應用材料 (AMAT) 2011 Q4 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 participate in a question-and-answer session.

As a reminder, this conference is being recorded today, November 16, 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, acquisition of Varian, opportunities, economic and industry outlooks, customer spending, market positions, capital allocation, and Q1 and fiscal year 2012 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 November 16, 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 investment 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, 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 fourth quarter and fiscal year, which ended on October 30.

Our earnings release was issued just after 1 PM Pacific Time, and you can 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 the call with comments about the industry environment, as well as our performance and plans.

Next, George will discuss our financial performance for the quarter and the year, as well as our expectations entering fiscal 2012.

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

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

Thanks, Mike.

And, good afternoon to everyone on the call today.

I'm pleased to report that Applied Materials ended our fiscal year with solid fourth-quarter results, despite a challenging environment for all of our businesses.

2011 has been the most successful year in Applied Materials' history, and we set records for revenue, earnings per share, and operating cash flow.

Our semiconductor business delivered a strong performance, despite a significant drop-off in wafer fab equipment spending in the second half of the year.

Our services group exceeded their previous peak revenue, driven by growth in our spares and services business, combined with robust demand for 200 millimeter equipment.

EES generated $2 billion of revenue and operating profit of over 20%, while in Display we established leadership positions in the emerging touch panel and high-resolution mobile display markets.

I'd like to thank the entire Applied Materials team for their achievements in 2011.

Shortly after the close of our fiscal year, we completed our acquisition of Varian Semiconductor.

The Varian acquisition extends Applied's portfolio with best-in-class ion implantation technology, a market that represents an annual opportunity approaching $1.5 billion.

The combination of Applied and Varian creates the industry leader in transistor technologies.

This will allow us to significantly enhance the value we provide to customers, as we partner with them to develop the next generation of transistors that are at the heart of faster, more power-efficient chips.

We're delighted to be welcoming Varian's talented team to the Applied Materials family.

2011 was a tale of two markets.

We saw first-half strength begin to falter during the summer months as economic headwinds grew.

Although we believe the prospects for a sustained economic expansion are improving, and we see ratable growth in demand for semiconductors, flat panel displays, and solar, the near-term capital equipment spending environment remains challenging.

We expect the semiconductor equipment market will begin to improve in early 2012, and strengthen through the second half of the year, as manufacturing capacity is absorbed and customers transition to next generation technology into volume production.

We believe we will see a clear increase in SSG orders in our first fiscal quarter.

Demand for mobile products is growing at a healthy rate.

We expect tablets and smartphones to lead end-of-year holiday sales, and reach our full-year projections of about 65 million and 470 million units, respectively.

As these devices fuel consumption of solid-state storage, we believe NAND investment will continue to grow, representing as much as 25% of total WFE in 2012.

Mobile devices are also driving demand for application processors, translating to high foundry utilization at the leading nodes.

We expect foundry investment to once again, constitute the largest component of WFE next year.

While 2011 continues to be a strong year for logic investment, DRAM bit growth is in the 40% to 50% range, and DRAM suppliers can meet demand by focusing on technology node shrinks.

Consequently, we expect DRAM investment to remain at its current low levels in 2012.

We estimate that 2011 WFE spending will end up in the $30 billion to $33 billion range.

And, as we look to 2012, we see capital equipment spending being down between 10% and 20%.

Over the past year, there have been significant puts and takes for new fabs and fab expansion projects, and these have impacted our expectations for our share gains.

The largest of which was our estimation that DRAM spending would improve in the second half.

We believe that we have increased our share in inspection, transistor products, PVD, CVD, and electrochemical deposition.

However, we now see 2011as a down year for etch and CMP, primarily due to spending mix.

Overall, this has been a strong positioning year for SSG.

We launched 15 new products, refreshing and extending our portfolio, while increasing our investment in 450 millimeter, in line with the industry's road map.

In the quarter, we achieved a number of critical positional wins at 3X and 2X nodes in logic and foundry, specifically in the high K metal gate and patterning etch applications.

We also saw significant volume orders from foundry customers for new applications in defect review, inspection, and Epi.

In service, semiconductor utilization rates and total wafer starts fell for the third consecutive quarter, and we expect current levels to remain relatively unchanged in calendar Q4.

In addition, we are seeing a significant reduction in demand for 200-millimeter equipment, as these customers become increasingly cautious and shift some capacity to 300 millimeter.

However, against this backdrop, AGS achieved record revenues in 2011.

We demonstrated sustained progress towards model performance, and increased our service penetration in Asia by nearly 30%.

In Display, we maintain our view that LCD TV growth will be around 10% in calendar 2011, which is not sufficient to drive new capacity additions.

Customers are delaying their investments, including their plans to build new factories in China.

Although we believe we have reached the bottom of the LCD capital equipment cycle, signaled by the extremely low level of orders for our display products, the rate of recovery will depend on an uptick in TV sales, both in the developed and emerging markets.

Over the past year, we have seen strong demand for mobile display technologies, and our product lines serving these areas comprising one-third of our 2011 Display revenue.

