應用材料 (AMAT) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the Applied Materials' earnings conference call.

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

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

As a reminder this conference is being recorded today, August 15, 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 and economic outlooks, customer spending, Varian integration, capital allocation, tax rate, and Q4 of 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 in the Company's filings with the SEC.

Forward-looking statements are based on information as of August 15, 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 Mr. Michael Sullivan, Vice President of Investor Relations.

Please go ahead, sir.

Good day 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 will discuss the results for our third quarter which ended on July 29.

Our earnings release was issued just after 1.00 p.m.

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 strategies.

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

And so with that introduction I'd now like to turn the call over to Mike Splinter.

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

I'm pleased to report that Applied Materials delivered solid financial performance in line with our outlook despite challenging industry conditions in semi conductor, display, and solar.

Thanks to strong execution demonstrated by our teams around the world, we posted $2.3 billion of revenue, with earnings near the midpoint of our target range.

Strong cash flow performance enabled us to return $615 million to shareholders while maintaining our cash balance.

Over the past three months, we have made excellent progress with the Varian integration.

We are accelerating our appliance to combine the two companies and we are on track to exceed our targeted synergy savings.

In June, we announced the appointment of Gary Dickerson as Applied Materials' President.

I've asked Gary to focus his attention on the Company's product strategy and development engine with a view to improving the effectiveness and efficiency of our R&D investments.

Gary is fully immersed in this endeavor, and will provide an update at our next call in November.

As we outlined at SEMICON West, demand for wafer fabrication equipment has softened dramatically since the first half of the year.

With sharp declines in foundry and NAND investment.

As we look to our fiscal Q4, we see a combination of macroeconomic and industry dynamics contributing to a very weak business environment.

We believe this pullback in demand is seasonal and we expect it to be short-lived with orders and revenue recovering in our first fiscal quarter.

During this period, we will diligently manage discretionary spending while focusing our investments on critical programs that support our strategic priorities to grow share in wafer fab equipment and expand our total available market.

From European austerity to slowing growth in China and the US, economic uncertainty is weighing on top of a seasonal pullback to reduce weaker near-term demand.

And our customers are choosing to delay their investments until they see stronger demand signals.

China is now the largest market for TVs, PCs, and smartphones and the Chinese economy will play a pivotal role in determining how quickly industry investment levels recover.

While mobility remains the most significant driver of growth in the semi conductor industry, it is also causing changes in market dynamics.

For the second year in a row, we are feeling the effects of more pronounced seasonal buying as consumers wait for new smartphone and tablet models to be released.

With foundries representing about 45% of wafer fab equipment spending in 2012, the investment patterns of these customers are the single most important factor impacting our business today.

In addition, lower than expected PC sales have held back DRAM bit growth to the 30% range, and consequently, investments in new capacity remain at extremely low levels.

The adoption of solid-state drives is not ramping as quickly as forecast, and with only modest increase in the bits per box for mobile devices, we now see NAND bit growth in the range of 60% to 65%.

As a result, customers have announced they will cut production by roughly 150,000 wafer starts per month on top of reduction in their capital spending.

Looking at the industry as a whole, we are maintaining the 2012 wafer fab equipment forecast that we shared at SEMICON.

We believe spending will be in the range of $30 billion to $33 billion for the year, and there is a firm foundation for the multi year capital investment cycle to continue.

As the mobility trend gathers pace, we believe foundries will need between 100,000 and 150,000 wafer starts per month of additional 28-nanometer capacity next year.

In addition, Ultrabooks and Windows 8 have the potential to spur PC growth and drive resurgence in demand for both DRAM and flash memory.

Within this investment cycle, the spending mix favors Applied's leadership areas as customers introduce increasingly complex transistor schemes.

We expect 2012 to be a record year for our epi business, driven by an increasing number of selective epi applications.

Our metal deposition group also delivered another strong quarter benefiting from broader adoption of metal gate transistors.

With the 450-millimeter road map becoming clearer and timing of major milestones more predictable, we continue to ramp our development program to be in the right position at the right time to serve our customers through this transition.

In display, mobility related markets represented 100% of our orders this quarter.

We expect investment in these markets to remain at healthy levels as customers shift production of displays and touch panels for both smartphones and tablets to larger substrate sizes and more advanced technologies.

