應用材料 (AMAT) 2012 Q1 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, February 16, 2012.

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, industry outlook, opportunities, customer spending, market positions, cost controls, capital allocation, and Q2 of fiscal year 2012 business outlook.

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

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

Forward-looking statements are based on information as of February 16, 2012, 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 Investors page of our website at appliedmaterials.com.

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

Good afternoon.

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

Today we will discuss the results for our first quarter, which ended on January 29.

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 along with our business outlook.

Before we begin, I have a calendar announcement.

Applied invites you to attend our 2012 Investor and Analyst Meeting in New York City on Wednesday, March 28.

At the event, you'll have a chance to meet the executive team, get an update on all of our businesses and take a deep look into emerging technologies during our afternoon breakout session.

The registration site is open now and we hope to see many of you in six weeks.

With that introduction, I'd now like to turn the call over to Mike Splinter.

Good afternoon to everyone on the call today.

On behalf of Applied Materials, I would like to convey our condolences to Steve Appleton's family and our colleagues at Micron.

Steve's leadership in the semiconductor industry will be greatly missed.

Now, let me comment on Applied Materials' performance and our industry outlook.

I'm pleased to report that Applied started 2012 with a strong first quarter, posting revenue and earnings that exceeded the high-end of our ranges.

Global demand for mobile electronics is driving strong capital investments by semiconductor customers, resulting in solid order momentum and higher expectations for our second quarter.

The rate of technical change continues to accelerate in all of our markets, and leading-edge technology investment remains a priority for our customers.

In early November, we completed our acquisition of Varian, and welcome their talented team into the Applied Materials family.

Bringing these two leaders together comes at a critical time as the industry accelerates its advanced transistor road map.

Our combined capabilities in Epi, implant, and thermal processing enable new opportunities to provide customers with high-value solutions for the next generations of high-performance energy-efficient transistors.

Let me now turn to the economic outlook.

Since the start of the year, we have seen improvements in a number of macroeconomic indicators.

While the ongoing recession and increased austerity in parts of Europe remain a concern, we believe the global economic environment will support healthy spending by consumers and businesses.

I'll now provide an update for each of our segments.

In Semiconductor, 2012 is shaping up to be the year of the foundry.

The mobility trend is driving growth and in the fourth calendar quarter, smartphones unit sales surpassed PCs for the first time.

We expect between 600 million and 700 million smartphones to be sold in 2012, an increase of 35% year-on-year.

In addition, we believe the tablet market will grow by more than 60% this year, on top of 65 million units sold in 2011.

Smartphones and tablets are driving demand for application processors and as these processors become increasingly sophisticated, we are seeing a significant increase in die sizes.

As a result, foundries are aggressively investing as they ramp production at the 3X and 2X nodes.

Applied is favorably exposed to foundry investment.

In our first quarter, we saw a 75% increase in revenue from these customers, and expect sequential growth of over 40% in our second quarter, driven by record quarterly sales in our [mobile] products, metal deposition products and implants.

(technical difficulties)

Mobile devices are also driving NAND bit growth, which is expected to exceed 70% this year.

As a result, NAND manufacturers are investing in new capacity and moving to the 2X and 1X nodes.

We believe PCs will be a primary beneficiary of improvements in the macroeconomic outlook.

The new Ultrabook categories and Windows 8 have the potential to drive a PC refresh cycle and spur growth in the second half of the year.

Oversupply in DRAM continues, with manufacturers able to meet the 30% to 40% bit growth that is expected in 2012 by migrating existing lines to advanced nodes.

As a result, we expect another year of low DRAM investment, although we do expect spending to be modestly higher in the second half.

Wafer fab equipment spending for 2011 exceeded our forecast, ending the year at approximately $35 billion.

Lithography investment reached record highs last year, as memory makers implemented device shrinks by upgrading lines with emersion systems.

As we look at 2012, we expect another solid year for capital equipment spending, and currently estimate wafer fab equipment will be in the range of $30 billion to $35 billion, or flat to down 15%.

2011 was a strong year for our inspection, transistors, deposition, and electro-plating businesses, and we expect to see share gains in all of these areas.

However, 2011 was a down year for our share in etch and CMP, primarily due to spending mix.

Over the past four quarters, we have increased the number of tools under service contract in Asia by over 20%, and as we progress with the Varian integration, we see opportunities to expand our implant-related services in the region.

During the quarter, we launched two new CBD applications on the producer platform, enabling enhanced device performance for our customers and adding to our served market.

