they'll come back in the second half or are you just being more cautious?

I think we think that the -- as you get closer to year-end, that thing start to strengthen again, so the push-outs start to come back in.

Whether we can call that they will come in into our fourth fiscal quarter or into the fourth calendar quarter I think is a little premature.

Got it.

Then just to follow up, just trying to get a sense of what your customers are telling you and what is the feedback post your Varian acquisition announcement?

Sure.

Overall, as you can imagine, we've talked to pretty much every customer that would be affected.

Overall, the feedback has been quite positive.

They see, as the industry matures and as their segments have consolidated, that the equipment segment needs some consolidation as well.

So I would say, on the whole, quite positive.

Thank you.

Jim Covello, Goldman Sachs.

Good afternoon guys.

Thanks so much for taking the question.

I guess, on the foundry side, do you think the issue is more that the foundries are seeing weakening demand, or that they've already added a lot of capacity and they have a lot more coming, or what do you think the breakdown is between those two dynamics that's causing them to soften up the orders a little bit?

Thanks.

Thanks for the question.

I think the primary look is they're adding capacity at the leading-edge, and the leading-edge is fully subscribed.

And it's fully subscribed to every one of the leading foundries.

So I don't think there is a lot of play here, and that's where they're going to continue to focus their capacity growth.

I think, when you look at it, the dynamics of what's happened in the last few months are that a lot of the growth is focused on smartphones, which really demand 40 nanometers and beyond 32 nanometer capability to be able to satisfy the processing speeds.

Those things are going to be up something on the order of close to 70% this year, I think even stronger than last year.

So I think that's a big focus right now.

Along with tablets and as a new category driving capacity, the new tablets require a lot bigger die, and again driving towards the more advanced nodes.

I think if there's a surprise for the foundry guys, it's that the subscription on 65 is lower than they would've thought.

That's where the push-outs in capacity adds are.

That's helpful.

If I could ask a follow-up, and I almost hate to ask the question, but I think what you guys are doing with the Varian acquisition is tremendous.

It was really really intelligent and Varian is a phenomenal asset to be buying.

But I guess we'll get the questions from customers, so we just want to ask you guys.

Is there anything about what's going on with the cycle that changes your willingness to acquire Varian and/or pay the price the deal was consummated at?

Thank you.

Absolutely -- absolutely not.

We are very excited about the Varian acquisition.

You can see how the strategies line up between the two companies.

The products are very complimentary.

We believe that there's complexity increase going on, and investment intensity increasing in WFE, so all those things make this acquisition make tremendous sense for Applied Materials and for Varian.

We've just been thinking about all the areas we can work together to enhance solutions for our customers and think that's going to have a big positive impact over the next few years.

George, do you want to add anything on that?

I would just add that when we look at acquisitions, and we've had I think a pretty good track record, we use a pretty fundamental analysis, discounted cash flow.

I can tell you our models assume that we are still a cyclical business.

So there is an appreciation for the fact that you can't predict the cycles, but you can get a sense for valuation over time.

You really look at are there ways that we can add value together?

We've talked about the obvious areas like synergies, but really helping them take these -- their foray into some of these markets where we're more experienced, like solar and display can create value.

Also, we think there's a lot of crossover when you start getting implant engineers together with some of our thermal engineers.

Some interesting things can come out of that.

I think on the edge side there's going to be some interesting products that come out of it, so there's a lot of areas where joint development is going to create I think solutions for customers that will create value for us.

Really helpful.

Thank you so much.

Timothy Arcuri, Citigroup.

Hi, a couple of things.

George, I'm just trying to bridge the gap between the bookings that you have in April and the revenue that you're guiding in July.

It would suggest that there was a least a couple hundred million dollars worth of push-outs in the silicon business, or it would suggest that the bookings in July in the silicon business will be down about 30% versus what they were in April.

So I'm wondering if those numbers are right, number one.

Then number two, I had a question on margins in SSG.

If you can help quantify maybe what some of the impact is from the Samsung settlement?

Is that costing you a couple hundred basis points worth of margins in that business?

Thanks.

I think your -- I think the first part of your analysis, which says there has to be push-outs, we've certainly seen push-outs.

That's part of the factor.

