應用材料 (AMAT) 2012 Q2 法說會逐字稿

Welcome to the Applied Materials earnings conference call.

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

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

As a reminder, this conference is being recorded today, May 17, 2012.

Please note that today's call will contain forward-looking statements, which are all statements other than those of historical fact, including any statements regarding Applied's performance, industry outlooks, customer spending, Varian integration, restructuring activities, capital allocation, and Q3 and fiscal year 2012 business outlooks.

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

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

The forward-looking statements are based on information as of May 17, 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 highlight slides which are on the Investor page of our website at AppliedMaterials.com.

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

Please go ahead, sir.

Thank you, Holly, 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 second quarter, which ended on April 29.

Our earnings release was issued just after 1.00 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 today's call with comments about the industry environment, as well as our performance and strategy.

Next, George will discuss our financial performance for the quarter, along with our business outlook.

Before we begin, I have a calendar announcement.

Applied will hold an analyst and media briefing at the SEMICON West trade show in San Francisco on Tuesday morning, July 10 at 8.00 AM Pacific time.

We hope to see many of you at the event, and we'll also provide a webcast and replay for anyone who won't be able to join us in person.

So, with that introduction, I would now like to turn the call over to Mike Splinter.

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

I am pleased to report that Applied Materials delivered another quarter of solid financial results, posting $2.5 billion of revenue, and earnings at the high end of our target range.

These results reflect strength in our semiconductor equipment business, driven by robust foundry spending.

Investments in areas related to advanced transistors are particularly strong, enabling our front end products and implant groups to achieve record quarterly sales.

In contrast, the environment for our display and solar businesses remains weak, as television sales continue to be sluggish, and solar market adjusts to excess manufacturing capacity.

We recently announced the details of our EES restructuring plan.

The actions we are taking are consistent with our previously stated goal to reduce the annual breakeven level for EES to approximately $500 million.

Our success in driving operational improvements across the Company has bolstered our confidence in our ability to deliver strong cash flow performance throughout our business cycles.

As a result, in March, we announced the 13% increase in our quarterly dividend, and a new stock repurchase program authorizing up to $3 billion of buybacks in the next three years.

Let me now turn to the economic outlook.

While a number of indicators point towards stronger growth of our global economy in the second half of the year, we remain mindful of the consumer spending implications resulting from macroeconomic risks in Europe and the emerging markets.

Mobility is the prominent macro theme impacting Applied's business, as it drives significant changes in consumer behavior, including faster adoption rates for new products and shorter refresh cycles.

Global appetite for mobile devices with new features, longer battery life, and brighter, higher resolution displays, continues to strengthen.

We now see smartphone sales in a range of 660 million to 710 million units for the calendar year, and maintain our view that tablets will grow approximately 60% year-on-year to more than 100 million units.

As these devices drive demand for leading edge foundry capacity, the market leaders are aggressively accelerating their ramps at advanced nodes.

Foundry investment has contributed almost 60% of our revenue in the first two quarters of fiscal 2012.

Over the past two years, seasonal buying patterns have become more pronounced, as the foundries need capacity and production to support smartphone model changes later in the year.

We see their equipment spending peaking in the second quarter, and despite the uptick in Q2, we believe foundry investment will be maintained in the second half of 2012, and distributed over a broader base of customers.

Unit growth of smartphones and tablets is also driving demand for NAND.

However, the average content per box remains relatively flat.

We believe bit growth will be about 75% for the year, with approximately one-third of investment representing new capacity additions, and two-thirds technology conversions.

This is resulting in softening of spending in the near-term.

With hard disk drive supply issues now resolved, global PC sales are recovering.

DRAM bit growth is in the 30% to 40% range, and process equipment investment remains at historic lows.

However, we believe Ultrabooks and Windows 8 will have a positive impact on logic and memory spending starting in late 2012.

Across the industry, factory utilization rates and wafer starts are steadily increasing, and this is reflected in revenue growth for our services business.

As a result of sustained investment by the foundries, we are narrowing our wafer fab equipment forecast.

We currently see spending in the range of $32 billion to $35 billion, or flat to down 10% compared to 2011, with a relatively even split between the first half and second half of the year.

A favorable spending mix also contributes to our positive outlook for fiscal 2012.

As foundries introduce advanced transistor schemes at 28 nanometer node, the number of selective epitaxy ion implantation steps is growing.

Applied's market leadership in epi and implant resulted in record quarterly revenues for these businesses.

Our metal deposition group also posted it's highest quarterly sales in more than a decade, reflecting the increased complexity in PVD per metal gate structures.