We also released the fifth generation of SEMVision, our industry-leading defect review system.

As the industry's 450-millimeter road map becomes clearer, we continue to work closely with our customers and focus on developing early test wafer systems.

In Display, the low absolute level of orders show that we are continuing along the bottom of a current down cycle.

TV unit shipments grew modestly in 2011, and holiday sales were encouraging, helping to reduce inventories and close the gap between capacity and demand.

However, we do not anticipate significant new investments in television-related capacity until late in 2012.

In order to reduce our breakeven point, we've implemented a range of spending controls while continuing to invest in targeted product development.

Our customers are starting to transition new technologies into volume production, specifically metal oxide transistors and low-temperature polysilicon for OLED and high-resolution LCDs.

We expect these next-generation factories to increase the served available market for our CVD and PVD products by over 30%.

In Solar, end market demand exceeded all expectation in 2011, with installations ending the year in the 26- to 28-gigawatt range.

This was driven by an acceleration of panel consumption in Europe late in the year, combined with strengthening demand in China, Japan, and the United States.

Germany alone installed 4-gigawatts in the last three months of the calendar year.

We expect strong end market growth to continue, and anticipate 2012 installations to be in the range of 28-gigawatts to 35-gigawatts.

In 2011, we capitalized on the industry's rapid capacity expansion, gained market share and delivered strong operating performance.

While the industry is currently in a period of capacity digestion, several top-tier manufacturers have been running their factories at close to full utilization.

We are also seeing a necessary rationalization of capacity as less competitive players consolidate or exit.

Given the depth of this downturn and equipment demand, we are taking significant steps to reduce our cost structure in EES.

However, we remain confident in the long-term potential of this business.

Cell efficiency is becoming increasingly important for customers, and as new technology is adopted, we expect to see an increase in demand for our leading-edge products as some portion of the industry's current capacity becomes obsolete.

In summary, Applied began 2012 with a strong first quarter and we enter our second quarter with order momentum, driven by our semiconductor businesses.

Visibility for the second half of the year is limited, but we're optimistic about 2012 and expect the third consecutive year of wafer fab equipment spending above $30 billion.

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

Thank you all for joining us on the call today.

For the first quarter of fiscal 2012, Applied delivered revenue of $2.2 billion, and non-GAAP earnings per share of $0.18, both above the high-end of our outlook, led by strong net sales in our silicon systems business.

The results included Varian's financial for the full quarter, which contributed net sales of $202 million, and approximately $0.013 in non-GAAP earnings per share.

Applied's orders in the first quarter increased by 26% to $2 billion, as an increase in SSG orders offset softness in AGS and a weak environment for EES and Display.

Our backlog decreased by 10% to $2.2 billion.

The decrease reflected a 0.92 book-to-bill ratio and negative backlog adjustments of $146 million, partially offset by $94 million in Varian backlog acquired.

The negative items consisted of $99 million in financial debookings, with the balance from cancellations and foreign exchange effects.

Financial debookings are made when the expected delivery date for an existing order moves beyond our 12-month policy window.

Our non-semi businesses accounted for over 75% of the negative adjustments.

Net sales were flat at $2.2 billion, exceeding the high-end of our outlook of down 5% to 15%, primarily due to SSG performance.

Non-GAAP gross margin was 40.7%, up 1.2 points sequentially, driven by a higher mix of SSG revenue that was partially offset by a $31 million inventory adjustment in EES.

Non-GAAP gross margin excluded the effects of Varian acquisition adjustments, which I will take a moment to explain.

In accordance with purchase accounting rules, Varian's balance sheet was adjusted to fair market value, with inventory essentially written up to sales price.

This adjustment, along with the amortization of intangibles, was reflected in cost of sales.

The adjusted inventory is expected to be consumed by the end of our second fiscal quarter.

Varian acquisition-related charges in Q1, including the purchase accounting adjustments, deal costs and integration costs, were $153 million, of which $96 million were reported in cost of sales, and $57 million were included in operating expenses.

We are very focused on exceeding our synergy goal of $50 million to $60 million by the end of year two.

Our efforts since the close have been productive, and we believe we will exceed the high-end of our two-year target and will reflect more than 50% of our announced savings in our fiscal year end run rate.

Our non-GAAP operating expenses were $546 million, slightly better than the low-end of our target range due to favorable one-time items and spending controls across the Company.

We expect our non-GAAP OpEx in Q2 to be $565 million, plus or minus $10 million, with higher investment in silicon systems and lower shutdown savings being mostly offset by lower spending in our non-semi businesses.

