應用材料 (AMAT) 2011 Q3 法說會逐字稿

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  • Operator

  • 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 participate in a question-and-answer session.

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

  • Please note that today's call will contain forward-looking statements, which are all statements other than those of historical fact, including those regarding Applied's performance, economic and industry outlooks, market positions, cost controls, capital allocation principles, fourth-quarter and fiscal year 2011 business outlooks and the planned merger with Varian.

  • 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 SEC filings.

  • Forward-looking statements are based on information as of August 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 highlights 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.

  • - VP, IR

  • Thank you, Carrie, and good afternoon.

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

  • Today, we'll discuss the results for our third quarter, which ended on July 31.

  • Our earnings release was issued just after 1.00 PM Pacific time, and you could find a copy on our website, 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 Q3, and our expectations for the rest of the year.

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

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

  • - Chairman, President and CEO

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

  • Applied Materials delivered solid third-quarter results in an increasingly challenging business environment.

  • We posted revenue of $2.8 billion, and an operating margin of 24.5%, and non-GAAP earnings per share of $0.35.

  • Over the past 3 months, we've taken a number of important steps toward completing the Varian acquisition.

  • On August 11, Varian shareholders voted to approve the merger, and to date, we have received regulatory clearance from Israel, Germany and Taiwan.

  • We're still awaiting approvals from the US and China.

  • We're committed to closing the transaction, which we now expect to occur in October.

  • We are excited about the opportunities that we will deliver to our customers, shareholders, and employees by combining the strengths of these 2 companies.

  • Q3 was another excellent quarter for our solar business and EES is on track to deliver close to $2 billion of revenue for the year.

  • Overall, I'm pleased with the strong execution demonstrated by all of our businesses during a period of uncertainty in the global economy.

  • In recent weeks, fears about the state of leading economies and slowing growth in Asia have highlighted the fragility of the global recovery.

  • Uncertainties about demand are causing a number of our customers to reassess their investment plans and push out orders.

  • Although we firmly believe that the fundamental growth drivers within our markets remain strong, today we are seeing a weaker near-term outlook across all of our businesses.

  • Based on our view of the next 2 quarters, we have taken action to insure our spending remains aligned with our business environment.

  • We are proactively managing our operating expenses and adjusting variable spending.

  • We will continue to invest in new products that are critical to our customers and for the long term growth of our Company.

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

  • In semiconductor, back-to-school PC sales have been disappointing, further contributing to weak PC shipments for the year-to-date of around 230 million units.

  • Consequently, we do not expect DRAM investments to increase from the low levels seen in the first half.

  • We believe that technology conversions will be sufficient to support the 40% to 50% DRAM bit growth now projected for 2011.

  • Smartphone growth for the past 3 months has been strong, and tablet sales for the second calendar quarter were consistent with our full-year estimate of around 65 million units.

  • However, strength in these areas was not adequate to offset slowing demand for PCs and weakness in consumer electronics, causing foundries to delay their investment timing.

  • We've seen demand from our foundry customers soften significantly in the past 6 weeks as low utilization at the trailing nodes leads them to reuse capacity at advanced nodes.

  • As a result, we now believe 2011 wafer fab equipment spending will be in the range of $29 billion to $32 billion, roughly $1 billion lower than the estimate we provided at Semicon West.

  • Looking further ahead, our outlook remains healthy.

  • The adoption of high performance mobile products is just starting and the next generation of multi-core processors used in these devices will have significantly larger die sizes, driving both increased capacity and the adoption of advanced nodes.

  • Although we currently see at least 2 quarters of softness in wafer fab equipment, the fact that many clean room shelves are in place means the turnaround could happen quickly, once consumer demand signals strengthen.

  • SSG launched 8 new transistor and interconnect products this quarter, while achieving a number of positional wins and double patterning etch, copper CMP and brightfield inspection.

  • However, as results of the weakness in DRAM and foundry spending, we now believe our 300-millimeter wafer fab equipment share in 2011 will remain roughly flat compared to 2010.

  • In service, we saw declining semiconductor utilization rates, combined with a minor reduction in wafer starts in the second calendar quarter, consistent with softening end demand and inventory accumulation.

  • We do not expect wafer starts to increase significantly in calendar Q3.

  • Against this back drop, this was another strong quarter for AGS.

  • Revenue was essentially flat quarter-on-quarter after taking into account the divestiture of our chamber cleans business.

  • We have made good progress towards model performance, enabled by improvements in our 200-millimeter equipment business.

  • In display, TV shipments for the first half of 2011 were weaker than expected, particularly in US and Europe, and we now expect year-over-year TV growth to be around 10%.

  • As expected, the LCD capital equipment market saw a severe downturn in 2011.

  • We are seeing virtually all investments in new TV-related capacity pushing out into 2012, including the leading customers' plans to build factories in China.

  • In contrast, supply for mobile display technologies remains tight.