However, we currently see softness in these markets, as the initial build-out of manufacturing capacity is absorbed.

In solar, we now see panel installations for the year ending up in the 22-gigawatt to 24-gigawatt range, up approximately 25% year on year.

Our outlook for the end market is healthy, and we expect panel demand to grow 10% to 30% in 2012.

We see continued strength in Germany and Italy, with significant growth in the Chinese, US, and Japanese markets.

With module spot prices approaching $1.00 per watt, competition between the panel makers is intensifying.

As prices fall, module efficiency becomes incrementally more important, accelerating the adoption of advanced technology.

2011 was an outstanding year for EES.

During the period of rapid expansion in capacity, we fully capitalized on our strong product portfolio by increasing our market share and delivering strong operating performance.

I'd like to acknowledge our solar team, who rose to the challenge of meeting a ramp that far exceeded our expectations.

However, as the industry absorbs the large amounts of capacity shipped, we are seeing a steep decline in orders and revenue.

While top-tier customers will add modestly to their capacity next year, we see the majority of our business in 2012 being generated by products that enable customers to upgrade their lines to increase module efficiency or reduce cost.

In summary, our performance in the fourth quarter capped a record year for Applied Materials.

Although we enter our new fiscal year in capacity-driven downturn, we look forward to 2012 with optimism.

The macroeconomic environment will ultimately determine how quickly capital equipment spending recovers.

However, we believe we have passed the bottom of the order cycle for the Company overall.

With our market-leading technology, broad product portfolio, the addition of the Varian technologies, and the talent -- our talented global team, Applied is well positioned to grow faster than our markets in the year ahead.

While keeping our spending aligned with the business environment, we will continue to invest aggressively in the technologies, products that we believe are critical enablers for our customers, and for the long-term growth of our Company.

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

George?

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

I would also like to thank Applied's employees for their part in making fiscal 2011 our most successful year in Company history.

We delivered $10.5 billion in net sales, GAAP earnings per share of $1.45, non-GAAP earnings per share of $1.30, and $2.4 billion in operating cash flow.

For the fourth quarter of fiscal 2011, Applied delivered both revenue and non-GAAP earnings slightly above the midpoint of our outlook, and generated nearly $700 million in operating cash flow, which included a non-recurring tax refund of $276 million.

Our orders in the fourth quarter decreased by 33% sequentially to $1.6 billion, due to lower bookings in all of our businesses, including a steep drop in EES and Display.

Our backlog decreased by 26% to $2.4 billion, including negative adjustments of $271 million, driven largely by the pull back in solar and display spending.

Financial debookings were $178 million, and cancellations were $74 million.

As a reminder, financial debookings are made when the expected delivery date for an existing order moves beyond our 12-month policy window.

Net sales declined by 22% to $2.2 billion, with lower than expected revenue in Display and EES, slightly offset by higher-than-expected revenue in AGS.

Non-GAAP gross margin was 39.5%, down 3.3 points sequentially, primarily due to lower revenue and related factory absorption costs.

Our non-GAAP operating expenses were $478 million.

Excluding one-time items, they would have been approximately $500 million, just below our expectation of $510 million.

We expect our non-GAAP OpEx for the current quarter to be $560 million, plus or minus $10 million.

This forecast includes approximately $60 million for Varian OpEx, and is otherwise flat with our fourth-quarter run rate.

Our non-GAAP effective tax rate for the quarter was 26.6%.

Our GAAP rate was a benefit of 32.7%, represent -- excuse me, reflecting the tax refund I previously discussed.

This benefit resulted in an increase in GAAP earnings of $0.13 per share, but was excluded from non-GAAP earnings per share.

Our non-GAAP tax rate for the year was 28%.

In 2012, we expect our full-year non-GAAP tax rate to be approximately 26% to 27%.

On November 10, we finalized the Varian transaction.

The final price, net of cash and investments, was approximately $4.2 billion.

We expect the merger to be accretive in fiscal year 2012 on a cash basis, excluding acquisition costs, and accretive on a GAAP basis in fiscal 2014.

We expect to achieve annual synergy savings of greater than $50 million to $60 million.

Cash and investments ended the quarter at $7.2 billion, up $366 million from the previous quarter.

If the Varian acquisition had closed during the quarter, cash and investments would have been approximately $3 billion.

Our strong cash flows over the past four quarters enabled the Company to fund the acquisition without the addition of short-term debt, and enabled us to resume our share repurchases sooner than expected, during a period of low stock prices.

We used $175 million in Q4 to repurchase 16 million shares, at an average price of $11.04.

And, in a year in which we made the largest acquisition in Company history, we were able to increase share repurchases by 34%, and dividends per share by 14%, while preserving our investment grade credit rating.

We will continue our strong focus on capital allocation in the year ahead.

Our capital allocation priorities are to make organic and inorganic investments that provide attractive long-term returns.

We are also committed to increasing the dividend in line with the growth of the business, and to utilizing share repurchases as the preferred means of returning excess cash, after investment in debt service.

We are mindful that economic volatility provides attractive buying windows, and we expect to again be in the market buying shares during this quarter.