Cash and investments ended the quarter at $3 billion, down $4.2 billion from Q4, reflecting cash from operations offset by the Varian purchase, and $304 million in cash returned to shareholders in dividends and share repurchase.

Operating cash flows were $181 million, or 8% of net sales.

The cash flows reflect the impact of certain Varian closing and initial integration costs, continuing decreases in customer deposits in non-semi as we draw down deferred revenue, and our annual variable compensation payout.

We expect a strong recovery in cash from operations in the second quarter.

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

We're 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 and debt service.

Dividend payouts in the quarter were $104 million, and we used $200 million to purchase 18.3 million shares at $10.95 per share.

Next, I will comment on our operating segments.

Silicon Systems Group orders were up 53% to $1.4 billion, reflecting demand from foundry and NAND customers.

Net sales increased 26% to $1.3 billion, above the high-end of our expectations, led by a more than 75% increase in our revenues from foundry customers and growth in memory-related sales.

Customer concentration remained high, with three customers accounting for approximately 70% of revenue.

The non-GAAP operating margin increased to 28.7%, and operating margin dollars grew by 36%, reflecting the addition of Varian's equipment business.

In Applied Global Services, orders were down 8% to $517 million, driven by low customer factory utilization levels.

We anticipate these levels to gradually improve throughout the year.

Net sales in AGS of $534 million were at the midpoint of our outlook of down 10% to 20%.

As a reminder, our lower guidance anticipated the absence of $71 million in SunFab revenues that were reported in the previous quarter.

Non-GAAP operating margin dropped to 21.2% on lower revenue.

In Display, orders increased modestly to $40 million.

Net sales were down 39% to $104 million, in line with the downturn.

Tight spending controls enabled the group to achieve a non-GAAP operating margin of 7%.

In EES, orders declined to $33 million, and net sales declined 34% to $207 million.

Non-GAAP operating margin was negative 8.2% on lower revenue, and an inventory adjustment of $31 million.

We have taken several cost actions in EES to date, including workforce reductions, shortened work weeks, product program rationalization, and spending controls.

Over the past few quarters, operating expenses have been reduced by approximately 20%, and we have removed over 50% of our manufacturing cost structure.

Given the uncertain period to an uptick in demand, we are continuing to look for additional cost saving opportunities in order to further lower breakeven levels.

We'll provide an update on these actions at the Investor Analyst Meeting in March.

Now, I will cover our targets for what is shaping up to be a very strong second quarter, led by our semiconductor businesses.

We expect SSG net sales to be up 15% to 25% due to strong sequential growth in foundry spending.

In AGS, we expect net sales to be up 5% to 10%, driven by improving customer utilization levels.

In Display, we believe net sales will be in the range of flat to down 25% off a low base, as the industry continues to absorb overcapacity.

In EES, we expect net sales to be down greater than 40%, due to continuing soft demand and the draw-down of backlog and deferred revenue.

We expect our overall net sales to be up 5% to 15%, and we expect our non-GAAP earnings per share to be in the range of $0.20 to $0.28 per share, reflecting the positive effect of higher semiconductor revenues on our margin structure.

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

Thanks, George.

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

Rachel, let's please begin.

(Operator Instructions).

Stephen Chin, UBS.

Hi, Mike and George, nice results.

A question on the silicon order momentum here that you mentioned, Mike.

The foundry and NAND orders were very strong in the first quarter.

Are you managing the Company to see those orders sustainable in the near-term or is there a normal digestion period that you're expecting to play out?

If we really look at the first half, we think certainly with the visibility that we have so far, we think that they'll be sustainable through the first half of the year.

I think the question for the second half of the year is we see that NAND spending will continue to rise in the second half of the year, and it's just a question of how much foundry will soften, if it softens during that period.

And just a quick follow-up on the EES operating breakeven level.

Do you have an estimate, George, of where we can think about the breakeven level being for the EES division going forward?

The breakeven level coming into the year was about $800 million, and with the actions that have been taken so far, probably see about $100 million come out of that today.

And we'll, again, like I said, we'll cover at the March investor meeting, we'll update our progress on that.

Jim Covello, Goldman Sachs.

Thanks so much for taking my question, and congratulations on the very good results and guidance.

First question, relative to customer concentration, what are you seeing price-wise in the industry as we see one or two guys dominate a big chunk of the order books?

Anything out of the ordinary there or business as usual?

Jim, we really make these agreements with customers just a couple of times a year that really frame how we're going to do business, so I don't think that there's anything that's not predicted.