  • We continue to see robust demand for our products in this area, which represented 50% of our display revenue and 80% of orders in the third quarter.

  • In solar, panel demand is now accelerating, following a slow start to the year.

  • We maintain our view that installations will be in the 19 to 22 gigawatt range for the year, with roughly 0.67 of these installations in the second half.

  • Germany represents over 35% of this demand, and the postponement of their mid-year subsidy reductions means that installers continue to generate healthy returns.

  • Earlier this month, China announced its national feed-in tariff which should provide a meaningful upside to the market, starting in 2012.

  • While China is the global leader in cell and module production, last year, it represented less than 3% of worldwide panel demand.

  • The feed-in tariff, combined with local incentives, could result in China taking a leadership role in solar installations, with module spot prices moving to the $1.20 per watt range, the economics for PV are becoming increasingly compelling, reinforcing our bullish view on the growth of this market over the next few years.

  • Although the rate of factory capacity expansions have slowed compared to the first half of the year, our leading customers are investing in upgrades that enable them to extend their efficiency and cost differentiation.

  • This is translating to strong demand for our Baccini double printing product, which enables customers to convert existing lines to next generation technology.

  • Our wire saw business is also having an outstanding year, and we expect to gain over 5 points of share in the wafering market.

  • In summary, Q3 represented a strong quarter for the Company in an increasing challenging market environment.

  • We are continuing to invest in our strategic priorities to generate long term shareholder value and attractive returns by focusing on organic and inorganic growth in high return areas.

  • As we adapt our plans to the realities of our cyclical environment, we will carefully manage our spending and capital structure.

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

  • George?

  • - EVP, CFO

  • Thank you, Mike, and let me add my welcome to everyone on the call today.

  • Applied delivered revenue and earnings at the upper end of our guidance range.

  • We generated $600 million in operating cash flow on strong performance and issued $1.75 billion in long term debt to support the Varian acquisition.

  • Our cumulative net sales and earnings per share over the past 4 quarters have been the strongest in the Company's history.

  • Orders in the quarter declined by 25% to $2.4 billion, reflecting softening demand across our businesses.

  • Our book-to-bill ratio dipped below one for the first time in 7 quarters.

  • Our backlog decreased 16% to $3.2 billion, including negative adjustments of $248 million, primarily from financial debookings.

  • These adjustments are made when the expected delivery for an existing order moves beyond our 12 month policy window.

  • Net sales declined 3% to $2.8 billion with higher than expected revenue and display in EES, leading us to the higher end of our target range.

  • Non-GAAP gross margin was 42.8%, up 90 basis points, led by margin recovery in AGS.

  • Our non-GAAP operating expenses were $510 million.

  • This includes an adjustment in our variable compensation and certain other accruals.

  • Absent these items, our non-GAAP OpEx for the quarter would have been just under our $530 million target.

  • We expect our fourth quarter non-GAAP OpEx to be approximately $510 million.

  • This represents about a $20 million decrease from our current quarterly run rate.

  • In the near term, our primary focus in OpEx is to tighten discretionary spending across the Company, while preserving our customer-facing programs and critical investments.

  • In managing our cost of goods, we have a highly variable manufacturing structure, and reflects our temporary workforce and overtime capacity in response to the rapid drop off in demand.

  • We plan to use selective factory shut downs in our fiscal fourth quarter and will schedule more broad-based shut downs in our first fiscal quarter of 2012.

  • We have managed our full time headcount additions carefully, through the cyclical ramp, and believe we are in very good shape going into the slowdown.

  • We expect to limit our hiring, for the time being, to critical positions and recent graduates.

  • Our effective tax rate was 28.8%.

  • We expect our fourth-quarter and full year rate to be approximately 28%.

  • We generated operating cash flow of about $600 million through strong working capital management and collections efficiency with days sales outstanding at 59 days, very close to our best historical performance.

  • Consistent with our practice of returning capital to stockholders we paid dividends of $105 million and purchased 2 million shares for $25 million.

  • During the quarter, we took a number of actions to strengthen our balance sheet and secure funding for the pending acquisition of Varian.

  • In addition to the $1.75 billion long term debt financing, we arranged a $1.5 billion commercial paper program to provide a source of low-cost, flexible borrowing as business conditions necessitate.

  • We believe these financings will contribute to a lowering of our long-term cost of capital over time.

  • Cash and investments ended the quarter at $6.8 billion, up $2.2 billion from the second quarter, including the debt proceeds.

  • The elevated level of cash is reflective of our all-cash offer for Varian.

  • We regularly review our capital structure relative to our capital allocation principles of insuring a strong investment grade balance sheet that allows us to fund disciplined investments in the growth of our business while supporting dividend growth in line with business performance, and use of share repurchase as the preferred means of returning excess cash to shareholders.

  • Next, I will cover our operating segment results as compared to our second quarter.

  • Silicon Systems Group orders declined 28%, primarily due to push-outs by foundry customers.