But if you look at our backlog, you are still going to see 80% of that turn in between this quarter and next quarter and about 50% of it during this quarter.

Also in the SSG side, as you know, we've been in a very high turns environment for the past four or five quarters, a little less so in this quarter, so some of the longer leadtime customers are adding to the order book, so it doesn't necessarily turn in the first quarter, first quarter out.

So those are factors.

In terms of margins on SSG, I think clearly the Samsung agreement has an impact.

As we've said relative to the overall model, we think over time the downside case is that it takes 1 point off of the operating model.

It's a little more front-end loaded when we first get started, but really I think what you're seeing is more investment in key R&D opportunities that's impacting us in the near term.

Thanks a lot.

Stephen Chin, UBS.

Thanks.

Hi Mike, George.

Nice results.

Just another follow-up question on that silicon business.

With the backlog in silicon growing 19% in the quarter, it does seem like the momentum is strong.

So is it just a one-quarter push-out that you think might be being seen here (inaudible) why silicon sales might be up in the fourth quarter?

Is that kind of the key read?

Yes, I think that's -- I mean I think that's a reasonable scenario for the second half of the year.

We haven't put a forecast out for Q4, but that's certainly one of the outcomes that we could see as a reasonable outcome.

But part of it is going to be -- you're going to have to see kind of a reversal of what we've seen in the last quarter, which is some of these consumer devices where we've had remarkably high growth rates quarter-over-quarter and year-over-year actually had negative growth in the last quarter.

I think that's one of the things that really affected some of the foundry customers to pull back is they weren't able to get through a lot of the inventory.

As you say, there are some signs that is going to be less of a factor going forward, but we've got to see the consumer demand side pick back up.

Then Mike, can you share any of your early thoughts on 2012 WSC?

It looks like WSC in 2011 was a little bit lower than originally expected.

So can 2012 WSC be a bit higher than expected, or is this still tracking kind of flash would you think?

I think where we're at in 2012 is pretty much where we were at analyst day, $35 billion plus or minus a couple of billion.

The puts and takes of course haven't changed all that much except I would say that some of these push-outs that may go into 2012 would actually strengthen our view at the current time.

Satya Kumar, Credit Suisse.

Can you hear me?

I apologize for that.

Back on this question on push-outs, so you mentioned that there were some economic type reasons and demand weaknesses that were leading customers to pause and push out the equipment requirements on the logic foundry side.

I was wondering if there were any non-economic "strategic" sort of reasons why your customers aren't sure on large boom in the market share for example that's causing customers to also take a little bit more time in terms of capacity additions.

Specifically on market share, market share is moving to those companies that have the most capacity at the leading edge.

Obviously, there's a couple of those that have invested in capacity at the leading edge, certainly in foundry and logic.

So I think you can see some movement in share in particular in this quarter, and then longer term it will depend how fast the other foundry competitors get their capacity online at 32 in particular, even 45 nanometers.

[In planning the] 450 millimeter, can you give us an update on where you stand on that?

When do you expect to ship the first half to the customers?

Well, as we certainly haven't established a ship date, there is a lot of work to do on 450 millimeter to look at automation and chamber design and how we're going to approach it.

So, we still think that the production dates are in the '15 to '17 -- 2015 to 2017 timeframe.

We'll have to start investing more in 2012.

But I don't think we are ready to publish a time when we're going to ship alpha tools, but it will be when customers need them.

Mehdi Hosseini, Susquehanna International.

Thanks for taking my question.

I have two.

First, Mike, is there any change in the memory customer such as consolidation that is having more of a structural impact on how much spending by memory type customers are out there?

Then just from a big picture, if I understand you correctly, the CapEx budget for this year has not changed.

There is a push-out, so that doesn't mean that the July or October quarter are going to be better than what you were expecting during the analyst event, because the CapEx budget has not changed if there's a push-out?

Why don't I take that second question first.

The push-out just depends on whether it pushes one quarter or two quarters.

I think that will depend on, again, the economic factors out there that everybody is reading the same tea leaves on this.

So from the memory standpoint, I still think by far the largest impact on memory investment -- let's take DRAM first -- is just the bit growth.

We're kind of seeing bit growth in the 40% to 50% range, which really isn't enough to drive significant capacity.