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

Silicon Systems Group orders declined 25% to $925 million, driven primarily by reduced memory demand.

SSG net sales were 24% lower at $1.1 billion, consistent with our expectations.

The non-GAAP operating margin was 26.6%, and declined approximately 6 points on lower revenue.

Performance relative to our model was impacted by inventory adjustments, factory cost under-absorption, and increased investments for customer-related programs across SSG's product groups, including 450 millimeter.

In Applied Global Services, orders were down 8% to $565 million.

Net sales were up 4% to $629 million, and non-GAAP operating margin was 25.7%.

The AGS results included $71 million in net sales for two thin-film solar projects.

In Display, orders declined 91% to $20 million, reflecting a steep downturn in capacity additions.

Net sales were down 23% to $171 million, which was below our expectations of flat net sales.

The non-GAAP operating margin of 19.3% reflected the low product volume, and a revenue mix heavily weighted towards touch panel.

In EES, orders declined 73% to $86 million, as our customers absorbed capacity additions.

Net sales declined 44% to $315 million, and the non-GAAP operating margin was 7.3%, reflecting lower revenue and inventory adjustments and product mix effects.

Next, I'll turn to our outlook, which includes the impact of Varian's performance in the relevant segments.

Given the volatility in the macroeconomy, we are not making a specific forecast for 2012 net sales.

However, I will provide some observations based on the visibility we have today.

While our semiconductor-related businesses will benefit from the addition of Varian revenue, the forecast range for WFE spending is still very wide, and it is too soon to know whether SSG and AGS will be higher year over year.

Display net sales are expected to be down 10% to 20% in 2012, as the downturn in LCD and touch panel equipment is expected to continue to the first half of the year.

If consumer TV demand improves, we would expect a strong pick-up later in the year.

EES net sales are expected to be down at least 50%, following the large build-out of capacity in 2011.

In general, we expect the first two quarters of fiscal 2012 to be impacted by the recent declines in Display and EES.

However, we expect strengthening in our semiconductor business, following a bottom in Q1.

Now, I will cover our targets for the first fiscal -- for the first quarter of fiscal 2012.

We expect SSG net sales, including Varian, to be up 5% to 20%.

In AGS, we expect revenue to be down 10% to 20%, reflecting the absence of the fourth quarter thin-film revenue, lower 200 millimeter sales and fab utilization rates, partially offset by the addition of Varian's services revenues.

In Display and EES, we believe net sales will be down 40% to 60%, as a result of the steep order decline we saw in fiscal Q4.

We expect both segments to operate at close to breakeven run rates during the first half of fiscal 2012.

We have taken substantial actions to lower our manufacturing overhead, and reduce other spending where possible, to maximize the performance of these businesses during the downturn.

We expect our overall net sales in the first quarter to be down in the range of 5% to 15%.

We expect our non-GAAP earnings per share to be in the range of $0.08 to $0.16 per share, in line with the bottom of the cycle.

Overall, we are continuing to use wider than usual ranges, to reflect the macroeconomic volatility.

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

Thanks, George.

And, 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 Instructions).

And your first question comes from C.J.

Muse with Barclays Capital.

Yes, good afternoon.

Thank you for taking my question.

I guess first question, in terms of your outlook for orders, I was hoping you could walk through the various segments, provide some color as to what you're seeing?

Clearly, on display and EES, I wouldn't imagine too much upbeat commentary.

But would love to hear your thoughts, particularly around silicon and service, as you think about January and April?

Sure.

Again, we think we bottomed out in SSG in Q4.

So we expect a bounce in orders in Q1, and that also, obviously, reflects the addition of the Varian orders.

The display is going to -- it's the law of small numbers.

They're -- they bottomed out in Q4 as well, at $20 million north.

So we'll see a percentage-wise, a big bounce, but the start of an increase in orders in the display area.

I think EES, it could go either positive or negative.

It really just depends.

It's coming off a pretty low order level in Q4.

So -- and then AGS is going to be, I would say down slightly in orders, but that's really more a function of the utilization rates we're seeing right now.

We think that will start to come back, as semi spending increases.

C.J., this is Mike.

The only additional comment I would make I think is, in semi, really the order uptick will be primarily driven, we believe by foundries, and a bit by NAND flash.

Helpful.

Thanks.

And as my follow-up, was hoping I guess, you could talk about two fronts.

First, given kind of distress you're seeing in display and EES, whether you're making any plans that you can talk about, in terms of cost reductions?

And then on the Varian synergy side, I know Bob and Gary ran a pretty tight ship there, so curious where you're finding that $10 million to $15 million cost savings per quarter?

So we have -- we've really focused our cost reductions in display and EES, on getting our manufacturing right-sized for the environment.

We're certainly in display, we're used to cycles, and so we've taken the normal actions there.

We've taken very strong actions also, in both of the businesses within EES, the solar businesses.

We're continuing, though, as you know, there's a lot going on in all of these businesses.

And so we'll continue with our program spending to make sure that we continue to drive the technology there.

In terms of the synergies, for Varian, I would agree with you, it's a very well-run business.