  • SSG net sales were 4% lower, consistent with our expectations.

  • The non-GAAP operating margin was 32.5%, declining 1.5 points on lower revenue.

  • Performance relative to the model continues to be impacted by margin pressure, and increased OpEx spending for customer-related programs across our product groups.

  • We have initiatives under way to mitigate some of these effects, however, we expect that reaching model performance will remain a challenge in the near term as we increase 450-millimeter spending.

  • Applied Global Services orders and revenue were relatively flat.

  • AGS operating margins returned to more normalized levels in the quarter, driven by the improvement initiatives in our 200-millimeter equipment business, along with an increase in service sales from the recovery activities in Japan.

  • In display, orders declined 14%, with more than 80% of the new orders coming from demand for equipment serving touch panel and advanced display applications.

  • These orders reflect our strong position in these markets.

  • Display net sales were up 41%, and the non-GAAP operating margin grew more than 6 points on the increase in revenue.

  • In EES, orders declined 48%, our solar business is now seeing the investment slowdown we anticipated as customers digest the record capacity additions of the past 5 quarters.

  • Net sales declined 12% to $563 million, which was better than our expectations, while non-GAAP operating margin fell 3 points, reflecting both revenue and mix effects.

  • China was once again Applied's largest country in terms of overall net sales, with 27% of the total, led by solar and touch panel equipment sales.

  • Now let me talk about our business outlook for the remainder of the year.

  • We are on track for 2011 to be the Company's best year ever in both revenue and earnings per share.

  • For the fourth quarter, we expect SSG net sales to be down 20% to 35%, reflecting lower foundry and NAND spending, along with continued weakness in DRAM.

  • In AGS, we expect revenue to be in the range of down 5% to 10%.

  • We believe spares run rates will be somewhat lower in the quarter as customers manage their operating costs in line with lower fab utilization levels.

  • We also expect lower spending in 200-millimeter equipment.

  • In display, we believe net sales will be flat with continuing strength in touch panel demand.

  • In EES, we expect net sales to be down by more than 30%, reflecting the pullback in orders we saw in our third quarter.

  • We expect our overall net sales to be down in the range of 15% to 30%.

  • We expect our non-GAAP earnings per share to be in the range of $0.16 to $0.24.

  • Our targets are wider than usual and reflect the volatility, both at a macroeconomic and industry level.

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

  • - VP, IR

  • Thanks, George.

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

  • Carrie, let's please begin.

  • Operator

  • (Operator Instructions).Your first question comes from Satya Kumar with Credit Suisse.

  • - Analyst

  • Hi, thanks for taking my question.

  • This is Farhan calling in for Satya.

  • Just wanted to hear your thoughts on DRAM market.

  • What do you see for next year?

  • Micron had a call earlier today, and they are seeing continued weakness next year.

  • Can you just comment on that?

  • - Chairman, President and CEO

  • I think what we would say is that it really depends on PC growth.

  • I think PC growth is at the heart of the weakness in DRAM pricing, and over-supply during this period, and we would have to see PCs get back to more normal double digit growth than we're seeing at the current time.

  • Obviously, prices have been weak.

  • Mobile DRAM still seems to be quite strong, consistent with Smartphones and handsets expansion, so in our frame of reference, DRAM is really weak because of PCs and until that recovers, we kind of expect a small investment, technology investments, it's at a low level, didn't recover in the second half as we had expected, if you'll recall earlier in the year, we had projected that DRAM capital spending would come back in the second half of the year.

  • It hasn't come back.

  • It stayed well below $5 billion for the year, which is as low a level as I can remember.

  • - Analyst

  • Thanks, that's all I had.

  • Thank you.

  • - VP, IR

  • Thanks.

  • Operator

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

  • - Analyst

  • Hi.

  • Good evening guys.

  • Thanks so much for taking the question.

  • The question is if you can help us understand how much capacity is still in the pipeline to come on line at the foundries, based on what you shipped maybe last quarter and this quarter to them, so obviously, their wafer starts, and you guys talked about this, aren't growing very fast right now.

  • There's some incremental supply coming online.

  • I'm trying to get a way to maybe quantitatively think about how much foundry wafer starts have to grow before they would get back to say like the 90%-ish utilization rate level where they would start to order again?

  • - Chairman, President and CEO

  • Yes, I think since every different customer has different timing to production, the best way that I think we can characterize that is that it looks to us like something on the order of 3% utilization drop off.

  • We're thinking wafer starts are roughly flat quarter-over-quarter but we'll see utilization drop off relatively flat demand around three points, maybe a little more than that, Jim.

  • - Analyst

  • That's helpful, thank you and if I could ask for my follow-up, it seems like foundry is pretty low, DRAM is pretty low, NAND is stable because the market there is okay, seems like if we're worried about there being another shoe to drop, it would be in micro processors.

  • Is that a fair thought process and how do you feel about that particular segment?

  • Thank you.