I do think that there can be difficulty in some of the smaller DRAM companies to get financing and have money available, but certainly the big three DRAM companies have cash available, including best in capacity if they need it.

We do expect to see more investment in the second half in DRAM, but it's still very small on relative terms comparing back to any of the recent peaks of wafer fab equipment spending.

DRAM is less than a third of where it was in those times.

So I think this is more really about bit growth.

In Flash, I think it's more timing.

I think in particular the soft tablet growth in Q1 allowed some of the NAND guys to push out, but again we expect them to come back in the second half and grow their investment.

We also still expect NAND investment to be larger than DRAM this year.

That view hasn't changed.

I look at (inaudible) out DRAM out of Taiwan has marginalized.

I look at every presentation slide by the top memory manufacturers.

They all talk about increased importance of return on invested capital and lower CapEx spending, so I look at all of those trends.

Quite frankly, it kind of suggests less spending compared to previous cycles.

So what gives you confidence that 40%, 50% bit growth is not enough?

Historically, it hasn't been enough to push capacity up because moving generation node to node allows them to get significantly more productivity or more chips per wafer.

It just -- they have to have demand to be able to invest.

I do agree that the smaller number of customers investing can have more discipline and you can get less accentuated cycles, but in the end it's a matter of supply and demand.

Thank you.

Edwin Mok, Needham & Co.

Thanks for taking my question.

So if I look at your prior full-year guidance, obviously you're not reiterating it here, but if I look at the $1.50 earnings that you potentially can earn this year and look at your midpoint of the third-quarter guidance, that would imply a pretty big increase in earnings for the fourth quarter.

Do you expect better margins in the coming quarters?

Specifically, is that coming from just recovery in the SSG?

Can you help me out on that?

I think you'll see gross margin improve a little bit just on mix alone.

We've also seen AGS had some margin issues this year related to 200 millimeter.

We said they are pretty much through all of that by the fourth quarter, so we expect to get that benefit.

But really it's going to require SSG revenues to come back up.

As you know, that flows through at a very high rate.

And so we'll just have to see how that plays out, but your analysis is correct.

Great, very helpful.

Then just maybe a longer-term question, I think Mike, in your prepared remarks, you talk about cell capacity, adding around 20 gigawatts this year.

It sounds like this is going to be a great year for solar equipment.

Just wondering how you guys feel about a cycle?

Are you worried as you look out 2012 that you might have a cycle pause in the solar equipment space?

We are monitoring what we think is effective capacity in our customer base.

There are a lot of things going on in the solar industry with share shifting and the Feed-In tariff reduction, and then those who can really reach the costs necessary.

You can see today that prices are -- our cell prices are coming down, spot prices are at a $1, around $1.

Poly prices are coming down quite dramatically to be able to fit into the envelope that these new Feed-In tariffs are indicating.

So at the same time, we are seeing the leading-edge guys continue to invest in capacity because they want to be ahead on capacity, especially in a market where material costs are coming down so that they don't have to have cells in inventory, which are depreciating in value at a relatively fast pace.

So in front of the Feed-In tariff changes, we always see a pretty big surge in installations and deployment, and I don't think this year is going to be any different than that in the third quarter and then near the end of the year.

So I think what we are seeing for capacity, you know, kind of effective capacity going into 2012 is something around 40 gigawatts in the customer base.

That's ahead of where we think installations will be, but that's true this year too.

We are seeing pretty much record capacity expenditures in the solar field.

Great, thanks.

Mahesh Sanganeria, RBC Capital.

Thank you very much.

Mike, just a question again on your comment.

You said what's happened in the second half.

So if I look at the second half flat from the first half on SSG, your revenue [had to] grow 9% in Q4.

The question I have is what do you need to see for that to happen?

Are you expecting a specific PC demand to improve, or the handset demand to improve?

Is it the foundries that have to order more or the NAND?

If you can give some more color onto what are the puts and takes that could drive that upside in Q4?

This is George.

Let me add a little color or add to that question here.

Our view is it just takes about one customer with the amount of concentration that we have that comes back, and just like the push-outs have been pretty concentrated, you could easily see 9% with an increase in foundry.

You could see it -- NAND/Flash certainly softer than we had anticipated in the second half of the year.