We expect continued strength from these product lines, as transistor formation becomes more process-intensive at the 20 nanometer node.

The Varian integration is progressing to plan.

We are pleased with our customers' response to the acquisition, and we are on track to exceed our target synergy savings.

As we integrate the two companies, we're deploying several members of the Varian management team, through roles in other business units and functions.

In display, near-term orders are being supported by mobility applications, as high resolution mobile displays migrate from smartphones to tablets, and as touch panel manufacturers add capacity in anticipation of touch-enabled Ultrabooks.

While investment in TV capacity remains at low levels, we see a number of indications that the market is improving.

With panel prices increasing, and factory utilization trending higher, and as customers start to build out new factories in China, we expect TV-related orders to pick up as early as the fourth quarter.

In addition, the adoption of metal oxide transistors is accelerating.

This technology increases the served available market for Applied's deposition equipment by about approximately 30%, and we expect this to have a positive impact on revenues in 2013.

In solar, our view of the end market has not changed materially since March.

Germany remains the leading consumer of PV, and has once again delayed their feed-in tariff reduction.

Demand in China, the US, and Japan is also accelerating.

Module efficiencies are steadily rising, and as manufacturing costs continue to fall, we are starting to see the economics of solar working, even in non-incentive markets.

Investment in new capacity remains at extremely low levels, despite the top panel makers in China and Taiwan running their factories at high utilization, and non-competitive capacity being taken offline.

While we remain confident in the long-term potential of the EES business, we are scaling back our development program for LED equipment, consolidating administrative and support functions in our solar business units, and moving manufacturing for our wafering products to Asia.

These actions will improve profitability across cycles, while still allowing us to invest in the products that are critical enablers for our customers, and for long-term growth of the business.

In summary, 2012 can be characterized as another strong year of wafer fabrication equipment spending.

Applied is delivering the solutions our customers need to meet their aggressive capacity ramps, and rapid transition to new technology and volume production.

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

George?

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

During the second fiscal quarter, we exceeded our expectations for revenue, and delivered non-GAAP earnings per share of $0.27, at the high end of our target range of $0.20 to $0.28 per share.

Strong performance in our semiconductor equipment business was the largest contributor to these results.

Our solar and display businesses continued to focus on next-generation technology, while managing their overall spending in the face of weak markets.

As Mike indicated, after the end of the quarter, we announced the restructuring of our EES business to lower the cost structure and the operating breakeven level.

We expect to incur charges of $70 million to $100 million for costs relating to employee severance, inventory write-downs, and other asset impairments over the next 12 to 18 months.

These costs represent approximately $0.04 to $0.06 per share on a GAAP basis, and up to $0.01 per share on a non-GAAP basis.

We will keep you updated as these charges impact our financial statements.

I will now compare our second quarter results to the prior quarter.

Orders increased 38% to $2.8 billion, and net sales increased 16% to $2.5 billion, led by strong demand for semiconductor equipment.

Backlog grew 10% to $2.4 billion, in line with orders.

Backlog adjustments were a negative $24 million, as cancellations, financial debookings and foreign exchange impacts of just under $100 million, were partially offset by $73 million of rebookings, primarily in display.

Our backlog aging remains healthy, with over 80% of backlog expected to turn in the next two quarters.

Non-GAAP gross margin was 42.1%, up 1.4 points sequentially, reflecting a higher mix of SSG revenue.

Total non-GAAP operating expenses were $580 million, slightly above our target range of $565 million, plus or minus $10 million.

We expect to be in line with our target range for the current quarter.

Spending on SSG programs continues to increase, in line with the rapid acceleration of technology adoption and the early work on 450-millimeter.

Overall, we are seeing some benefit of early synergy capture.

We expect the impact of further synergies, and our broader EES actions to bring operating expenses to the lower end of our target range over the next several quarters.

Our non-GAAP effective tax rate was 25.9%, and for the fiscal year, the rate expectation remains at 26% to 27%.

Cash and investments ended the quarter at $3.2 billion, up $289 million.

Operating cash flow was $603 million or 24% of revenue, driven by higher earnings and a reduction in working capital.

Improved inventory and payables more than offset increases in receivables associated with higher net sales.

Our capital allocation priorities continue to be investing in attractive opportunities in our core businesses, increasing the dividend in line with the growth of the business, and utilizing share repurchases as the preferred means of returning excess cash.

In addition to increasing our dividend and setting a new three-year repurchase program in the quarter, we paid $104 million in dividends, and spent $200 million to purchase 16.2 million shares.