  • - Chairman, President and CEO

  • I think we believe that consumer electronics and PCs are at the heart of what's causing the supply-demand imbalance here, so there's many factors in micro processors since there's been a shift to Tablets here.

  • Tablets are still strong so when you aggregate the numbers that's hard to see in a unit volume, but we may see it in a dollar volume.

  • - Analyst

  • Thank you very much.

  • - VP, IR

  • Thanks for your question.

  • Operator

  • Your next question comes from Chris Blansett with JPMorgan.

  • - Analyst

  • Hi, Mike.

  • I wasn't sure if you were willing to give an initial stab on what you think the solar related CapEx and semi CapEx would be for next year.

  • I know it's a pretty uncertain time, but how are you thinking about modeling this out for next year?

  • - Chairman, President and CEO

  • Well semi actually, I'll say a little bit about semi and then go to solar, since we've kind of been on that topic.

  • We still think about the current environment as being pretty healthy, and if we were going to model this particular downturn after one that we've seen in the past, it will likely be the 2005.

  • We saw two quarters down and then saw some recovery.

  • We think fundamentally, that the products in the marketplace, the innovations that happened, people really want them and we're seeing consumer softness today largely because of the macro-economics, so if we could get those back on track, I think we could see a recovery in a few quarters.

  • In solar, we're already seeing a recovery in end demand, so the key here I think is, just how impact full this China feed-in tariff is going to be.

  • Prices have come down.

  • They're at a very low level.

  • You already hear the cell price is at $1 a watt, below $1 watt, module prices, spot prices, $1.20, maybe the average is closer to $1.40 but these prices have gotten very low, making the investment thesis quite good, so if the China feed-in tariff really comes in and creates a couple of gigawatt, two or three gigawatt of demand next year, I think we see a turnaround in capital additions, especially by the major Chinese solar manufacturers.

  • Go ahead.

  • - Analyst

  • Mike, the question is, we're going to see some subsidy cuts in Europe and the US at the end of this year and your overall view, do we have a volume growth year for solar next year, basically will China be able to offset some of the potential subsidy cuts that we're seeing in the Western Hemisphere?

  • - Chairman, President and CEO

  • The US will go up next year dramatically.

  • I think percentage-wise probably close to as much as this year.

  • And PB is really taking over in the US, substituting, we know of at least eight projects now that concentrated solar, PB has been substituted for concentrated solar.

  • Those projects are already approved.

  • I think we're going to see a pretty dramatic growth in the US.

  • I don't think we'll see a fall off in Europe.

  • I think the Germans are committed.

  • They are 35% of the market.

  • Don't think we'll see a down year in Europe.

  • I think we'll see an up year, so even though the lowering of the incentives is helpful, it drives the price down.

  • It improves the economic performance of the installations.

  • - Analyst

  • Thank you very much.

  • Operator

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

  • - Analyst

  • Yes, good afternoon.

  • Thank you for taking my question.

  • I guess first question, was hoping you would discuss the dialogue you've had with foundries and over the last month, and I guess particularly interested what the conversations are like around foundry 28-nanometer spend and when you think that will start to come back.

  • - Chairman, President and CEO

  • Sure.

  • Well one thing for sure, no one is slowing down on technology.

  • If we started 28-nanometer, what we're seeing is that because of the underutilization of primarily 65-nanometers, they are able to reuse an awful lot of equipment for increasing capacity at 28-nanometers, so that's the first thing that I would comment about that conversation.

  • The second thing is, we're hearing very robust discussions around 20 and 14-nanometers even today, and really talking about the capabilities that we're going to need to deliver and deliver to R & D units this year and to production in subsequent years, so no slowdown in the focus on advanced technologies, CJ.

  • They are very critically focused on what to do next and how to keep the treadmill going.

  • - Analyst

  • That's helpful, and then as my follow-up, your non-silicon business looks like we're tracking to about $1 billion here in your guide for October, so curious, I think we've come down from around $1.3 billion or $1.5 billion on a quarterly run rate.

  • Does that $1 billion represent to you a trough or how should we think about that kind of number?

  • - EVP, CFO

  • So I think we still have to see how the solar market plays out.

  • I think the services side of the business, do you consider the services side part of the semiconductor, how do you view it?

  • - Analyst

  • Yes, I added that in.

  • - EVP, CFO

  • Oh, okay, so I think with solar, we'll have to see.

  • We expect orders to be down again this quarter in the solar area, so I think though we haven't guided orders, I think we'll have another down quarter for orders pretty much across-the-board for the Company and so I'd say Q4, it's too early to call our fiscal Q4 the bottom.

  • - Analyst

  • Thanks, George.

  • Operator

  • Your next question comes from Timothy Arcuri with Citigroup.

  • - Analyst

  • Hi.

  • This is Wenge Yang for Tim.

  • Thank you for taking my questions.

  • The first question is regarding NAND market.