There's a lot of reasons for that, but those reasons could also reverse themselves and customers could have more confidence and we could see that in our fourth quarter.

Those two alone could take us well above up 10% in the fourth quarter.

But also again, as Mike said, we are operating at a very low level of DRAM, and if customers start to see some firming (inaudible) that kind of three strong quarters of down price for DRAM, you start to see a reversal in that and people start to get a little more confident that you could see DRAM coming back a little early, but I would say foundry and Flash will probably be the first place.

On the flat-panel side, you said that you have seen some push-outs, but you're seeing a big jump in revenue here.

Going forward, do you basically see that flatlining the flat-panel on the revenues or --?

No, what we said is we think we will be up more than 25% in Q3 versus Q2, so I think the second half of the year is going to be much stronger.

I think, first and foremost, we are still seeing strong demand for touch panels and OLED stronger than we had seen even last time.

It's the large-panel fabs, many of which are going to be built in China, that have been pushed out.

So, we may start to see orders for those in our fourth quarter, but we may be in the early part of '12.

But in general, overall, we think spending will be up by a healthy amount in the second half.

Okay, thank you.

Patrick Ho, Stifel Nicolaus.

Thanks a lot.

Just maybe a little more color in terms of the foundry push-outs that you've mentioned.

Could some of those orders for 65 nanometers potentially convert to 40, 45 nanometers [if they] continue to add on that capacity since you also mentioned that they feel that they're still constrained on that front?

Yes, they certainly could.

While we haven't seen that yet, that would be a scenario for a strong Q4 if either 65 nanometer capacity comes back or they up their investment at the leading-edge nodes where capacity is much more constrained.

Great.

Maybe just a bigger picture question.

With Intel's recent announcement about the Tri-Gate process technology and the layers involved there, you know, given your broad-based coverage across a lot of their -- across their production lines, where do you see the biggest incremental benefits specifically within Applied Materials?

What process segments do you see incremental benefits from this transition?

Yes, well, first of all, this is a new technique to make transistors.

I kind of alluded to it a bit in the prepared remarks, but we think this technique over a period of time will be adopted or a similar technique will be adopted to make high-performance transistors by all of the logic makers.

It just depends when they are able to put it into production, but it clearly lowers power and improves performance.

So for us, I think one of the areas of course as we've moved to High-k/Metal Gate, PVD and CMP have been big beneficiaries.

As we move into the next generations, we're going to see more epi steps, significantly more epi steps in the channel as well as in the source drain.

Then plasma doping, because of the shape of these transistors, plasma doping, this is a structure that lends itself well to plasma doping.

We think that this will be one of those trends that really allows plasma doping to get into high volume.

Thank you.

Gus Richard, Piper Jaffray.

Thanks for taking my question.

First (technical difficulty) nanometer, 20 nanometer chips are coming out of the foundries.

Any thoughts on sort of how those are ramping for your customers?

If yields are better-than-expected, worse than expected, how do you think that might impact your business over the next several quarters?

I would just say that leading-edge is constrained today.

I don't think we can really comment about our customers' specific performance, but I think the overall indicator when we check with our leading foundry customers, everyone is constrained on the leading-edge.

Where there is -- so there's competition for capacity there.

Are there some rationales for why it's constrained?

I wouldn't want to comment on that, but people are moving quickly to expand capacity there.

Then just to follow on, having followed the industry for a long time (technical difficulty) I've seen push-outs of this, they're usually followed by inflations.

Is there anything that gives you confidence that the next step isn't going to happen?

Gus, I didn't hear.

Followed by -- you broke up there.

I'm sorry.

I'm sorry -- followed by cancellations.

Right.

Yes, we really try to monitor the quality of our backlog.

George might want to comment, but at this point, we haven't seen any cancellations to speak of if we -- had we mentioned it.

The big players in our backlog right now are not those that have historically canceled.

George?

Right now, I think when you look at the aging of the backlog, it looks fine.

Like I said, particularly with SSG, you've got over 50% of the backlog is going to go out in the next quarter, and you got 30% in the quarter after that.

So right now it looks healthy, but we always have the same concern that you have, which is you've got to watch this very closely and make sure that you balance everything from the way you look at your inventory to everything as you see this kind of behavior.