And -- but we're confident that we'll get more than the $50 million to $60 million annually that we expect out of that.

And I would say, two-thirds to three-quarters will come out of OpEx, and part of that is just overlap between the operations.

And then, obviously, on the cost of goods side, we have a global supply chain where we think we can take some costs down.

Very helpful.

Thank you.

Your next question comes from Chris Blansett with JPMorgan.

Hi, guys.

I wanted to ask about potential need to restructure your EES business, given that we have such a significant fall-off in that business outlook?

And that's the first question.

And the second one is really tied to, when you throw Varian in the mix, are you separating the Varian equipment from the service and the solar business?

Are those going into the buckets for your guidance for Q1, kind of on the orders and revenue?

Great -- I'll -- I can take it, sure.

In terms of restructuring, I think we're -- we have, and are continuing to take actions with these -- with our solar businesses to get their supply chain aligned with our global supply chain, to make the manufacturing process more and more efficient.

They're actually very lean organizations, operationally.

And so I think what you're going to see is it's going to be -- we're looking at a very strong and rapid fall-off.

You had over 45% drop in orders in Q3, followed by over 70% in Q4.

So it's going to take a little bit of time to adjust to how rapid that is.

But we'll -- we accelerated the manufacturing actions.

And we think overall, the basic cost structure of those businesses is pretty solid.

And as the business recovers, you'll start to see good margin performance again.

Chris, on the Varian organization, already we are reporting the services revenue in AGS.

The organization, we're keeping together, obviously, in Gloucester.

Over a period of time, as the -- we get more familiar with the organization, how it's run and the like, we'll most certainly have the various products report in, to the analogous product groups in our Company.

I think, George, you may want to comment on how we're handling rev rec and -- for Varian during this first quarter.

Sure.

So the -- if you look at Varian's run rate coming into this quarter -- so the three months leading up, the revenue would have been around let's say, $240 million, $250 million.

We're going to -- we're assuming in our Q1 numbers, that you have about $200 million in revenue overall.

Not because it really is down period-over-period, but there's some rev rec adjustments that we'll take a look at, to align with our rev rec policies.

About 80% of their revenue is systems-related, and about 20% is services, and that will be the breakout that we use in this quarter.

And so, pretty straightforward adjustment for the first quarter.

All right.

Thank you very much, guys.

Appreciate it.

Your next question comes from Mehdi Hosseini with Susquehanna International.

George, just a clarification.

Did you say that the EES is going to be breakeven over the next two quarters?

We said that they were going to operate near breakeven.

We did not -- there's still a lot of volatility in their number.

Could be below breakeven, could be slightly above.

Because last time -- if I remember correctly, when you restructured more than a year ago, the breakeven was annual run rate of $700 million.

Correct?

Yes.

I would say right now, with some of the spending programs -- we've added to some programs that are outside of the specific operating units.

So I would say, that the breakeven is more in line with $750 million, maybe $725 million to $800 million, depending on mix.

You've got -- obviously, you've got different margin structures of the businesses.

Sure.

And my follow-up question has to do with Varian's solar exposure.

Should I assume that's still small enough, that it's not really impacting the EES and EES breakeven point?

Yes.

Right now, we're -- right now we're actually carrying the solar activities in the -- in our SSG segment, until we get to the point where the product's a little more mature, and then we'll switch it over.

Okay.

Thank you.

Your next question comes from Krish Sankar with Bank of America-Merrill Lynch.

Hi, thanks for taking my question.

Mike, I had a question on your recovery scenario coming out of the -- on the SSG side.

You said it would be driven by foundry and some NAND.

I'm kind of curious to find out on the NAND side, do you expect it to be from one specific customer, or is it going to be more broad-based, and what's driving the demand for CapEx for NAND.

It will be a little more broad-based than one customer.

But as you know, our overall customer base is pretty consolidated.

The big thing that's driving NAND demand right now, is still tablets and SmartPhones, we think still a pretty strong end of the year for both of those product lines.

And that's what has customers interested in moving a little capacity forward.

And the application processors on the tablets are getting bigger.

That's really the big move in foundries, as well as just sheer numbers growing.

Got it.

And then in terms of on the solar side, I was wondering if you had any thoughts on what the industry CapEx for solar would be in calendar 2012?

And when you come out of this solar downturn, whenever that is going to be, do you think the industry's going to be vastly different, given the fact that half the players might be out of business?

Thank you.

Sure.

Obviously, the -- we've known that there's been capacity excess in solar for some time.

And -- but customers have continued to put on quite a substantial amount of capacity, spent over $10 billion this year.

We think 2012 will drop something in half, to the best of our knowledge at this point.

So if you just start at the solar cell and module suppliers, as you know many of them are not making money at this time, after a very successful start to 2011.

I do think that, that there will be some consolidation in that part of the market, maybe some significant consolidation.

How it happens, I think we'll probably see a number of companies go out of business.

We've already seen 7 in the US go out.

But I think this is going to be a world-wide phenomena, the stronger companies that have access to cash will survive.

But the end market, through this whole period is going to grow.