At current price levels, we continue -- we expect to continue to be an active buyer of our stock.

Next, I will comment on our segment results, as compared to the prior quarter.

SSG orders were up 39% to $2 billion, reflecting continuing strong foundry demand.

Net sales increased 32% to $1.8 billion, above the upper end of our outlook.

Customer concentration remained high, with the top three customers representing 72% of orders, and 68% of revenue.

SSG's non-GAAP operating margin increased to 32.3% on higher revenue, with improved earnings flow-through more than offsetting spending increases for new programs.

In AGS, orders grew 26% to $650 million.

Excluding a thin film solar line booked in the period, orders would have been 7% higher compared to the prior quarter.

AGS net sales were up 3% to $551 million, slightly below our outlook due to the timing of some 200 millimeter equipment shipments.

Non-GAAP operating margins declined slightly to 20.1%.

In display, orders increased to $84 million, driven by advanced mobile display investments.

Net sales for display were up 29% to $134 million, and above our outlook due to earlier than anticipated tool sign-offs.

Non-GAAP operating margin was 6.7%.

Display has maintained it's spending discipline, and will remain profitable in a challenging environment.

In EES, orders increased $29 million to $62 million, reflecting very low levels of demand.

Net sales declined to $79 million.

EES had a non-GAAP operating loss of $57 million on lower revenue, and a $20 million inventory charge.

Next, I will talk about our expectations for the third quarter.

We expect SSG net sales to be down 5% to 10%.

This decrease follows a stronger than expected second quarter.

In AGS, we expect net sales to be flat to up 10%, driven primarily by improving wafer starts.

In display and EES, we believe net sales will be in the range of flat, to plus or minus 20%, with both operating from a low base.

We expect our overall net sales to be flat to down 10%.

We expect our non-GAAP earnings to be in the range of $0.21 to $0.29 per share.

This estimate includes a non-GAAP charge of up to $0.01 per share for the EES restructuring actions.

For the fiscal year, the Company expects net sales and earnings per share to be at the high end of the Company's previous outlook, which estimated net sales in the range of $9.1 billion to $9.5 billion, and non-GAAP EPS in the range of $0.85 to $0.95.

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.

Holly, let's please begin.

(Operator Instructions).

Your first question comes from the line of Satya Kumar, Credit Suisse.

Yes, hi.

Thanks for taking my question.

Mike, it sounds like you said that the year is likely to be flattish for WFE.

And you have taken up at least the low end of your WFE outlook.

But you also said that Q2 may be a peak for foundries, and you think memory is likely to remain weak.

Could you just give a sense of the moving parts, between first half and second half, what's sort of coming up to make it flat in the second half?

Sure.

So I think first of all, to kind of understand our view on this, you have to think about what's, what the foundries need to supply model changes, and the buying season at the end of the year.

So what it does is peaks out foundry spending in this, in this kind of second calendar quarter, end of the first quarter, beginning of the second calendar quarter.

Now since, if you look at both our fiscal year, in the very beginning of the calendar year, spending in wafer fab equipment was a little bit weak.

So as you go through -- when we add it up, we get pretty much flat, first half, second half, even though we see a peak in this time period of March, April, May.

Then if we look at the other kind of segments of wafer fab equipment spending, in the DRAM area, we expect low levels of spending throughout the year, modestly down in the second half of the year.

NAND spending, we previously had thought it would be better, but we now think it's not going to be better.

It's going to be a little bit lower in second half of the year, as well.

And then, we do expect logic spending to perk up at the very end of the year, as new technology, the next node of logic technology starts to be, starts to be purchased.

So the summation of that is, foundry will end up being pretty flat, first half, second half.

Logic will pick up, and memory will be modestly down in the second half.

Okay.

So, one quick follow-up.

If I take a step back from the seasonal trends in foundries and all that.

If I looked at how weak the 40 nanometer node is at all the foundries, and if I looked at how much capacity is being added at 28 nanometer.

And if I sort of try to think about the capacity at the end of the year, related to how big the opportunity is, do you think that we are [lengthening] the 28 nanometer additions, or [lengthening] the (inaudible) how do you sort of think about the overall opportunity for 28 additions?

Our view on 28 is that this is going to be the largest node.

We think demand on 28 nanometers is very high, and there is still constrained supply.

The speed of the ramp is about something in the neighborhood of 50% faster than the 40, 45-nanometer ramp.

And we think in the end, when this -- when 28 nanometer peaks out over the next few years, it will end up being something on a range of 40% higher than the previous generation peak.

So, right now, we think 28 nanometer is going to be strong through the year.