In contrast, TV sales for the first half of the year were around 90 million units, which is below the level needed to stimulate capacity additions.

In the near term, TV related investment will be limited to development tools for new technology focused on metal oxide transistors and organic LEDs.

As macroeconomic conditions improve, we believe that TV supply and demand can rebalance quickly, and this will provide a catalyst for customers to resume their plans to populate new factories in China.

We expect to see the first orders for these factories before the end of the calendar year.

In solar, end market demand is still robust and we maintain our view that global installations will be in a range of 27 to 35 gigawatts for the year.

The industry is relentlessly driving down manufacturing costs and making conversion efficiency improvements.

As a result, PV generated electricity is reaching parity with retail electricity rates in many areas of the world.

At the same time, overcapacity within the supply chain has created an exceptionally challenging environment for wafer, sell and module manufacturers.

Our EES results reflect an environment of extremely cautious investment by our customers, as they focus on conserving cash.

Industry consolidation is occurring, albeit slower than anticipated.

And this rationalization of capacity will be a critical factor in determining when supply and demand come back into balance.

We remain focused on lowering our cost structure in EES and have made significant progress shifting our manufacturing footprint to Asia while exiting LED.

In summary, we are currently navigating a period of turbulence in our markets and managing a rapidly changing demand profile in our semiconductor equipment business.

We delivered solid results for the third quarter, and we're operating the Company efficiently with disciplined spending aligned to the contours of this business environment.

Although we see a weaker near-term outlook, we firmly believe that the fundamental trends in mobility and solar energy adoption provide a strong platform for Applied Materials to generate long-term value and attractive returns for our shareholders.

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.

In our third fiscal quarter, Applied generated strong operating cash flow and ramped the return of cash to shareholders, buying back 3.6% of shares outstanding in the quarter.

In a difficult environment we are controlling spending while ensuring we prioritize investment in key areas to support future growth.

Let me start by comparing our third-quarter results to the prior quarter.

Orders declined 35% to $1.8 billion, reflecting push outs in semiconductor equipment, lower AGS orders due to the absence of a thin film solar order, and continuing weak demand in our non-semiconductor business.

Net sales decreased 8% to $2.3 billion, due to lower semiconductor equipment sales.

Non-GAAP gross margin was down slightly to 41.6% primarily due to the impact of lower volumes.

Total non-GAAP operating expenses were $543 million, 6% below our Q2 levels, and 4% below our outlook of $565 million plus or minus $10 million.

Adjusting for one-time beneficial items, our run rate was approximately $560 million.

For the fourth quarter we expect to lower our target run rate to $545 million, plus or minus $10 million, as we continue to tightly manage discretionary spending while selectively increasing our investment for critical programs in SSG.

Our non-GAAP effective tax rate was 27%.

And for the fiscal year, the rate expectation remains at 26% to 27%.

The modest uptick in the rate reflected the impact of lower revenue on our global tax structure.

Cash and investments ended the quarter approximately flat at $3.2 billion, as our operating cash flow offset total cash returned to shareholders and CapEx.

Our strong cash flow performance was due to effective working capital management with improved inventory and receivable balances offsetting the impact of lower revenues.

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

We increased share buybacks to $500 million in the quarter, repurchasing 46.7 million shares at an average price of $10.71 per share.

We also paid $115 million in dividends reflecting the 13% increase we announced in March.

Over the past four quarters, we have repurchased approximately 97 million shares, or more than 7% of shares outstanding, at an average price of $11.08.

We expect to continue to be an active buyer of our stock in this environment.

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

SSG orders were down 41% to $1.2 billion, led by foundry customers.

For our fiscal year, we expect SSG orders will be weighted 60% to 65% in the first half, with nearly 70% of foundry orders in the first half of our fiscal year.

Net sales decreased 13% to $1.5 billion consistent with our outlook at the SEMICON West briefing.

The largest sequential declines were from foundry and NAND at 17% and 18%, respectively.

SSG's non-GAAP operating margin was 31.2%, in line with model performance.

In AGS, orders were $531 million.

Excluding a thin film solar line booked in fiscal Q2, orders declined 4% sequentially.

AGS net sales were up 5% to $579 million, as strength in spares and services offset weakness in 200-millimeter equipment demand.

AGS achieved model performance with non-GAAP operating margin increasing to 23.3%.