And we think grow substantially, because the costs are getting to the point where prices can achieve the $1.00 a watt -- a cell - or module goal we've been striving for quite some time.

Still a long way from $1.00 a watt installed, but we're getting a lot closer to parity with other kinds of electricity generation.

We'll see that happen, I think within 5 years, for sure.

So we do think that, there will be some restructuring in the industry.

I think we like our position.

We're concentrating on technology, and how to help customers lower their costs, improve their efficiency performance.

And we're going to continue to drive a road map like that going forward.

And we think if we do that, so we'll continue to have a successful solar business.

Thanks, Mike.

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

Yes.

One quick question on SSG.

You said foundries are driving the upside right now.

The question is how sustainable that is, because my guess, is that overall utilization in the foundries is pretty low.

What you're getting is, probably all 28 nanometer.

And if you can give us some idea what your expectation of how much 28 nanometer capacity is needed?

Well, let me start out by -- we look for overall wafer fab equipment spending in 2012 to be down 20 -- 10% to 20%.

That's our initial premises.

So we think that foundry spending overall, is going to be down at pretty much that rate, as the largest part of wafer fab equipment spending, they'll kind of be at -- the average down.

NAND will be up overall, year-on-year.

And then DRAM flat, because it's already so small, and we see logic being down a little bit more than the average.

So we're not expecting -- while we're seeing an uptick from a lower level on foundry spending, we're not expecting in our plans that foundry spending would be up year-over-year.

Now, I do agree that most of the spending that we're seeing right now is on 32, 28, 20 kind of nanometer technologies, that's good for us.

We like that -- like the continued treadmill.

We think that's very positive.

Utilization at those nodes is quite high.

And as the economy strengthens, I do think we'll see fill-in on the older nodes.

So I'm not expecting, at least at this point, foundries to make a massive move to reconfigure their older lines to the most modern technologies.

So I think they're going to stay focused on 28 nanometers.

I think most of their spending, across the board, is going to be in that range.

And I think because of the significant increase in capital required to deliver these technologies, I don't think we're seeing over-investment at this point.

And I see it still strengthening through that -- these investments strengthening through the year.

That's very helpful.

Just to follow up on the EES, on the breakeven point.

So George, if you could give us some idea, with reference to the October quarter, you had $315 million in revenue and $17 million in operating income.

How do you go down from there, to running 175 kind of run rate breakeven?

Is that -- where are you getting the costs out?

Are you going to have a restructuring, in terms of headcount reduction?

If you can walk through, how are you taking those expenses out from the last quarter to this quarter, that would be helpful?

Sure.

I think a couple things.

One, you're going to see the factory absorption improve.

It doesn't improve instantly, as you know.

It takes time to bring that down, but that will improve substantially.

Also in the quarter, the operating margin was impacted by some of the -- some inventory reserves that were taken.

So that, kind of in essence, understated the performance at that level.

So you have a little more head room to get to the 175.

And then the question will be, what's the mix of the business that we have overall, whether it's going to be 150 -- or excuse me, 175 or 200 a quarter for breakeven.

Okay.

Thank you very much.

Your next question comes from Jim Covello with Goldman Sachs.

Great.

Good evening, guys.

Thanks so much for taking the question.

I guess the first question is on logic spending.

Obviously, you talked a little about NAND and DRAM and foundry, foundry 28 nanometer driving the pick-up.

What are we seeing on the logic side?

It's been an area of relative strength.

We think it will be down a little bit more than average next year, Jim, primarily just driven by when node adoption happens for major customers.

So I -- nothing severe, but a little bit more than average.

But it's a positive factor in the first half of the year, it's --

Yes.

It should be mentioned, along with the others.

I'm sorry.

I missed that last point.

(Multiple Speakers).

It's a positive, it's down more than average, but it's a positive factor in the first half of the year?

It is -- it's a -- it's contributing to the -- to basically the floor, as it were, in the first two quarters.

Oh, I see.

I see.

And relative to expectations on logic six months ago, is it any -- is it significantly different one way or the other?

No, I don't think it's -- it's not different than we thought it would be.

And then going back to the foundries for a second, there's obviously quite a difference in relative health of some of the foundries, some of whom are doing pretty well, both technically and customer-positioning wise, other of whom are, obviously, struggling quite a bit.

Yet they all seem to be spending a lot of money.

I mean at the end of the day, how worried are you about a couple of the foundries that continue to spend -- one foundry in particular that continues to spend an awful lot of money, without having really any customers behind it.

How long do you think that can go on for?

Well, that is one of the things we took into our view, as we tried to make a projection for 2012, Jim.

And I think, in one case, we've already heard of some ramp push-outs, so those are public.

Okay.

I think, Jim, I think there's as much variability in, what their spending plans are going to be, just from the macroeconomic situation.

They're so consumer-based, in terms of their demand signals, that I think, that will be as much a factor in the coming year, as their business models.

Helpful.

Thanks so much.

Thanks, Jim.

Your next question comes from Srini Sundararajan with Oppenheimer.

Hi, guys.

I guess my first question is on OLEDs, organic LEDs, do you expect any revenue from organic LEDs during 2012?