It's going to be strong into 2013.

Assuming that our customers can find a place to put equipment, they will continue to add equipment as quickly as they can.

Very helpful.

Thanks.

Your next question comes from the line of Jim Covello, Goldman Sachs.

Great.

Good afternoon.

Thank you so much for taking the question.

Two questions.

First, in the EES segment, what is normalized profitability have to get to over the next couple of years, post the restructuring, in order for you to want to stay in the business?

That would be the first question.

Second question is, on the NAND side, obviously it's been a little lower than we all would have thought this year.

Is it just pricing that we need to look at, in order to determine when that segment could pick back up?

Or are there some technology transitions coming along, that could create a need for increased spending, even in the absence of a pickup in pricing?

Thank you so much.

Hi, Jim, it's George.

I'll take the question on the EES segment.

I think if you look at the new EES model that we talked about at the Analyst meeting, we showed that operating margins went to, somewhere between 16% and 19%, when we get to a $1 billion dollars of revenue, which is about half of the run rate that we saw last year.

So, we think as EES moves up into that range, it starts to show the underlying benefit of the core operating businesses.

It continues to be an investment vehicle for us.

We think this is an attractive long-term business, and so we'll continue to invest in next-generation cell technologies.

But we think in that range, it will be a positive contributor to the Company.

So, Jim, I think you got both the question and the follow-up.

But the main follow-up question, what we're seeing right now is about a 75% bit growth.

But within that, there's a number of things -- maybe I can address, first supply, and then demand.

On the supply side, we're seeing a number of things happening here.

A lot of the legacy demand is kind of falling off for things like cameras, iPods, or MP3 players and USB drives.

So, that allows them room to upgrade their legacy capacity, so factor one.

Then additionally, the 3-bit per cell technology is getting qualified in many more applications, and much faster probably than we thought it would.

On the demand side, I think the biggest factor is that the footprint in tablets and smartphones of NAND flash is not moving up as fast as we had thought.

So, while they are affected by that big growth rate of 60% in tablets and 30%-plus in smartphones, they are not getting a big additional kicker on the bit growth, because the number of bits per box are staying relatively flat.

I think that part of that is pricing, but I think part of it is just what consumers demand for storage in these devices.

So, until a solid state drives get into PCs or the footprint dramatically changes, I think we'll see this kind of growth rate, bit growth in NAND.

Thank you very much.

And your next question comes from the line of Stephen Chin, UBS.

Hi, thank you.

Hi, Mike and George.

Nice results in silicon.

Just a question on the 2012 sales guidance being at the higher end at $9.5 billion.

Do you have an updated view on the silicon group sales guidance for the fiscal year?

Can we assume that silicon sales will be at the higher end of the range given at Analyst day?

Yes, I think the pickup that we're seeing in our outlook is driven by SSG.

So it's -- that's where we're getting the additional benefit.

And my follow-up question is, do you think you could achieve the 24% target market share gain goal at foundry customers faster than you originally thought, given that -- the strength you are seeing there now?

I don't know about faster than we're thinking.

I think we have to see some more transistors move the gate last to be able to see that, and some more gains in our etch and PD, in our Inspection business to be able to reach that goal.

But we are encouraged by the gains in the front end at this point.

Thanks, Stephen.

Your next question comes from the line of Mahesh Sanganeria, RBC Capital Markets.

Thank you, thank you very much.

Hi, Mike, in perspective of 28 nanometer capacity constraint, can you tell us about -- are you getting a longer lead time, because it seems like that your revenue is going down, but that your orders are pretty high.

Is that the customer are slotting for a longer period of time with you, because of the capacity constraints?

I think that customers are -- recently realized how constrained the capacity is.

So, we have a way of doing business, and for them to signal as soon as they know where they are going to need capacity.

I wouldn't say that they are giving us a lot more lead time.

I think they are telling us as soon as they know that they need more capacity.

In part, you can see that here in our Q2, where demand was a bit higher in our semiconductor group than we thought it would be.

And I think that actually is extending into Q3.

So I don't know that we get any more lead time on this.

We would like to get more lead time, but the way this business is working right now, I think customers let us know as soon as they know.

And with some of our customers, the time between order and shipment is pretty tight.

And so, we had another quarter of pretty high turns, which is also makes it hard to make the math work, when you look at the high orders in this quarter, and the lower orders.

But still, very strong demand.

It is good to see the backlog inch up a bit though, I will say that.

(Laughter).

Yes.

And one more thing, if you can elaborate on the foundry side.

I think you said, the first half was very concentrated.