  • In the last couple of days, we've been hearing some customers talking about adding some additional CapEx in the calendar Q4 to increase their NAND capacity beyond their current 2011 plan.

  • Just want to check if you have heard those discussions in the last week, and if so, could you comment on the scale and also the timing of the additional CapEx in the NAND?

  • - Chairman, President and CEO

  • Well, I think that we continue to think this market is growing and strong and pretty much proportional to Tablets and adoption of solid state drives in PCs.

  • What a particular customer is exactly doing, I can't really comment precisely, but I would say this is the one market that is really staying quite strong during when you compare it to the other segments of wafer fab equipment spend.

  • - EVP, CFO

  • Yes, I think what you're seeing is the markets are holding up well.

  • We have seen our expectation for Q4 both on bookings and revenue is that NAND will be down quarter-over-quarter, fairly substantially and is contributing to the fall off that we're seeing but there is a much more confident tone around the customer base in terms of spending plans for the next year.

  • - Analyst

  • Okay, that's helpful.

  • Just one additional.

  • So your Baccini product has pretty much 100% market share.

  • Just want to get your estimate on how much capacity we actually added into the solar manufacturing and we heard numbers like 40 to 50 gigawatt.

  • If those numbers are true, how does the orders look like next year given the demand is going to remain around 20 gigawatt?

  • - Chairman, President and CEO

  • I don't think we would agree with a number in that range in delta.

  • We would say maybe cumulative capacity would be close to that range but one of the things that's happening right now in a solar market is if you can't reach a certain efficiency, you don't sell your panels, so it essentially takes off line some of the older capacity so you have to get back to looking at what the overall effective crystalline silicon capacity is, and we're kind of thinking it's more like 35 or so gigawatt.

  • - Analyst

  • Okay, thank you.

  • - EVP, CFO

  • And I would also add, you have to think about in the second half of the year, essentially two-thirds of the installations are going to happen, so they have to have capacity plus inventory enough to handle those installations, deliver on those installations.

  • - VP, IR

  • Thanks, Wenge.

  • Operator

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

  • - Analyst

  • Good afternoon.

  • Thanks for taking my questions.

  • This is Paul Thomas for Krish Sankar.

  • George, I just thought I'd ask quickly about 450.

  • You did mention you thought you might not reach model levels due to incremental spending on 450.

  • Just wanted to get a little color around that, what kind of spending you think you'll have going forward.

  • - EVP, CFO

  • Yes, we took a shot at Semicon at guiding on that.

  • We said we thought it could be in the $100 million range in 2012.

  • I think our focus all year has been on making sure that we're positioned well in our SSG group.

  • There's a lot going on in the industry right now and just kind of building on the technology inflection that Mike was talking about just in the foundries, but it's really across-the-board with our customers so our spending has been coming up at this time, even as our volumes, our revenue has been coming down a little bit, so we think that's the right thing to do in the near term.

  • It certainly impacts the model in the near term, but we think it positions us well for the longer term.

  • - Analyst

  • Okay, thanks and maybe just one follow-up on January quarter.

  • You did mention that you were looking at shut downs also in that quarter, so but I imagine you have some flexibility there, but is the expectation then that we're still going to see the sequential declines in January in overall revenue?

  • - EVP, CFO

  • Yes, I mean I think what we're seeing is we're seeing orders, the order outlook for this quarter to be down again, so it's a little too early to call exactly what the revenue will look like in our first fiscal quarter, but clearly, we're still going to be in a period of softness and so, kind of in line with a more if there's such a thing as a normal slowdown in our business, it's more in line with that and our shut down activity will be reflective of that.

  • - Analyst

  • Okay, thank you very much.

  • Operator

  • Your next question comes from Stephen Chin with UBS.

  • - Analyst

  • Thanks for taking my question.

  • Mike?

  • If I could ask, you mentioned that the shut down looks more like a normal cyclical shut down.

  • Given your weakness in the last six weeks, is it more of an early sign of a severe shut down or a slowdown that we saw back in 2008 and if so, what are the leading indicators you would be looking at to gauge for a turnaround?

  • Thank you.

  • - Chairman, President and CEO

  • So we think this is more of a supply/demand slowdown.

  • If you'll recall back in 2008 it was really memory dropping off from over almost 70% of wafer fab equipment spending down to 20%, we're not seeing that kind of a situation here and I don't think we will see that kind of a situation because end markets have products that people really want.

  • The beginning of mobility, real mobile computing is just happening but to your question about what are we looking for to see that really starting to come out of this?

  • We're looking for stronger consumer demand, for PCs, consumer electronics, particularly TVs, that have been very slow this year, and pushing out our orders in demand for capacity there, so it needs to be strong enough, also that demand come back has to be strong enough to diminish the inventory that's been built in this weak back-to-school period.

  • Now, of course I think our customers have been very good at lowering utilization, managing their inventory, so I don't think that inventory is as big as its gotten in past times either, which helps us think that this slowdown can be temporary, but then the final thing is, it really is going to be dependent on something not in our control and that's the global economy and whether we're going to get a little movement away from the volatility that we've seen in the last few weeks and get some stabilization there.