Srini, do you mean OLED displays?

Yes.

I assume -- you're talking about the displays?

Yes.

We do expect some revenue from OLED displays.

We're clearly working with our customers, a number of customers are looking at these.

They've been primarily focused at smaller display varieties for cell phones and the like.

A couple of customers have some strong strategies to move that up to the TV scale.

We're working closely with them, and do have some revenue from that.

A movement OLED would be very positive for Applied Materials.

There are more layers, more very critical layers which we benefit from, as well as potentially achieving gains with our PVD -- our pivot PVD system.

But I think these are still in the early days of testing, whether this technology really can be cost effective in the TV market, and offer enough differentiation to attract buyers.

So we'll see.

But I would say right now, one of the reasons we're still quite focused on our OpEx spending in display, is because, not only are customers investing in OLED, they're also investing in a new kind of metal oxide transistor, which we're also working closely with them to improve the performance of their TVs.

There's other things going on as well, but those two things are very key to ensure that we maintain and increase our position in that market.

Great.

Just one follow-up.

Have you taken into account the December 5 reporting of the ITC vote to the Commerce Department regarding the solar tariffs and dumping claims, and essentially the problem between -- China and the US regarding the solar?

Well, I think the biggest thing for us, is to stay focused on our customers, and on the products that we're delivering to those customers.

As you know, prices have dropped by 40% or so in 2011, and a lot more than that over the last 3 years.

And it's done that because -- we've and our customers have stayed focused on investing in new technology, improving efficiency and productivity and manufacturing and driving up the scale.

So our, both hope and desire, is that the industry can continue its development and growth without any interruption.

Okay.

Thank you very much.

Your next question comes from Timothy Arcuri with Citi.

Hi, guys.

Two things.

First of all, George, I was going back through your financial model that you put out at Semicon.

And the SSG model, at this run rate is more like in the 34% operating margin level.

And even if you embed some impact from Samsung from the settlement there, I think you've talked about maybe a couple hundred basis points impact from that, it's still like 500 basis points lower.

And at the time, certainly 450 millimeter was pretty known, that you would have to invest in that.

So I'm just wondering, maybe if you can quantify the inventory impact, because it seems like it's a significant bit below where the model is?

And then I had a follow-up.

Thanks.

Sure.

Tim, yes, we are well below the model.

And Samsung is -- the Samsung settlement is a factor.

It was also a quarter where we had a big drop off in revenue, so factory absorption is another factor in that.

Also, we -- there are inventory adjustments that were taken in the quarter which had an impact.

I think overall, as we've said, our spending levels that we see going forward, are higher than we thought at the time we put the model out in March.

We would expect to continue to see an impact there, but the gap between the model and where we are today, will close several points over the year.

Okay.

Then maybe, can you break down backlog for us, the $2.4 billion in backlog?

Yes.

About 38% of it is SSG, 28% AGS, 20% EES, 14% display.

Awesome.

Thanks.

You bet.

Your next question comes from Stephen Chin with UBS.

Thank you.

Hi, Mike and George.

Just a follow-up question on preserving capital in the energy division in this down cycle.

Is there a time frame, Mike, that you're willing to give the solar industry a chance to show some demand elasticity, before considering a bigger restructuring program.

Because I'm quite surprised there hasn't been that -- with module prices below $1.00 a watt, there hasn't been that big pickup in demand.

So is there kind of a time frame you're looking at -- for the recovery in the industry?

Well, I think, you're right in the sense, there hasn't been a doubling of demand.

But end demand's up 25% this year.

We -- as we said, estimate it will be up 10% to 30%.

Again, as you know, most of the overall demand is driven by government incentives.

And in many countries there are limits to how much governments are willing to spend on -- or allocate to these markets.

We think the biggest growth is going to be in China and the US and Japan in this next year.

China's feed-in tariff that they announced in July, is already stimulating a lot of demand in China.

We think that's going to probably double, where it is this year.

But then the real tough question to answer is, when does capacity get in line with that demand?

And if you look at what we think applicable capacity is today, it's between 30 gigawatts and 40 gigawatts.

We think -- on the high end next year, demand gets to 30 gigawatts of deployment.

So in a season -- in a market that's very seasonal, where you have to have excess capacity to meet demand in certain quarters, if those two things would happen in the next 12 months, the alignment on capacity and demand wouldn't be too bad.

So if you put those things together, you kind of have your answer.

And Stephen, I don't want to imply that we're not taking a lot of action.

Yes.

If you look at the level of production that both of these -- both of our solar divisions were operating under, just a quarter and-a-half ago -- and so, the rapid ramp-down, getting the manufacturing organization sized to where they are today, and starting to take down the cost structure has -- there's been a tremendous amount of action on the part of our employees and our managers.

So -- but it is a rapid and big drop-off that we have to absorb.

Okay.

Thanks.

And congrats on closing the Varian acquisition.

I'm sorry, Steve, I didn't catch that last statement.

Sorry.

Okay.

Go to the next question.

Yes.

Carrie, we'll take our next question, please.

Your next question comes from Edwin Mok with Needham Company.

Hi, thanks for taking my question.