Is it -- did you say that you are seeing some broadening from the foundry customers, in terms of foundry customers in the second half?

Yes, I think that's fair to say, but it -- when you really look at this, there are four major foundry spenders.

And it's really a matter of the mix between those four major foundry spenders, who is spending more, who is spending less.

I think the second half will be a little bit more even than the first half.

Thank you.

And your next question comes from the line of Edwin Mok, Needham & Company.

Hi, thanks for taking my question.

Actually, a question on the display side.

You mentioned on (inaudible) you expect fourth quarter to pick up.

Just clarify, is that calendar or fiscal?

And in terms of pickup, what is driving that?

Is that new model changes, or just general demand?

Yes.

So we said by our fourth fiscal quarter, as we said this early as our fourth fiscal quarter.

But the biggest thing that we continue to see some increased investment in mobility for tablets and for touch-enabled Ultrabooks.

But also, to really have the orders pick up, we have to see TV investments increase, and that particularly will be in some factories in China.

The factories are built, and it's a matter of customers deciding when to facilitize those.

But we think that could be as early as fourth quarter.

Their factory -- there has been pretty significant investment this year, CapEx as low as $3 billion, or equipment CapEx as low as $3 billion.

So very significant underinvestment here.

And meanwhile, the market is growing, so the shortages are improving.

Prices are improving.

Supply and demand is getting more in balance.

So we think that there is needed investment.

And as we projected in Analyst day, we think 2013 can kind of get back to 2011 revenue levels for us.

Thank you.

That's very helpful there.

Very helpful there.

And going back to silicon, just I guess, kind of now a question on foundry.

I think one of the foundry, at least one of the foundry, or some of the foundries are starting to talk about 20 nanometer node, as the new node.

And I think some people are speculating that it will be a bigger node.

And if you listen to what Intel was talking about in 20 nanometer is seeing, they say bigger [fabs] because they need more equipment.

So are you, are you anticipating that to start to come in calendar in the fourth quarter of this year?

And do you expect that to be, I guess, a long-term driver for the Foundry business?

Certainly, we do expect 20 nanometer to again, be a very big node for the foundries.

We'll see some R&D equipment, but we don't expect major ramp in 20 nanometers in the fourth quarter.

The -- really, what we expect is logic spending to increase at the end of the year, as the 14 nanometer capacity starts to get built.

Both of those technologies are quite good for Applied, as the advanced transistors take a lot more steps.

They will take more Epi steps.

They will take more metal steps to be able to develop those high performance, low power transistors.

Great, thank you.

Your next question comes from the line of Chris Blansett, JPMorgan.

Thanks, gentlemen.

A quick question on the second half as you diversify out your customer base in SSG.

Should we expect a modest improvement in the margin profile when this occurs?

It will be -- I think more impact on the margin will be, just the activities we're taking on costs.

So, it will be modestly positive, but not material.

Okay.

And then the follow-up was tied to the disclosure that you're going to significantly reduce your spending on the LED front.

Does this mean you're out of the area, or are you just trying to kind of minimize the development expenses at this time, for maybe a longer burn before you get to some product?

So, what we're going to do there is -- certainly, we have a number of customers that we've been working with.

We'll continue to support those customers in their efforts to get our products into production.

But we're going to pull back on how much we've been spending on the new capabilities, and the new products in the MOCVD area.

So, we will pretty significantly pull back on the spending there.

And really, the rationale is, we have a lot of areas that we are looking at that have good return for the Company and for shareholders.

And we had to prioritize some of our spending.

And this is one of those areas where the return looked quite far out.

So, we made our choices to spend in other areas, and also cut back, and get our profitability in our Solar business up.

All right, thanks.

Appreciate it.

Your next question comes from the line of Terence Whalen, Citigroup.

Hi, this is Wenge Yang for Terence.

Thank you for taking my question.

In terms of DRAM spending, as the DRAM price stabilized, is there any discussion from the customers to resume some of the technical -- technology shrinks for the DRAM sector?

Yes, technology shrinks are ongoing.

The DRAM guys have had -- it's primarily -- where they are spending their small capital budget is on technology shrinks.

But we've been encouraged to see prices stabilize here.

I think it's certainly a sign that capacity and demand are getting more in balance.

As we all know, there is some capacity coming off line here at the current time, which also should help that balance.

But people are not talking about new factories yet, at this point, or new big capacity adds.

Okay.

Just a quick follow-up on that.

Last time when [Kumonga] was bankrupt and merging to Micron camp, there was a technology spending to convert the processes from [Kumonga] to Micron process.