In display, orders decreased to $67 million as LCD equipment spending continued to push out.

This is the fourth consecutive quarter with orders below $100 million.

Reflecting exceptionally low demand for television manufacturing equipment.

Net sales for display were up 6% to $142 million, with mobility investments for touch panel and high resolution screens accounting for the majority of revenue.

Non-GAAP operating margin for the quarter was 8.5%.

In EES, orders decreased to $35 million reflecting low solar equipment demand as capacity continues to be absorbed.

Net sales were approximately flat at $77 million, with solar sales largely reflecting deferred revenue.

EES had a non-GAAP operating loss of $64 million, which included an inventory charge of $26 million.

Next I will talk about our expectations for the fourth quarter.

As Mike indicated, we are seeing strong seasonal effects in our wafer fab equipment business, along with macroeconomic uncertainties that are leading our customers to reduce spending until they see signs of stronger consumer demand over the next few months.

Accordingly, absent further weakening in the global economy, we expect the Company's orders and revenues to bottom in our fiscal Q 4. Turning to our business segments, we expect SSG net sales to be down 45% to 55% in Q4, marking the low point of our business for the year.

We are seeing a strong pull back across all categories of semiconductor equipment customers, and this is the primary factor in the near-term reduction in earnings for the Company.

In AGS, we expect net sales to be up 5% to 15% including more than $75 million in revenue from a thin film solar line.

In display we believe net sales will be down 25% to 40% as the TV capacity ramp in China is pushed out for at least an additional quarter.

Despite the lower level of revenue, we expect displays to remain profitable in the quarter.

In EES, we expect net sales to be down 10% to 30% as the timing of the solar equipment recovery remains uncertain.

We expect our overall net sales to be down 25% to 40%, and our non-GAAP earnings to be between $0.00 and $0.06 per share.

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.

Jay, let's please begin.

(Operator Instructions)

C.J. Muse, Barclays.

First question, in terms of calling the trough here, in October and looking for recovery in calendar Q4, can you talk about what you're seeing, what conversations you're having with customers and what gives you the confidence that we're in this seasonal pause and that we will see a recovery?

And as part of that, where do you expect to see customer spending come back strongest?

As we look at what's happening in our Q4 and a drop off in our discussions with customers, this is pretty much the seasonal low.

We are also obviously discussing what's ahead, so our capacity is ready for them in the next months ahead.

So we're quite certain that this is on the bottom from those discussions.

But I would also add that we still view that 28-nanometer build out for capacity in 2013, we still need between 100,000 and 150,000 wafers or so to fuel the growth in smartphones and tablets as well as the build out of the LTE infrastructure.

And then we also think in 2013 we are going to see investment of about 50,000 wafers of 20 nanometers.

That will come a little bit later in the year, but I think when we look at last year's pattern, this year's pattern, this year's more accentuated, but really quite similar in this seasonal cycle.

I think my big caveat on that is what's going to happen macroeconomically.

But macroeconomics are pushing everybody down, not only in the foundry sector, but in the other sectors as well.

But we really think foundry is going to lead the way out of this in the calendar -- late in the calendar fourth quarter.

That's very helpful.

And then as a quick follow-up, in terms of the product strategy, you talked about providing an update on your November call, what should we expect to hear at that point in time?

Are we going to hear primarily on the product side?

And where you're going to refocus R&D efforts?

Or as part of that, will you be talking about optimization of your product portfolio, cost rationalization?

What kind of color do you think we'll hear at that point?

I think we're going through a lot of detail right now on each one of the products.

Looking at high-value problems that they're solving.

And the return on those products, as you know, we really try to look at this on -- the return on a product-by-product basis.

And judge where we should invest.

So we'll be ready to talk about that in November, but I think the starting point is the product-by-product analysis.

Very helpful.

Thank you.

Edwin Mok, Needham and Company.

Question on the WFE, Mike.

You didn't change the WFE even though you provided a pretty weak outlook for the fiscal fourth quarter.

Is that just a calendar versus fiscal thing?

And then regarding recovery, I think answering previous question, you said that mostly will come from foundry?

What you think will happen on the memory side?

Yes, what we're looking at is really calendar versus fiscal here.

The timing of our particular fourth quarter gets us into this air pocket, but we're expecting that foundries will lead the way out, and we will see the overall WFE in the range that we had talked about earlier.