He was just congratulating you on the Varian deal.

But anyway, my questions relate to kind of the backlog adjustment.

Can you tell us what -- which division that adjustment came from?

And also, if you look at the display -- sorry, if you look at the EES side, there is still about a $0.5 billion worth in your backlog.

How much confidence do you have in those backlogs will eventually materialize into revenue?

Sure.

The financial debookings were about two-thirds or more, were EES and display, and really just reflected the steep drop off that we saw.

Obviously, you've seen a drop in orders in SSG and AGS as well, so there's been some -- there's some minor adjustments there, mostly again, financial debookings.

The cancellations were only $74 million of the total overall.

So -- and then in terms of the -- what was the other question -- was on the inventory and how we feel about the EES inventory?

As you may recall from previous discussions, we don't book anything for these businesses until we get a deposit.

So we have deposit and LCs covering much of our backlog and our inventory.

And while we would expect there to be a lot of discussion with customers, our economic protection is quite good.

And remember, a good portion of our inventory, for instance, is deferred inventory in EES, where we already have it fully secured.

Great.

That's helpful.

And then last question I have, is on the AGS side.

I remember, if we go back to your Analyst event, you had a pretty robust target for your AGS business going into 2012.

I think part of it is recovery on the 200 millimeter, which may not materialize.

But was wondering, how do you feel about that?

Do you think that AGS revenue can still grow in the coming year?

Oh, absolutely.

We're quite confident we can grow our AGS revenue over the next few years.

We're very happy with the ability to deliver solutions to customers in Asia.

This has been a focus of ours for some time.

We grew that part of our business by almost 30% last year, which I think is a great accomplishment for the AGS team.

Next year, we think 200 millimeter will be down.

Actually, 200 millimeter had quite a good year in 2011, but applications for power devices, for MEMS, for analog, these kind of applications are going to continue on 200 millimeter.

And I think we'll see another cycle in 200 millimeter that we'll do quite well in.

Thanks, Edwin.

Your next question comes from Satya Kumar with Credit Suisse.

Yes, hi, thanks.

First, question on OpEx.

If I look at Varian's OpEx before, in the June quarter, the last reported quarter was about $72 million.

And I think you said it adds about $60 million to the OpEx.

Was wondering if that takes out some of the savings that you expect?

And if I look at your OpEx from a couple quarters ago to now, your core OpEx is sort of flat, although revenues are down about 30% from your peak to January.

So can you talk a little about the two things?

Sure.

In terms of the -- any reduction with Varian -- and again, I don't have those numbers in front of me to validate them or not.

The $60 million is really carrying forward their current spending plans.

So it was consistent with what they were planning on doing over that time period.

There may have been some compensation accruals or other things in their 70 that -- but we'll update you over time, as we pull synergies out of the combined operation.

Overall, what was the --

The core OpEx.

The core OpEx, we went -- on core OpEx, we're actually down in a run rate, from running around 530, plus or minus $10 million to running at about 500, plus or minus $10 million.

And what you're seeing, we're actually down further than that, in what I would consider to be G&A type OpEx, as we're trying to preserve spending in these critical programs during this bottoming period.

So we think at 500, plus or minus 10, plus then the 60 for Varian that, that's actually the right kind of positioning for our spending, given the fact that we do expect to start to bounce up off the bottom.

And we don't want to compromise our ability to compete in these critical opportunities with customers, just because we have a weak quarter.

Okay.

And then on the SSG front, you mentioned that CapEx, you think would be down 10% to 20%.

I was wondering if you have a sense of what type of linearity you expect between first half and second half?

And if I take a look at your October SSG orders.

And if I add, maybe like 180 or so for Varian on average for next year, for me to get to this midpoint of the CapEx guidance, that CapEx outlook that you think you'll get, I need orders to go up at least 40% to 50% in SSG from their October levels.

I know you said that orders look to be going up in January.

But looking at the pipeline, do you see the pipeline looking like it could approach anything close to that type of growth off the trough?

Yes.

We definitely think the second half of the year is going to be a little bit stronger.

The only place where I would maybe take a little bit exception with your math, is just the fact that the backlog factors into our outlook in the math.

So again, we think to get to the midpoint of the guidance, you would have to see some increase in the second half, but not -- I don't believe it's 40%.

Thanks, Satya.

All right.

Thanks.

Your next question comes from Patrick Ho with Stifel Nicolaus.

Thanks a lot.

Mike, maybe just going back to the industry CapEx forecast you have for next year, down 10% to 20%.

You mentioned that foundries are obviously the big lever that you're looking at.

Are there any other segments, maybe whether it's DRAM or NAND, that you see as potential wild cards also that could be swing factors that get you to either the high or low end of that outlook?

Sure.

I think there's only four, so we can -- it's pretty easy to name them.

But I think we see -- we'll see with strength in the economy some upside in NAND flash, especially if consumers start coming back more strongly in emerging markets.

But I don't think that's so much a wild card, as an incremental increase.

I think where there can be a wild card, is if DRAM would come back much more strongly, since it's at such a low level today.

We're expecting substantially less than $5 billion investment next year.