So in this round, if Elpida and Micron (inaudible) through, do you see another round of technology spending to consolidate the process into a single process platform?

I really think it's too early to tell exactly how Elpida and Micron are going to get together.

I would just say, we're encouraged that the factories are still running, and Elpida is getting orders from major customers.

I think those things are positive signs right now.

How far down the road, certainly, eventually they have to synergize the technologies.

But that may not be needed for a while, because the kind -- the spec DRAM cells are relatively similar.

Thanks, Wenge.

Your next question comes from the line of Krish Sankar, Bank of America Merrill Lynch.

Hi.

Thanks for taking my question.

I have two of them, Michael or George.

One is a long-term question, with all the well publicized supply side issues faced by the fabless companies.

Do you think down the road, these fabless guys that are well-capitalized might start buying front end tools and consignment, and places at the foundries, kind of like what they do in the back end, the testers at the [OSAT]?

I think that is -- it's a great long-term question.

I don't think we have any visibility to that trend starting now.

And again, I think what you are seeing with foundry customers is a desire to add capacity to meet future demand, and across a broad group of customers.

So I think the model as it stands right now is, it's still on the horizon.

But certainly, people are concerned about not having enough supply at this node.

So I think it will be interesting to see what strategic actions they take for the next node of capacity.

One of the challenges is, how do you -- you would have to be a customer that had tremendous scale (Multiple Speakers).

Because the factories today, are only going to get more scale intensive.

So there's probably only one or two customers, and maybe three actually, that have that kind of scale, and two are already fairly engaged in production.

Got it, got it.

And just my follow-up, along the same path, it seems like the foundry players are spending for yield and demand.

So in a scenario, if the macro economy deteriorates in the second half, in your view do you think the foundry players continue to invest for whatever reasons they want to do it for the second half, or do you think they will scale back the second half of the year?

Well, I think it really depends on what the demand on smartphones and tablets are.

These things seem to transcend some, some of the economic environment, but it depends how bad a situation we can imagine.

Certainly, if there's a situation like 2008, I think everybody pulls back like they did in 2008.

But I think with any kind of modest pull back, there is a good chance that these electronic devices continue to be sold, in nearly these kind of quantities that we're talking about.

And we're starting to see PCs pick up, which is a positive sign, and certainly we didn't get much help from PCs last year so.

All right, great, great, thanks, Mike and George.

Thanks, Krish.

Your next question comes from the line of Patrick Ho, Stifel Nicolaus.

Hi, yes, thank you very much.

Can you go back for a second, in terms of -- just trying to reconcile the revenue outlook that you are presenting for July, versus I guess, the strong order flow you've seen over the last two quarters?

You mentioned Turns business continues to be high.

I guess, is that any indicator for us to look at how orders are, or what's the discrepancy?

And how can I reconcile the strong order flow that we've seen versus the revenue guidance for July?

Well, I mean, I think the -- I think we discussed the (technical difficulties) SSG element, which is a high degree of turns business that we saw in the second quarter.

Also remember, we had a large, close to a $100 million booking in AGS related to a Sun fab project.

And that won't actually revenue until after the third quarter.

And so, that may be part of what you are -- if you're trying to reconcile, that may be part of the math.

Okay, great.

And also, second question, in terms of the margin profile on a going forward basis, you mentioned a lot of the gains you hope to get on the margin profile from the cost savings efforts.

As revenues begin to grow again, to what I would characterize more normalized levels, how much is just the impact of increasing revenues contribute to say, the gross margin line particularly?

Well, I think you're already going to see it in the third quarter.

We said we would be down on revenue.

I think we're going to be fairly flat on gross margin as the, as some of the improvements help offset the effect of volumes.

So we'll -- one of the things in margin that is a big factor, is going to be mix.

And as we get, continue to see a strong semi mix while we're, particularly while we're seeing the non-semi businesses still at absolute low levels, we still have some room for upside.

But really, it's when the Non-semi businesses start to recover, which we expect to happen in '13, that I think you're going to see some real lift on the margin side.

Great, thank you.

Your next question comes from the line of Vishal Shaw, Deutsche Bank.

Yes, hi.

Thanks for taking my question.

George, I'm just trying to understand the bookings profile that you reported in the second quarter.

Some of your competitors reported a much lower bookings number in March quarter.

I'm just trying to understand, is it just timing, or is it exposure to certain set of customers, or lack of exposure in Japan, or is it the share gains?

Yes, I think, I think it's -- I would love to say it's a little bit of all of it.

But the fact is, we also had an additional month, which was an important month, in terms of demand.