When you look at -- if you said what's going to happen to drive it to the top end or the bottom end?

To get to the top end, it would have to be all about foundries pushing harder for capacity in the last few months of the year.

And the downside is both NAND I think and foundry, even pulling back a little bit more than we currently anticipate.

So in large part, it's a foundry story for the last part of the year.

One of the reasons why we're not changing it, when we updated at SEMICON, we talked a lot about the uncertainty in foundry and the outlook that we had seen, which was a strong pull back in foundry.

So when we lowered it, we already had the foundry action pretty much in our thinking.

I would say the one thing that is marginally worse than we expected at SEMICON has really been NAND push-outs have been stronger and deeper than we anticipated.

Great.

That was very helpful.

George, a question on R&D expense, I think on your prepared remarks you said OpEx would be down again in the October quarter because of the cost reduction, but I think you are also starting to invest in 450.

Do you see that as potentially would drive your R&D to go back up in the coming quarters?

I think what you've seen is if you compare year-over-year, that's probably the easiest way to think about it.

We've had -- the biggest drivers of increase in our OpEx, number one we didn't have Varian last year at this time so we've got the Varian spend in, and then you've got 450.

And what you're seeing though is a reduction in OpEx from a variety of discretionary activities, which quite frankly, we also had some of those in Q4 last year because that was the down quarter for last year.

But if you look at our non-semi businesses, they're down between 17% and 20% in their OpEx year-over-year.

And that's helping us be able to manage some of the fluctuation.

And also it's part of obviously the restructuring program that we have going on in WDF as well.

Great.

That's all I have.

Thank you.

Terence Whalen, Citi.

This question is related to the solar business.

It looks like solar revenues were roughly flat sequentially.

However, the operating income loss was steeper.

I know part of that sounds like it may have been from an inventory charge, just wanted to understand what other trends you're seeing in solar profitability there to cause this steeper income loss.

Terence, your analysis is right on.

It's the differences, the inventory charges taken and we've been running with some degree of inventory write-downs as we've been going on, and that, if you look at the underlying operating impact of that business, it will be about $0.06 for the year and then the inventory adds another $0.04 to that picture.

Gets you to about $0.10 for the year.

But for the quarter, your analysis is spot on.

Okay.

Terrific.

And then as my follow-up, it sounds like since SEMICON West where you were expecting foundry spending to be down about 30%, in second half, it seems like things have slipped a little bit more since you're now thinking that it's going to be a little bit of a steeper decline.

Can you just help us understand how you're thinking has developed since SEMICON West with regard to foundry spending?

Have things weakened even further from what you had seen in the later month of June?

And also, is it broadening out to other customers, or is it just deeper cuts at the top foundries?

I think directionally foundry is where we thought it would be.

We gave a range, we said foundry would have about a $0.15 to $0.20 impact on the year.

I would say we're probably more at the $0.20 end of the range as we look at what actually came out, but it was within our view of what could happen.

I would go back to the fact that NAND has been a little bit weaker in the second half.

That's been a factor that certainly impacting us in this quarter, but also as Mike said, the macroeconomic effect is, if you look at DRAM customers we think could be down -- this is on a revenue basis, close to 35% to 40% in the quarter as well.

Logic will be down probably 20% to 25% quarter-over-quarter as well.

Obviously the big hitter is foundry.

And NAND.

But even the other customers are down in the quarter.

Thank you.

Satya Kumar, Credit Suisse.

Just wanted to go back to this point about how the year has changed.

Three to six months ago, we got a number for WFE which is still the same number that most people think.

Three to six months ago we thought that shipments would be flat for the start of second half.

If it's just a fiscal versus a calendar year issue, you need to see a very sharp pickup in your January quarter for making those WFE numbers remain consistent with what the chip companies are saying.

Or perhaps we have some downside to of WFE, so I was wondering if you could talk a little bit about perhaps the magnitude of the pickup that you are expecting to see in January?

The year has changed pretty dramatically.

I think from our standpoint, we thought that wafer fab equipment was going to be closer to flat year-over-year.

And now we are in the down 10 to 20 range.

And so that's a pretty big impact over the last few months.

I think our supposition earlier in the year was that foundries needed to power through the seasonal curve that we saw last year because of the shortage of capacity.