But I think that this is just part of the consolidation that we're seeing, and especially when you think about the trends that are happening in the industry where the smartphone supply chain is also consolidated through a few players, it's not surprising that we're going to continue to see this high rate of concentration.

That makes sense.

For my follow-up, more of a bigger-picture question about the cycles and if they're changing at all.

Just from the standpoint of, historically, when your customers were doing well they ordered more, when they weren't doing more they ordered less.

Back half of 2011 you actually saw a change to that, where really (inaudible -- technical difficulties) was actually really strong, but a couple of the customers stepped up and ordered tremendous amounts of equipment, especially in the fourth quarter.

Do you think there's any chance customers are going to be ordering equipment or adding capacity vis-a-vis their own Business or do you think that's a little bit of an anomalistic situation?

You were breaking up a little bit, but I think I got the essence of your question.

We've been doing a lot of thinking about this particular issue, and the essence, I think, of what's happening kind of has a few elements.

First of all, the smartphone and tablet demand is accelerating, so it's pretty fast, and to keep up with that ramp, foundries are going to have to move more quickly.

Over the last couple years, dye sizes have doubled, or you could say dye sizes are going up at a 50%-a-year kind of level, which is pretty unprecedented for the applications processors, which are the major silicon consumer there.

Then the other thing is that because these dye sizes are going up, you've got to move to the leading edge very, very quickly.

And as we've all certainly seen, as these smartphones change model, everybody moves to the new model immediately.

So, there's a lot of pressure for foundries to be ahead on capacity and be in a position to supply the demand that's coming, even though their utilization might not be 95% or 90%, where they used to wait until that point to order significant amount of new capacity.

I know you said something, Jim, but we didn't hear you.

Thanks, Jim.

C.J.

Muse, Barclays Capital.

First question, if we were to assume, I guess, the higher-end of your WFE guide, let's call it flat to down 5%,how would you see seasonality first half versus second half, in terms of silicon shipments?

C.J., we would take the midpoint, if I could just move your question to, if you look at our midpoint of down 7% or so, is close enough, to down 5%, we think that you would have to see equal first half, second half.

And the puts and takes there would be more NAND spending, a little less foundry spending, and a little more DRAM spending.

Logic kind of ratable across the year.

So if we would think that we're going to be able to get to the high end of that range to flat, I think we'd have to see a little more foundry spending, probably a little more NAND spending.

That's helpful.

And as my follow-up, can you talk about, George, the trajectory of OpEx that we should expect post the April quarter?

Clearly there's pluses and minuses there in terms of volatility to the top line, but as you see it today, what kind of cost savings do you think we could see in the next couple quarters?

I think you're seeing some cost savings already in the non-semiconductor areas, but we're continuing to increase spending in semi.

Again, really there's just an extraordinary number of activities going on with customers that are important to do right now for positioning.

But we'll continue to see improvements in the cost structure in our Businesses that are in the bottom of the down cycle, but some of those are variable.

So I think the current run rate in the $550 million to $565 million range is probably a reasonable place to assume we'll be.

Very helpful.

Thank you.

Edwin Mok, Needham.

Regarding your silicon bookings in the coming quarter, could you give us, at least directionally, how do you think about the different segments, Foundry, NAND, et cetera?

For Q2, Edwin?

Yes, sorry, regarding your silicon booking guidance, regarding the coming quarter.

We said foundry revenues were going to be up significantly.

We also see bookings being up as well quarter-over-quarter for foundry customers.

Flash had a pretty good bounce last quarter.

We see it being kind of flattish, and then the same with DRAM and Logic.

So really it's a Foundry story, as we see it.

I guess that's why we're calling it the Year of the Foundry.

Maybe last year.

Quick follow-up on AGS, just curious how 200-millimeter is trending within AGS, and its booking and revenue in 200-millimeter is still pretty low here, and do you anticipate any kind of improvement yet?

I'd say that's a good description of where we are.

It's been pretty light on bookings and on revenues at the end of last year, but more so this in the first half of this year.

We do expect that actually to pick up, though.

We're seeing signs from customers that they need to add capacity, particularly in selected areas.

So, we expect it to be a little down overall from last year, but to recover and that will be a source of improvement in the second half.

Edwin, we think the automotive market is coming back and electronics in there, especially power electronics, is going to help drive a little pick-up in 200-millimeter but I think we would be happy if we improved margins and it was flat to up year-over-year.

Thank you.

Krish Sankar, Bank of America/Merrill Lynch.