  • - Analyst

  • Mike to clarify, in terms of the PC growth, are we looking at double digits?

  • That would be a meaningful growth?

  • - Chairman, President and CEO

  • That would be a meaningful number that we would get excited about.

  • - Analyst

  • And just a follow-up would be, would you share any color on how we are trying to manage through this kind of a downturn in almost all of your segments, is the goal really to stay profitable in all of the segments, or you mentioned about some share gains in the solar segment.

  • I just want to see if maybe trying to be aggressive to gain share during this downturn?

  • - Chairman, President and CEO

  • Absolutely.

  • We're staying very focused on our products and our customers.

  • This is the key to moving through this, stay very close to the customers, make sure that our products are adding value in a significant way to those customers.

  • We believe we had some very significant positional wins during the last quarter.

  • I tried to itemize a few of those in the semiconductor area.

  • In the solar area, we really think the key right now is to really focus some developments in areas that are going to add efficiency to existing lines.

  • Those are things customers are going to buy whether there's an upturn or a downturn, so things like our double printing solution which adds efficiency, we're working on a number of areas that will add improved efficiency or improved productivity for our customers and that theme goes in display as well where I think you know we've been trying to expand our product line into PBD but even more significantly in this time period, we've been able to create products for touch panels, for advanced displays, because the consumer and the customers are moving to these very advanced displays, so we've been focused on low temperature poly-silicon, metal oxide transistors on OLED TV applications, and these are areas where both our SAM can expand and we can gain share.

  • - VP, IR

  • Thanks.

  • Operator

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

  • - Analyst

  • Hi.

  • Thanks for taking my question.

  • So, first question relates to solar.

  • Mike, you mentioned on your prepared remarks that you started to see customer purchasing more equipment for driving increasing efficiency.

  • I was wondering if you can quantify how much of yourselves come from those, almost like quantify the technology buy versus capacity build, and if all your customers just focus on driving efficiency, what do you think those sales will get to?

  • - Chairman, President and CEO

  • Yes, so it's a little bit of a complex answer, but what we've seen so far from our double printed, this business, since we introduced this product, has produced over $200 million in revenue and is ramping every quarter, so that's been starting to get quite significant.

  • Other products, I think we've talked about a selective emitter product, and we have other ones I'm not going to talk about at this time until we get significant traction with customers, but the specific efficiency depends on whether you're using multi crystalline or single crystal and the techniques often vary there as well, but I would just say that every quarter we're seeing the peak notch up of by 0.1 or 0.2 and the distribution of sellable products.

  • - Analyst

  • I see.

  • The $200 million number just to clarify is up to this point or is that last quarter?

  • Want to make sure I've got that number correct.

  • - Chairman, President and CEO

  • Sales up to this point.

  • - Analyst

  • Great, very helpful and then George a question on gross margin.

  • If I take the mid point of your guidance, it seems to imply gross margin goes down maybe 40% below that.

  • Just wondering if that was all to do with lower sales level or is it anything else related to mix or anything like that related that you can help us on a gross margin line and how do you look at that beyond the October quarter?

  • - EVP, CFO

  • I would say 90% is sales volume and heavily impacted by SSG.

  • You've got minor puts and takes in the mix during the quarter so I think if you follow that line you'll be all right on your estimate.

  • - Analyst

  • Great.

  • That's all I have, thank you.

  • Operator

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

  • - Analyst

  • Thanks so much for letting me ask a question.

  • Mike, I'm going to ask you what I asked you during Analyst day.

  • Given the structural changes in the PC market, what's going to help your customers to step up an increase in spending next year and what I mean is DRAM prices are near cash costs and I just don't see any increased box loading.

  • - Chairman, President and CEO

  • Well any increased box loading for DRAM?

  • - Analyst

  • Yes.

  • Technically in the past 20 and 30 years when DRAM prices collapsed, then the elasticity kicks in and box loading goes up, and from what I hear from your customers and your customers' customer's is that they are reallocating the budget to other areas like display, so we're not seeing any increased box loading and therefore, I see that as structural change in the industry that is going to trickle back to the [technical] industry.

  • - Chairman, President and CEO

  • Yes, I think the first thing is we have to see PC growth, and the second thing is box loading still isn't at 4-gigawatts.

  • We know it's not at 4-gigawatts a box or -- gigabit's but it's not at 4-gigabits per box at this time, and it certainly can get there and as new advanced processors come on line in the next year or so can get beyond that.

  • But yes, the money is going in other places on the footprint of the PC.

  • The other factor is, that's going to drive DRAM growth is mobile DRAM as Smartphones continue to grow in double digit ranges over the next few years.

  • While they are not going to have multiple or 4-gigabits in a Smartphone but the numbers will start to get very large and push bit growth.