And that's clearly not the case.

They added a lots of capacity in Q2 and are now more in the put it in production and produce phase of adding capacity.

As far as chip companies' projections on their overall capital spending, I think there's two factors.

One, it may be at somewhat of a lower range of what they projected.

And two, then there's the mix of what they're spending their CapEx on, how much is really on wafer fab equipment versus buildings and other equipment.

So I think that's one of those factors that we know is going on, because some of our customers need more space and capacity to add the next phase of capacity.

Satya, I would also observe that our non-semi business, if you go back to the beginning of the year to where the year has played out, have turned out to be weaker in general than we had anticipated at the start of the year.

Yes.

My question is more on semi, but the answer was useful.

A follow-up question for Mike, on the display business, if you just take us back, look at 10-year trends in the industry, it's clearly benefited the last 10 years, LCD TVs have become a bigger part of the mix, more people bought TVs and the size of the TVs increase.

As we look at those fundamental drivers over the next 10 years, has something structurally changed the area demand growth and as we look at that, how do you think about sizing the display business for the next 10 years?

I think the drivers for the display business -- I don't know that I can talk about 10 years, but 5 years, number one is still build out in the emerging markets.

Flat panel TV penetration still has a long way to go.

We've been disappointed with demand in China, but I think that is coincident with the slowdown of the economy there.

So I think as maybe stimulus comes back there and the economy improves, we're going to see a significant build out.

Then there's the change in technology that we're seeing moving to metal oxide.

These experience-oriented elements, we believe, are going to shorten the replacement time for TVs coming up, certainly over the next five years.

And then the final element is we still believe that smart TV or potentially Apple TV, if it's a disruptive factor, can spur a replacement demand for TVs.

So we still think there are elements out there in the markets that are going to push demand, even though today flat-panel TVs, we've moved from the flat-panel TV build out era, if you will, where every year and half we changed the size of the glass, to now we're really looking at viewer experience, working with the customers on how to improve the technology to deliver that.

Great.

Thanks.

Jim Covello, Goldman Sachs.

You talked about a product review on the next call.

Is it fair to assume, safe to assume that everything is on the table relative to that product review including exiting product lines or exiting business segments to the extent they don't meet the high-value solution approach criteria?

We've had a history of looking at our businesses and product lines that don't meet our investment hurdle, and I don't think that's changed.

We're going to look at every one of our products and make sure that they're really solving high-value problems for our customers and they have significant enough differentiation to be sustainable in the future, but everything, certainly in our portfolio reviews, everything is on the table.

Terrific.

Not just Applied Materials, but most of the semi-con companies now are referring to the seasonality in the business or a seasonal decline on top of the macro issues.

And the discussion around seasonality in semi equipment is something pretty new, I think, relative to the last 10 or 15 years.

It used to be that customers just had to order relatively far in advance.

Is the discussion of a seasonality emerging in the equipment business a function of shorter lead times?

Or is it a function of this is what happened last year, so everybody's running the play book back for this year?

Or are there other dynamics at work?

I think shorter lead times are necessary for this seasonality to be in play, but the primary driver of the seasonality is the introduction time of new models of smartphones and tablets and the buying pattern of consumers.

And then our customers are backing up from that's when they need to have those parts in production to the dates they need equipment.

And because those are pretty consistent, I think among most of the process equipment companies, you can see this kind of seasonal peak.

And I would say that we've mapped this out; actually, you can see it for three years at least, maybe you can see it for longer, but in the last three years, each year the peak has been getting higher in and around our Q2 time period.

So that's how we're looking at it.

It takes more than one factor here to produce this, but you're right, part of it is supply chain compression.

Thanks so much.

Good luck.

Vishal Shah, Deutsche Bank.

I wanted to just follow-up on some of the comments you made earlier about weakness in foundry and memory.

I was wondering if you can comment on the logic segment.

Have you seen any change there since last time you provided guidance?

Well, we would say that as George just mentioned, logic is down in Q4, but what we would say about the overall segment is 2012 has pretty much played out as we thought it would.

We think 2013 will still be an up year for logic spending as the major player there moves to the next generation of technology, where we're certainly seeing many more process steps moving to the next node.

So I think there's no real fundamental changes in logic, other than the macroeconomic effects.

I agree with that.