I have two of them.

Mike, if I look at memory spending, I understand the secular drivers for NAND, and both NAND and DRAM, it seems like at the beginning of the year there is all this optimism that they come back in the second half.

But over the last couple of years it's never panned out exactly.

I'm wondering what gives you the confidence this year memory spending will come back in the second half?

And then I have a follow-up.

If we first of all just say NAND spending, I think that talking to customers, it would be the broadening out from the current set of customers to at least one additional customer that we believe is going to make some more significant NAND investments in the second half of the year.

Our expectation for DRAM is very modest, so it's just a timing of when they're going to make their investments to move their lines to the next generation.

Just to be competitive, they have to keep moving node to node to node.

We don't expect any capacity investments in DRAM at all.

It's just trying to stay competitive, Krish.

Thanks, Mike.

Just a follow-up.

On the Varian synergy, you said you might exceed the $60 million target.

Where is most of the savings coming from?

Is it SSG, or are you seeing a lot of savings on the cost line, too?

When we first announced the synergies, Krish, we said that maybe 60% would be coming out of OpEx, maybe 40% in cost of sales.

And what we're seeing is much more opportunity in cost of sales, and so we would expect maybe those ratios to change a little bit.

We also have seen some additional opportunities in SG&A.

So overall, that's why we're confident we're going to be able to increase the number, and as we get a little bit further along we'll set a new and higher target.

Got it.

Thanks, Mike.

Thanks, George.

Srini Sundararajan, Oppenheimer.

Fantastic results and good outlook going forward.

My question is, will EUV likely to be inserted only around 2014, do you expect durational sales from maybe SADP and maybe quadruple patterning?

Yes, first of all, our view on EUV is pretty consistent with what you said.

I'd just add to that, that as it comes in to production, it's really going to come in at one layer, probably contact layer first, get it into production for a year, maybe another layer as we go through time.

But I think the insertion, because of the costs and need to get it productized are going to be relatively slow.

So, the net of that is that double patterning, quadruple patterning is pretty much here to stay.

We kind of view that our SAMP gets increased by about $800 million with those applications today, as it gets applied to more layers, that will grow over the next few years.

So, we think with or without EUV and how it's going to go into production, not much change to the current trends.

Okay.

I have just one follow-up.

Looking back at Varian, can you tell me something that makes you feel that you made the right decision?

I can tell you a lot of things, but let me just start with the Varian team.

Bringing the Varian team into Applied has already had some great effects.

As you get to see how we're integrating the Company, you'll see Varian executives in a number of different jobs throughout Applied.

In the end, when you buy a Company, you buy the people and the culture, as well as the products.

So, that's one that we're really excited about, probably way more excited than, certainly, the day we announced that we bought the Company.

Then just the way our technical people are working together and finding synergy and issues, areas to do experiments together on.

I think we have great opportunity.

These will take some time to talk to customers about and get into solving the customer problems, but I think that's another one that is going to be very, very exciting.

And then just the match-up of the strategies.

We think the solar product is going to be very good over a period of time.

When you put all those things together, and we save more than we announced at the beginning on synergy, we're still incredibly excited about acquiring Varian.

George, would you add anything to that?

I've got to throw in a couple numbers.

Obviously they were non-GAAP accretive right out the gate, as we said they would be, and in the second quarter, as we look, they could be close to GAAP accretive, so they've got a lot of leverage in their performance model, as do we.

I think that was maybe underestimated by -- as you could see in the consensus, why we came in so much stronger when you saw an uptick in the Semi business.

Their business model works well with ours.

The people are outstanding, and not only are we able to help them in areas, but they've got some practices that quite frankly that will help us and we're adopting as well.

So, it's the kind of acquisition you like to see, and everything we've seen so far say it's only better than we thought.

Thank you so much.

Terence Whalen, Citi.

Congratulations on the results as well.

I have two questions.

One is we saw actually very strong December quarter performance from a few of your Japanese competitors, but then we saw these competitors guide March bookings down, contrasting what you and your US peers have seen.

I was wondering what is your view on F2Q orders in this context, and what could explain the difference between the strong order momentum you and your US peers are seeing versus what some of your Japanese counterparts are not seeing in the March quarter?

Yes.

Well, the Japanese companies typically are on a different fiscal year, and if you look at their order pattern over time, it always moves with more of a six-month cycle than a three-month cycle.

So, I don't know that I could say anything more intelligent about how their Business goes.

But for us, it's clearly exposure to foundries, our strong position with those foundries that are buying today.