  • - Analyst

  • I've got it and my final question has to do with Varian.

  • Given the fact the announcement was made in the Spring when the fundamentals are different, when is the earliest we'll hear how the integration and the revenue and cost synergies are going to impact the P&L?

  • - Chairman, President and CEO

  • Sure.

  • Maybe I can comment on what we're seeing as far as getting closed on the Varian agreement and George can talk about the revenue and cost synergies.

  • So we expect to have our substantial compliance with the Department of Justice done very soon.

  • We expect Varian to have all of theirs done by September and we expect approval from the DOJ then 30 days after that, some time in October.

  • - Analyst

  • And in terms of the financials, we, following close, we'll be talking more fully about that.

  • We certainly are confident that we'll be able to capture the synergies of $50 million to $60 million that we described and there will be further opportunities we think as we come together.

  • The fact that things have turned shortly after the deal, our economics on these things are based on a cyclical industry and so the ability to capture value in this isn't really dependent on your first three to six months, whether there's a downturn or not, we model the fact that there will be downturns periodically as part of the economics, so we feel good about the deal and look forward to getting it closed.

  • - Chairman, President and CEO

  • Thanks much.

  • - Analyst

  • Thanks.

  • Operator

  • Your next question comes from Ben Pang with Caris & Company.

  • - Analyst

  • Thanks for taking my question.

  • On the cancellations that you guys talked, about the financial cancellations, are they primarily at the SSG group or other groups are also seeing those type of push outs or cancellations?

  • - EVP, CFO

  • The vast majority of the de-bookings were financial de-bookings, the cancellations were about 10% of the total.

  • Of that, about three quarters were SSG, so it's not a big number.

  • Customers are really hesitant to cancel orders.

  • They're concerned that things are going to come back and if they cancel, they are going to lose their positioning in the slots.

  • - Analyst

  • Okay, and my follow-up is that in your change in terms of your wafer fab equipment forecast between your call right now and Semicon West, is it still foundries causing you to go down or other applications in the manufacturing semiconductor manufacturing?

  • - EVP, CFO

  • I think both foundry and DRAM are weaker and if you look at, six weeks ago when we made this, there's been a lot that's happened in the macroeconomic environment.

  • Everybody at Semicon was noting each day the outlook got more various, among the customers that were in attendance there, so there was kind off negative momentum in Semicon, and then that was based on a rosier economic outlook than we see today so you have to assume that all customers are affected by the change in the economic outlook but the big spenders that people were counting on, NAND and foundry, have been more cautious in the near term than people expected.

  • - Analyst

  • Thank you very much.

  • Operator

  • Your next question comes from Patrick Ho with Stifel Nicolaus.

  • - Analyst

  • Thanks a lot.

  • Back to DRAM for a second.

  • The improvement in the overall PC market, DRAM content, Mike, (technical difficulties) where do you see the process changes, and which technology node do you see to be additions occurring because the conversions can't stretch out for another technology node?

  • - Chairman, President and CEO

  • I was having a very difficult time, you were breaking up there, but maybe I can repeat and you can see if I have it, really asking about technology node adoptions in DRAM.

  • - Analyst

  • Yes, maybe just in terms if this is clear, in terms of it being (technical difficulties) right now we're seeing (technical difficulties) -- process technology -- over the next few nodes, where do you see I guess the inflection point where you need to basically buy new line for capacity additions versus just simple converters?

  • - Chairman, President and CEO

  • I think I got it now.

  • What we think is the bit growth has to be above 50% to really drive capacity versus technology conversions and this year, we're thinking right now someplace the bit growth is in the mid 40s as we kind of alluded to earlier, the bytes per box are not increasing at the rate that we would like to see.

  • - Analyst

  • Okay, great.

  • Follow-up question, in terms of gains that you're looking for in SSG, you mentioned it will be flat and I'm assuming part of that is (technical difficulties).

  • What do you need to see next year to see share gains take 2012 in terms of customer (technical difficulties)?

  • - Chairman, President and CEO

  • Well the easiest thing to say would be DRAM coming back in a significant way, but if foundry and DRAM are strong, that's good for us, and if NAND and logic are strong, it's less good for us.

  • Those are kind of the mix aspects other than, as you know, there's other things going on today, like currency and Litho taking a bigger overall share of the market.

  • - Analyst

  • Great.

  • (inaudible).

  • - VP, IR

  • Thanks, Patrick.

  • Operator

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

  • - Analyst

  • Hi.

  • This is [Rick Springster] in for Mahesh.

  • First question, what's your estimate of foundry utilizations right now?

  • You mentioned about 90% range I think earlier.

  • Can you give anymore color on that?

  • - Chairman, President and CEO

  • We would say in the high 80s.

  • We would not say 90.

  • - Analyst

  • Okay, and--

  • - EVP, CFO

  • Of course it varies by node, where most of the under loading is in, we believe in the 65-nanometer region.