But again I think it really reflects the near-term economics conditions that Mike talked about, and we'll see if they worsen or if things start to moderate and get better.

That's right.

Gus, I think we do have to see a return of growth in tablets in a significant way, and those supply constraints come off -- when they have -- when they see other kinds of actions taken.

But we're going to closely monitor this.

I think we are still relatively optimistic about what's going to happen the rest of the year and the growth of the world economy.

So -- and the just popularity of the electronics devices we have in the market today.

Thomas Diffely, D.A.

Davidson & Company.

Yes, good afternoon.

I was hoping to step back and just get your view of the PC cycle right now and specifically where you think we are in terms of a Windows 7 buildout or a refresh cycle, as well as some of these emerging markets over the next year or two?

I think that, right now, in PC cycle, we were not particularly encouraged after Q1 sequentially down 10%.

We think that emerging markets really are the key to growth in PCs, especially in particular China where we think that PC growth can be dramatic.

We need to see notebook growth return in a significant way.

Right now, our estimates on PC growth for the year are between 6% and 10%.

Earlier, we thought it would be more greater than 10%, but after first quarter, we kind of tempered our view.

I can certainly speak about Applied Materials moving to Windows 7.

We're making the transition and have made the transition and think that now is the right time for many corporations to do that.

There is really a change in the way you can do computing across the Company that Windows 7 enables.

So it seems like the right time.

I don't have good data on how the penetration is going.

I'm sure our customers in Intel would have a better view.

When you look out at 2012, do you think the emerging markets could by themselves drive a nice DRAM investment cycle, or do you really need the domestic market coming back as well?

I think we need a strong PC market overall.

What we've said, and I think this is still true today, if PCs are growing 10% or 15% and smartphones continue their growth trend, we're going to see return of investment in the DRAM space.

We think that would drive bit growth above 50% and necessitate a pretty significant investment.

While we haven't thought that DRAM investment would get back to its levels in 2006 and '07, it's at such a discount today that we think it could double from today's levels and still be a prudent investment for the DRAM makers.

Thank you.

Timothy Arcuri, Citi.

I just wanted to see if you can give us any idea of what, sort of what the concentration is of the $1.45 billion worth of SST backlog.

Is that -- I would think it's pretty heavily concentrated amongst a very small number of customers.

I'm wondering if you could feel comfortable to give us any idea there?

Lastly, since you were very intimately involved in the 300 millimeter transition when you were at Intel, I'm sort of wondering how, now that you're on the other side, given how much the equipment suppliers got burned during that shift, how you plan to sort of take what you learned from the chip side and make sure that you don't get burned this time from the tool side.

Thanks.

George, do want to comment on backlog and then I'll comment on 450?

Sure.

As you know, some of the larger customers have been part of the reason for why you have high turns business on our orders.

So actually the distribution of the orders is broader than you might think.

It's not nearly as concentrated as our revenue is in the backlog.

It really reflects the technology -- a lot of it is technology as well as capacity requirements of these customers.

So the backlog is not overweighted.

You do have obviously a large logic presence there, and the foundries are certainly reflected, but at a much lower level than their overall share of the spending right now.

Is that helpful for you?

It is.

Yes, George, thanks.

I'd say a couple of things about the 450 transition that we are trying to look for in working with our customers.

The first one is, is there a win-win window for both the suppliers and the customers, a space where they can get their cost reduction and we can still have a reasonable market that's going to grow over a period of time?

The next one is the customers that are going to convert need to decide to convert on one node.

One of the things -- and really aim the development at one node in technology.

The 300 millimeter there was an initial fab at 250 nanometers.

The real conversion didn't happen until, really start in earnest until 130 nanometers.

Then maybe the final thing I would say is we really have to aim at a specific timing that we're going to really try to be able to stick through [two despite] cycles.

Other thing that happened in 300 millimeter is the transition got delayed several times because of the industry cycles.

So, those three things are topics that we're having serious discussions with the key players that are interested in 450.

Great.

Thank you, Tim, for your question.

We'd like to thank everyone for joining us this afternoon.

A replay of this call will be available on our website beginning at 5 P.M.

Pacific time today.

Thank you for your continued interest in Applied Materials.

This concludes today's conference.

You may now disconnect.