So, that's really the essence of it for us quarter-over-quarter and how we see the first six months of the year.

Okay.

Thanks, Mike.

My follow-up question is, with the year coming to a close, if you look at your market share in silicon equipment throughout 2011, how did that market share progress compare to the targets that you set out a year ago and what are your targets looking forward one year?

If you could maybe highlight some of the share gain opportunities and challenges in your Silicon business now.

So, I said some things during my prepared remarks, but maybe I can just summarize.

On the macro, on wafer fab equipment spending, including everything, including MOCVD, we saw a pretty big spending shift towards lithography.

That spending shift, basically, on a percentage basis shrinks our SAM, so we saw a 2- to 3-point downward shift because of that during 2011, and that was caused a lot of line upgrades, also in logic, a big shift to immersion lithography.

And you can kind of see the change now that we're maybe through that period, except for DRAM.

I think DRAM's only going to do technology upgrades for a while.

But as we look at our product line, we think we have great opportunity to gain share virtually in every area.

We did gain share in all of our major areas, ECP gained double-digits last year.

We gained in metal deposition, in CVD.

We lost in CMP and Etch where we have good chance to bounce back this year and gain points there.

In our inspection division, we gained last year at least 1 point of overall share.

We expect with wins we've already seen this year that we'll also gain this year.

And in that area, in Inspection, we really had a shift in the Business over the last few years to really the bulk of our Business is with the top three or four manufacturer customers, as opposed to in previous years it was quite different.

Thanks for the color, Mike.

If there's any specific product line that you'd like to know about, we can cover it, or we can cover it after the call.

Thanks, Mike.

I'll re-queue and follow-up.

Okay, great.

Chris Blansett, JPMorgan.

Mike, I had a question.

When you thought about the year, you gave some projections for the different product divisions you have.

Seems like we've had a little bit of adjustment here.

Could you give us a little thoughts on maybe over and under?

Sounds like flat panel and EES might be weaker than you thought, maybe that's offset by better silicon semi equipment sales?

Yes, certainly.

Back in November when we started, we certainly underestimated where we where we are today with semiconductor equipment sales.

As you said, really the thrust by foundries to get capacity in place has been the biggest part of that.

Our flat panel display seems to push out, has been pushing out.

We've been expecting factories in China, that buildings have been built to start to get facilitized.

Those things seem to be getting pushed out.

We're seeing a little bit of capacity digestion in touch panels right now, but we do expect that technology and that product line to come back with the growth in tablets and during this year sometime.

In solar, I think this is pretty much what we expected.

If anything, we're surprised by how strong the end demand is, so if we look at effective capacity there, we think there's effective capacity of 40 gigawatts, a little over 40 gigawatts.

There's name plate capacity over 50 gigawatts, but when you look at who can make solar cells that will sell, it's really a little bit over 40 gigawatts.

If demand gets up to 35 gigawatts this year, that's a significant closure of the gap, the demand gap, that we're dealing with right now.

You could see a more normal kind of buying pattern than we're seeing today.

Okay.

Then the second question I had was just tied to gross margin expectations throughout the year.

You have a very concentrated customer exposure beginning the year, and it sounds like you expect this to mitigate as we go through the year.

In general, should this improve overall the gross margin structure for the Company or how do you think we should trend that out?

Hi, Chris, that's a good question.

I think what you're seeing is a couple factors.

Number one, gross margin improving in general in our semiconductor businesses, with volume, but also the gross margin improving as the mix of our Business changes in the year.

With the softness in our Non-semi businesses, what we refer to as a Semi business, which is SSG and AGS, which is largely serving semi customers, you get close to a 90% mix now of those Businesses which were down in the 80% or less range last year.

So you're getting a much better flow-through and that's reflected in the margin.

Thanks, guys.

Appreciate it.

Mahesh Sanganeria, RBC Capital Markets.

Mike, question on longer-term.

There's certain segments like PVD and RTP and Epi, CMP, where you have more than 70% market share.

As your customers prepare to move to 450-millimeter, do you think that the smaller competitor can survive, they can invest in the 450-millimeter, and as a result on that concern you might begin to get 100% market share in those segments?

We can always hope that the smaller guys -- but they've been awfully resilient in this industry over a long period of time.

What we're trying to do here is work closely with the customers, understand their needs and timing so that we don't, first of all, invest too soon or too late, that we put our investments in the places that are going to be needed.

I said earlier that we're looking at the early test wafer systems.

We're pretty specifically focused there, because that's what our customers need first so that test wafers can be run, robotics can be tested, defects can be measured and the like.