  • - Analyst

  • Okay, and looking into 2012, for your WSE, I don't think you're giving estimates yet, but any color on which segments you think might pick up first and specifically within SSG, DRAM or foundry, where you might start seeing a pick up and as well as EES, as far as, you mentioned you're starting to see improvements, some improvement in that segment, but kind of the timing on when you might see that picking back up again?

  • - Chairman, President and CEO

  • Yes, it's certainly too early to make a projection on 2012 but our view has been that memory will be stronger next year and the logic and foundry will be a bit weaker.

  • That's kind of how we've looked at it.

  • We've of course projected DRAM would get stronger in the second half of this year so that's part of the reason why we're a little hesitant right now to make too much of a projection on 2012 for DRAM because we do believe we have to see that PC growth come back and sustain growth in handsets and communications infrastructure.

  • - VP, IR

  • Thanks and then I think we've got time for two more questions, please?

  • Operator

  • Your next question comes from Srini Sundararajan with Oppenheimer.

  • - Analyst

  • Hi, this question is for George.

  • Right now if it looks like your OpEx is only down 4% versus your sales might be going down much further than that so what steps are you going to take to get it in line with the sales as it goes down further in calendar Q4 perhaps?

  • - EVP, CFO

  • As I said, we're taking the steps to reduce discretionary spending in Q4, so we think it will be down at least $20 million in the quarter.

  • I would expect if we see another soft quarter as we expect, it will come down further in our first fiscal quarter.

  • As I said, we're being very careful on the OpEx spending, particularly in the R&D area, not to pull back the throttle given the number of opportunities that we're working right now, and it's a particularly critical time for positioning so we'll probably -- you'll see us be a little more careful in that.

  • Now, we're going into this slowdown in much better shape than we've been historically.

  • We took much a lot of actions in 2008 and 2009 and we've also been very careful with our regular full-time headcount so we created more variability in our market and our manufacturing and other areas of the Company.

  • If you look at our RFTs today, we're about flat with where we were in Q3 2009 so that helps us going into this, but so we think we're in a good position going into it but we'll be very careful on pulling back too hard on R&D spending here in the first part, which is what you'd have to do to take it down further than where we're taking it right now.

  • - Analyst

  • Thanks.

  • One more question.

  • I think this question is for Mike.

  • Just wanted to know what are your plans on LED product?

  • I think you might have been for quite some time and I keep hearing either it's going to be shut down or it's going to be going forward so if you could please comment on what are your plans on that growth market, I would appreciate it.

  • - Chairman, President and CEO

  • Yes, we didn't prepare to talk much about this today, but we're still excited about this product.

  • We think that we have a system that's differentiated and will add value to our customers.

  • We currently think this market is soft as well as because a lot of the consumption is dependent on TV growth, so it's an opportune time for us to work with customers and really get them to adopt our technology.

  • - Analyst

  • Okay, thank you very much.

  • - VP, IR

  • Thanks, Srini.

  • Operator

  • Your next question comes from Gus Richard with Piper Jaffrey.

  • - Analyst

  • Yes, thanks for taking my question and pronouncing my name correctly.

  • If DRAM growth was 25%, where does going forward sort of on average, where do you think capital spending for DRAM would be and I think historically, its been $7.5 billion and I think you said it was $5 billion.

  • - Chairman, President and CEO

  • I'm sorry, I didn't catch the, Gus, I didn't get if did you say if PC growth was--

  • - Analyst

  • No, if bit growth, DRAM bit growth historically is 40 to 50 and it comes down to say 25%, gets cut in half, what do you think cap spending is for DRAM going forward?

  • - Chairman, President and CEO

  • I don't think it's much different than it is today.

  • All they're doing today is selected technology conversions of their lines.

  • Maybe they could do a few less, but they have to invest in R&D and you have to invest in the next node.

  • I think the one thing we do know, prices continue to come down and the only way they stay profitable in the DRAM business is to continue on the treadmill driving the costs per bit down.

  • So we think that we're very close whatever is called maintenance levels of spending.

  • - Analyst

  • And then just as a follow-up, can you sort of quantify, clearly people are going to move to thin tech technology in the foundry space.

  • I wouldn't expect any announcements within the next year.

  • What sort of revenue opportunity or is there an incremental opportunity for Applied in that kind of conversion, if you could kind of, dollars per fab would be helpful.

  • - Chairman, President and CEO

  • Yes, I think we could get you that number after the call in a little more detail, because we kind of have to talk about number of passes, and exactly what's included in different companies' thin tech, so you have to normalize it a bit.

  • - Analyst

  • Okay, great.

  • Thanks so much.

  • - VP, IR

  • Okay, Gus, thank you and we would like to thank everybody for joining us this afternoon.

  • A replay of our call will be available on our website beginning at 5.00 PM Pacific time today and we would like to thank you for your continued interest in Applied Materials.

  • Operator

  • This concludes today's conference.

  • You may now disconnect.