It's a month that will be in our competitor's next quarter, and won't be in ours.

But we had very, very strong, particularly foundry orders, in the second quarter, and that really was the foundation.

In addition, as I said, in AGS, we're above trend in orders, because we had the one large project order that skews the data a little bit.

Okay, great.

And then, one of your foundry customers recently pulled in 20 nanometer CapEx.

Are you seeing similar activity at some of your other foundry customers?

Are they asking you more for 20 nanometer, and do you expect maybe some of those customers to similarly follow the big move?

I think they have to be -- everybody will move to the next generation of technology as fast as they can, because demand is high, and next generation gives smaller die size.

But I think there's time yet to get those technologies to really be production worthy.

And so as soon as they can get them into production, they will.

Everybody is working on that next generation of technology at a breakneck pace.

So, it's just a matter of how soon those breakthroughs come, and how good the transistors are, and how reliable they are.

Great, thank you.

Your next question comes from the line of C.J. Muse, Barclays Capital.

Good afternoon.

Thank you for taking my question.

I guess with the silicon guided down here in July, but your outlook for second half to track in line with the first half.

Curious if your expectations are for a snapback in Q3, or how should we think about the linearity of silicon revenues in the second half?

Yes, I think we're thinking that, that will happen later in the calendar year.

Not probably in the, in the Q3 timeframe, as customers are really trying to get that equipment into production status and starting to build chips.

For the way we're looking at it, is that the pickup will come in the latter part of the calendar year, C.J.

Okay, that's helpful.

And as a follow-up, can you I guess outline what your expectations are for OpEx as we move into the second half?

I know clearly, if the market moves around, things can change.

But assuming that the scenario you've laid out for us in the various business segments, how should we think about the trends for OpEx?

Yes, again, for Q3, we would expect to be in the range of $565 million, plus or minus $10 million, certainly down from Q2.

And then, as we see the effects of synergies increasing, and also the impact of the EES restructuring, we should be able to move down lower in the range.

Excellent.

Thank you.

Thanks, C.J.

Your next question comes from the line of Jagadish Iyer, Piper Jaffray.

Yes, thanks for taking my questions.

Two questions, Mike and George.

First, on the display side, when do you think you could probably see north of the $200 million run rate level, if display has been kind of quiet for a few quarters.

So when do you think it's going to pop up, given that the touch panel has been one of the hot areas on the Ultrabook side, so any color on that?

Sure.

I mean, we think you could see orders certainly bounce up to that level as early as our fourth fiscal quarter.

But we would expect that run rate to be certainly more prevalent in 2013, than we are seeing here in 2012.

Okay.

Fair enough.

On second question, just as follow-up, you had assigned a $500 million breakeven for the EES.

A two-part question.

First, what is your conviction level that [fuller] equipment spending should come back sometime in '013?

And second thing is that do you believe you could be profitable in fiscal '013?

Yes, we think both of those are possible.

It's in part, why we aimed the target at $500 million, so that we could be profitable in 2013, with our current level of expected revenue.

It's, of course, pretty hard to tell right now, but we're encouraged by what's happening on the end market.

We think the first quarter was pretty close to 8 gigawatts of deployment.

So, we'll see what happens the rest of the year, and how close supply and demand get.

Thank you.

Your next question comes from the line of Ben Pang, Caris & Company.

Thanks for taking the questions.

Two questions.

One, did your bit growth expectations change for NAND or DRAM since (inaudible) the year?

And the second question is, in terms of the 20 nanometer front for (inaudible), how would you characterize the growth relative to 28 nanometer?

Thank you.

I'm sorry, Ben.

I didn't quite catch the second question on 28 versus 20 nanometer.

Were you talking capacity or complexity?

Basically, your market.

Your (inaudible) or I guess on a 10,000 start basis or whatever, how much of a bigger opportunity do you have with the (inaudible) now as part of the fold?

I just want to see if it's -- is that your biggest (inaudible) SSG going forward?

Yes, okay.

So first, on bit growth, our view on bit growth really hasn't changed much in the last few months.

DRAM in the 30% to 40% range, not a lot of momentum there, although we see increased footprint on DRAMs in smartphones which again, is another one of those positive signs for DRAMs, and NAND flash in the 75% bit growth regime.

And that's resulting in, about one-third of that results in capacity additions, and two-thirds in upgrades.

They are achieving it through upgrades.

We think the 20 nanometer technology is going to be between 30% and 40% more complex layers that are deposition layers, etch layers, inspection, inspections that all could accrue to Applied Materials.