So we're going to make sure that Applied Materials is very well-positioned going into 45-millimeter so that our solutions are there for the customers, we're solving their problems in the 300-millimeter generations ahead of 450-millimeter, because we believe that there is a lot of risk in transitioning to 450-millimeter.

If we can maximize our position in 300-millimeter going into that transition, that will be the best possible scenario for Applied Materials.

And then we have to make sure we're managing our spending very tightly so that we don't get ahead of the game or behind the game.

But we're going to be lock-step with the customers, is the best way that I can try to describe it.

Okay.

That's very helpful.

And also on the SSC sub segments, where are you most excited about in terms of above-market growth?

You participate in several segments, but my sense is that transistor is becoming a lot more complicated and you have several markets, implant, RTP, Epi, metal gate.

If I take all these together, where do you think you see more growth opportunity if I look at all your SSC sub segments?

Yes, well, I'm certainly excited about all of them, but if you make me pick one or two, especially focused in on the transistors where we're going to see a lot of change.

We're going to see a lot of change on the memory cells.

So we're getting ourselves prepared to help customers make those transitions.

Epi has been one of those areas that doesn't get noticed a whole lot.

It's a product inside of our front-end products group.

But pretty much now with each generation, there's an added Epi step, at least in Logic and Foundry.

In the future, we're going to see a need for Epi in the channels, so we'll have additional Epi steps.

We'll see probably in the generations to come, Epi needed on memory devices to enhance the performance of the transistors, and then as we go to vertical NAND, I think we've got a lot of opportunity on both our deposition, our CVD products and our PVD products.

Finally, if you look across all these different things, they're all going to need more and more implants.

It was part of the analysis that we did when we bought Varian, but we see the number of adjustments and dialing in of the performance of the various transistors to accelerate with time here.

So, we think that if I really, really have to narrow it down, then I get to Epi and implant.

All right.

Thank you.

That's very helpful.

(Shaw Shaw) Deutsche Bank.

Thanks for taking my question.

Mike, you mentioned 70% of your sales were from three customers.

Can you maybe talk a little about your order concentration in the last quarter and also maybe the next quarter?

This George, Shaw.

The order concentration was right on top of the revenue concentration, maybe just slightly higher.

And again, it's looking sort of equally concentrated in the second quarter.

That's great.

Thank you.

And maybe you could talk a little about your expectations for revenue growth this year.

You said that Litho was very strong last year.

How do you see your revenues in fiscal 2012 grow compared to overall industry?

Well, maybe we could wait for that projection until our March analyst meeting.

I think we'd feel a little more comfortable and have a little better view of what's going to happen in the second half.

I think you get an idea from the discussion about there's pretty good momentum in our view that wafer fab equipment spending will be over $30 billion.

So I think we're quite confident in where we'll be with our semiconductor and service.

The service division will grow quarter-by-quarter through the year.

I think where there's still a lot of uncertainty is in our other two divisions, Display and EES, on exactly how their performance is going to trend through the year.

So, if you'll give us a little bit of a pass for a few weeks here before our analyst meeting, we'll give you a lot more detail then.

That's great.

Thanks a lot.

Satya Kumar, Credit Suisse.

Couple of things.

Firstly on your comments on market share in response to an earlier question, wanted to probe a bit into the Etch and CMP portion, and you said customer mix was the reason overall share was lower.

Is the right interpretation that market share for Etch and CMP is lower at the top three customers, or how should we think about that?

Our Etch business is very much towards DRAM and memory, in particular, so especially during this last year, we suffered quite a bit because of the low spending in those areas.

Spending mix was down, so that certainly hurt our Etch business substantially.

Where we're really focused with the Etch business is on the patterning applications.

We think that the solution that we have with Centris offers better performance, certainly better productivity and uniformity than the competition.

So we think our focusing in in that area should give us some opportunity to grow back some share this year and then in the years to come.

In CMP, it was really just a spending shift, who's spending more, who's spending less.

And I think that we'll see a pop back on CMP share this year to previous high levels.

Then a longer-term question on NAND flash.

(Inaudible) said a few things, they expect the long-term cost reduction for NAND to almost decline in half to maybe 30% a year, down from the low-50% it used to be.

And they expect that might slow down the rate of wafer capacity adds.

How do you think about NAND evolution longer-term if the cost reductions were to slow, and what can do AMAT do that could push the cost reduction back up?

I'm not sure of everything they said, but NAND certainly benefited from being able to go faster than Moore's Law for many, many years.