And if we look back in history, in 2010, DRAM was about $9 billion of investment, and in years previous to that, much higher even than that.

So if we were -- if there's a wild card here, a strong DRAM bounce-back would probably be it.

So foundry and NAND flash we would think would be more incremental, and ratable back, to maybe where we are in 2011.

Right.

That's helpful.

And maybe just kind of a bigger picture question, in terms of the memory market and their eventual move to vertical device structures.

In terms of your market share positioning and application, or I guess your process segment, where do you see the biggest gains potentially for Applied Materials, as the memory market moves to those type of device structures, whether it's CMP, etch?

What process segments do you see the biggest gains?

Sure.

Well, it depends exactly, what kind of memory types get implemented.

But if we look both at two that people are talking about an awful lot today, vertical NAND, and then MRAM in certain configuration, these two are ones that we've been working on -- working with customers on.

In the vertical NAND, I would say we have some enabling technology that we think will help customers actually implement this in a few years.

Epi, of course, is one of those, advanced styles of Epi.

But we have other unannounced product that also could be very enabling for customers there, that we're working with them on.

Those would be the two biggest ones.

I think we'll see incremental capabilities in some of our oxide and high K kind of products in those applications.

In the MRAM, it's a little bit different.

And that's -- those will be very much a PVD story, or an ALD story, as you try to put down the multiple layers, and then etch them.

So our teams are working very hard together because the combination of these exotic materials, and being able to etch them appropriately, I think is a winning combination.

All right.

Thank you.

Thank you, Patrick.

And Carrie, we have time for just two more questions, please.

Your next question comes from Jagadish Iyer with Piper Jaffray.

Okay.

Thanks for taking the question.

Two questions, Mike.

So given the backdrop of your commentary on DRAM, how should we think about Varian's contribution, given that Varian has a lot more bias on it's product portfolio towards DRAM, how much do you think Varian could potentially contribute to your SSG revenues in fiscal 2012 or calendar 2012.

Then I have a follow-up.

Sure.

I think Varian has very good share across the board.

And everything that we're going to be doing in the next few months, as we all go visit customers together and work with them, is to continue to advance that.

What we see as the big opportunities coming up, the most obvious opportunities are in some material modification applications, where we think we can increase the number of implants to help improve patterning, line edge roughness, and the like, and really play a much stronger role, particularly in the foundry area.

Okay.

I have a follow-up.

This is for George.

George, given that your (inaudible) on the SSG is going to be much more on your revenue side, how should we think about gross margin trajectory through 2012?

Yes, I think from a mix standpoint, you saw -- we had some margin recovery, obviously, year-over-year this year, with thin film coming out.

But we still were with about $2 billion in revenue in EES, the gross margin structure of those businesses is not as high as, obviously, the gross margin structure in the semiconductor business.

So we would expect just from a mix standpoint, that should have a positive effect on gross margin.

And just one housekeeping question.

Did you call out what your fiscal year-over-year sales in silicon is going to be for 2012?

What we said, overall, is that we thought it would be up almost 10% to 20% year-over-year as a range.

But obviously, if -- we'll just have to see whether or not it's enough to offset whatever -- that's assuming a certain level of wafer fab equipment.

What we said -- excuse me, we said it would be up that much, in the first quarter.

What we believe for the full-year is, it's possible to be up, even in the face of a down year, because of the addition of Varian.

But we're not -- we don't have a specific guidance yet, because quite frankly the range is just so broad on the full-year, that trying to do that would be -- it's just too early in the year.

Thanks, Jagadish.

Thanks.

Your final question comes from [Mark Heller] with CLSA.

Thanks for taking my question.

I had actually a question on the display business.

It sounds like oxide TFTs are actually starting to gain some traction, at the display over in Asia.

Just wondering, if that does in fact happen, how does that affect the long-term outlook for your display business?

If metal oxide transistors come into play, it will be a positive for Applied Materials.

At a minimum, we think we would get one more application layer for that technology transition.

Still, we think it's a little early.

People are -- have to solve a lot of technical problems, but we're working closely with them.

Particularly to ensure that the defect levels and the mobility levels of these new transistors really meet expectations, and deliver viewer improvements, because that's really what's needed for the adoption to take place.

And how does your dollar content, I guess, change with oxide TFT versus amorphous, and as well as compared to LTPS?

Okay.

So on LTPS, it would be the most positive for us.

So it -- nominally let's say LTPS would be up 20% for us.

Metal oxide is kind of in the middle at 10, and if we called amorphous, 1.0.

Okay.

Got it.

And -- (multiple speakers)

And you didn't ask me about OLED.

So -- (Laughter).

-- OLED would be up more, so.

Got it.

And my understanding is you only are addressing the back plane though, for OLED.

Any plans on the front plane?

Not at the current time.

All right.

Thank you.

Thanks, Mark, for your questions.

And we would like to thank everyone for joining us on the call this afternoon.

A replay of our call will be available on our website beginning at 5 PM Pacific time today.

Thank you for your continued interest in Applied Materials.

This concludes today's conference.

You may now disconnect.