So our overall SAM, if you will, should increase by roughly that amount on a per wafer start or per 10,000 wafer start basis.

All right.

Your next question comes from the line of Mark Heller, CLS.

Good afternoon.

Thanks for taking my question.

Mike, I just had a, I am not sure if you covered it, but there was a decision today on solar import tariffs on the Chinese.

I'm just wondering how that -- you think that might affect your EES business?

Yes, the import tariffs for -- the anti-dumping import tariffs were certainly larger than we thought, 30%, more than 30% for many, as many, many Chinese solar manufacturers.

These tariffs are on top of some tariff -- some countervailing duty tariffs already levied.

So this is -- seems to be pretty steep.

It will certainly cause changes in the supply chain.

For those global companies, I think they will be able to adjust their supply chain, move around, get access to cells from other regions.

It will also give opportunity I think, to Taiwanese manufacturers.

And, of course, it will give some benefit to US manufacturers, as these tariffs get levied.

For Applied Materials, we're selling to pretty much every solar manufacturer, every crystalline silicone solar manufacturer, and our focus with them is on reducing costs and improving efficiency.

We certainly -- our goal, and I think the goal of most of our customers is to drive the cost down, so that governments don't have to intervene into the business either from incentive or tariff kind of situations.

So, we're going to keep our focus up in this area.

In the end, if it doesn't affect demand, my biggest worry that these tariffs would affect end demand, slowdown end demand.

That would be a negative for every part of the solar industry.

So hopefully, they don't do that, but I think there is a pretty big risk of that.

And then a quick follow-up for George.

How should we think about gross margins and the tax rate in the second half of the fiscal year?

Thanks.

Sure.

So, as we said for the second half of the year, we don't really see a big shift in mix impacting.

So, I think, at the levels that we're seeing today, we are possibly slightly improved on margin, and the tax rate for the full year, our outlook is still 26% to 27%.

Thank you.

Thanks, Mark.

Holly, we have time for two more questions, please.

Okay.

Your next question comes from the line of Westin Twigg, Pacific Crest.

Hi.

Thanks for taking my question.

I just wanted to comment on the Varian numbers.

Thanks for breaking those out.

That's helpful to see how that business is developing.

And I am just wondering if you expect the implant revenue to stay at the current revenue levels through the year or improve?

And I'm also wondering if you see an expansion of that market at 14 nanometer logic, or 20 nanometer foundry?

Well, I'll talk about the year, and Mike, maybe you want to talk about the future technology generations.

The -- for the year, this is -- the second quarter was just a very, very strong quarter, record quarter for Varian since it's inception.

So while I would like to see every quarter going forward at this level, I think it will move in line with the rest of the industry, but very, very strong overall.

Again, we think that making advanced transistors is a very intricate business, and implant is going to play an increasingly big role in that.

That was part of our thesis from the very beginning, of why we were attracted to Varian and the Implant business.

So we believe that it will be a bigger part of gate-last transistors.

We think it will be a bigger part of how you dope thin-film transistors.

So we think that this is going to continue to have a growing SAM over the upcoming generations of technology.

Okay.

Just to clarify, why was Q1 so strong for implant -- or Q2?

Sorry.

Well, really, foundry in both our share at foundries, but because 28 nanometer transistors, you can see all of our transistor businesses rise.

Epi gets -- there's more passes of epi.

There's more implants to adjust the transistors.

There's more metal passes to ensure that the transistor performance, the turn on voltages are set at the right levels.

So these devices are getting more complex.

We have great technology and products that are really aimed at exactly -- we've been working for years with customers, exactly for this inflection.

Very helpful.

Thank you.

You bet.

Thanks, Wes.

And your final question comes from the line of Mahesh Sanganeria, RBC Capital Markets.

Yes, thank you.

One question on buyback.

It looks like you have been buying back about 15 million, 20 million, around ($11).

Should we think that, that is going to be the level, and you will increase or decrease, if at lower and higher prices, in terms of buyback?

What we've said is, historically we've been pretty rateable when we were buying.

And we've said with kind of volatility we're seeing in the markets today, that we're going to be a little bit more opportunistic.

And so we, we won't forecast ahead of the quarter, what amount we're going to buy, but we certainly expect to be active buyers at these levels.

Okay.

Thank you very much.

You're welcome.

Thank you, Mahesh, for your question, and we would like to thank everyone for joining us this afternoon.

A replay of this call will be available on our website beginning at 5.00 p.m.

Pacific time today.

Thank you for your continued interest in Applied Materials.

Once again, we would like to thank everyone for joining today's call.

You may now disconnect.