So I think that's one of those impacts that's affecting NAND.

I still think the biggest cost reducer is how much of their mix they can put on multi-cell, multi-bit devices.

But I think the demand is going to continue to grow pretty rapidly because of this mobile trend.

So, perhaps more of the dollar footprint ends up in NAND or we decide we don't need as much capacity.

But I think the trend has been pretty clear that for servers with Windows 8 and ultrabooks coming in, SSDs will grow dramatically, and the amount of flash in the rest of the mobile world will grow with each generation.

We're working very hard.

Double patterning, quadruple patterning works the best in flash, then moving to a vertical NAND structure should allow them to get significant cost-per-bit reductions.

So, we're working very closely with it.

We think we have some enabling technology, especially for vertical NAND.

But that's still a few years away from getting to production, but those discussions are happening today.

Thank you.

Patrick Ho, Stifel Nicolaus.

You mentioned in your prepared remarks that you're expecting bit growth in DRAM to be about 30% to 40% this year.

Do you see a level of where you would get a tipping point for where actual capacity buys return versus the conversions you're seeing today?

We think it's certainly above 40%, more like 50%.

If we start to see bit growth over 50%, we think some capacity will have to be added, but last year it was pretty close to 50%.

We just saw, really, conversions coming through.

So we'll wait and see.

But I think the key still with DRAMs is how fast do PCs and how fast ultrabooks get adopted and then how much DRAM capacity per PC.

That starts moving up, you could easily see 50% growth.

But we just don't see it today.

Okay.

Great.

And maybe a question for George in terms of the cycle times and the lead times you guys have been doing on the SSG side of things.

Sounds like you still have a pretty high level of Turns business, given the orders and the rapid turn in revenues.

Is that still the case?

It is still the case.

But again, the cycle times, while they have improved ratably over time, a lot of the Turns business reflects certain customers' preferences to bring orders very close to the shipment date, even though you have letters of understanding and a lot of dialogue with the customers over time.

So, some of that Turn business is really a reflection of the way of operating of certain customers.

We have time for two more questions, please.

Ben Pang, Caris & Company.

First, on the $30 billion to $35 billion on the wafer fab equipment, on the low-end of that, what changes in your view?

If we would go to the low end of the spectrum, we would see DRAM stay at the low level that we're seeing in the first half, and we'd see a bigger drop-off in Foundry and Logic.

Okay.

So your current outlook at $30 billion, the DRAM would still be lower than where it is right now?

What you're projecting right now?

We wouldn't see any improvement in the second half.

Okay.

And the second question is also on the wafer fab equipment spend.

You commented that Litho was a bigger percentage in 2011, do you think that trend continues in 2012?

I think it will remain roughly flat in 2012, maybe down a little bit as a percent as the trend that we cited for last year played out.

And again, I think our view is you start to see that change maybe come down a little bit as Memory starts to add capacity instead of upgrading.

Thank you very much.

Mark Heller, CLSA.

Thanks for taking my question and congratulations on the quarter.

I was wondering if you could comment on the competitive environment, obviously one of your major competitors is buying another competitor with deposition, etch, and combined now.

I was just wondering how you see the competitive environment going forward?

Sure.

Well, we certainly weren't surprised by that move.

Obviously, we've been on this strategy for a while with the acquisition of Semitool and then Varian.

So, we've certainly been trying to position ourselves ahead of the competition.

As far as this particular move, we're pretty familiar with both of these companies and have competed with them for many, many years.

As we cited, we think we've been in a strong position and improving our share in Electroplating and in CVD and PVD, which have been prime competitive fronts with one of those two Companies.

We've had less success in Etch, but we know certainly the game plan here and feel like we know how to compete, and we'll meet them in the marketplace as we always do.

Okay.

And one more question.

I know that you want to maybe wait a bit and give us more details later, but obviously we've had pretty strong growth and you're guiding to strong growth in SSG through April, but assuming a flat July and October, it looks like fiscal year SSG numbers could be up 10% to 15%.

I'm just wondering if we should expect a softer July and October?

Well, I don't think we can really say.

I think we tried to outline what we thought on the spending.

If we would pick the middle of our range on WFE, we think our performance would be flat first half to second half, but right now it's pretty hard to nail down that range.

Thanks.

Thanks, Mark for your question.

We would like to thank everyone for joining us this afternoon.

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

Thank you for your continued interest in Applied Materials.

Thank you.

This concludes today's Applied Materials' earnings conference call.

You may now disconnect.