I would also add that I think you certainly see a more moderate pattern and more -- you don't see quite the level of seasonality in the logic side, and I would say in the fourth quarter it may be one of the few positive order areas for the Company as well.

That's very helpful.

Thank you.

And just wanted to follow-up on the memory segment, I know you mentioned that logic and foundry segment will be up next year.

Will be strong.

What to do you think about the memory segment?

Do you see a similar trend there?

2012 has been somewhat disappointing.

Do you see a recovery in NAND?

And is it going to be more front-half loaded or back-half loaded?

Memory is really still largely tied to the success of PCs.

So if we see more strength in the PC business next year, that could provide increase in capacity, but flash factories are under-loaded today.

We've seen investment pull back fairly significantly.

We're kind of down to $1 billion a quarter in both DRAM and NAND investments per quarter.

I would not predict that we're going to see an early change in that vector.

Maybe later in the year as we see more momentum, we would expect more mobile DRAM and some increase in bits per box on the mobile devices, but that's just not enough to provide greater than, let's say, 70% bit growth in NAND that we need to see increased investment and greater than 40% to 50% in DRAM to get that kind of investment growth.

That's very helpful.

Thank you.

Stephen Chin, UBS.

I was just curious if your view on 2013 WFE has changed since SEMICON West?

It sounds like you're seeing increased seasonality and it sounds like a similar trend is swarming in 2013 with 65% in the first half, Mike?

We certainly think that this seasonality trend will continue into 2013.

We can already get views from customers on how they want us to position our capacity and orders throughout the year.

It's too early to make any specific claims on 2013, other than we do think that it again, it will be above $30 billion of overall invest.

Still pretty strong investment as we see the continued build out of smartphones, tablets, increased investment in logic.

We are quite hopeful that there will be a bounce in PCs with Ultrabooks getting more cost-effective and Windows 8 coming into large-scale production.

Okay.

And my follow-up question is on the solar business profitability.

We're starting to see some financial troubles at some of your solar equipment competitors, especially in solar cells, who have a few customers in India.

Is this a trend you think that can help Applied maybe get to breakeven in solar sooner?

Thanks.

We're certainly seeing many of our competitors that don't have the kinds of balance sheets that one would like to have to weather the kind of market environment we're seeing.

Certainly it's a little deeper and longer than we had anticipated, so we're taking actions to lower our cost structure in the face of that.

But there are some companies where the ability to weather this time period is a real question.

And ultimately, that should be helpful coming out of this.

Thank you.

Chris Blansett, JPMorgan.

I had a question related to your guidance for the third calendar quarter versus your peers.

Obviously you're guiding down a little more than some of your US peers, and I just wanted to get a feel for how much of this is potentially due to revenue recognition policy, lead times and things like that versus, just to get a feel for why you're seeing such a bigger drop off?

My sense is when we break these things down, particularly when you see downdrafts like this, it's virtually always a function of rev rec and shipment recognition.

And then second question was tied to the solar business.

Although you have a longer positive look for this area, it's pretty weak right now.

And I wasn't sure if you think there's some need to bring the breakeven level down even further than you had previously expected?

Well, we're working hard on the program that we announced.

We just took the first restructuring charges this quarter, so we've got a lot of work to do.

We'll continue to look at it.

And if we need to take additional action we will, but we've got a lot to do right now.

All right.

Thank you.

Medhi Hosseini, Susquehanna International.

Mike, do you see any significant difference among foundries in Korea, Taiwan, and US?

And as a follow-up, it seems like the Varian semi booking contribution declined less compared to the rest of the SSG.

Should we assume the Varian semi to see a steeper recovery in bookings by the January-April quarter?

First, I think the real differences between the foundries is their part of their business that's dependent on smartphones and tablets, mobile devices.

I think that's the biggest factor.

And whether that divides out by Korea and Taiwan versus US, it may.

But I think there is somewhat different.

But the rest of the foundries can't make up the difference for the two biggest foundries' major seasonality that we're seeing.

On Varian, actually if you looked inside our businesses, the products that are aimed in and around the transistor are doing better than those that are more mature processes.

That's a general statement of where to look.

But we have real strength even in the bottom of this cycle.

When you look at some of the CBD, some of the metal depositions in and around the transistor, where things are changing very rapidly, people have moved high K, then to high K metal gate, metal gate last, and now to thin fabs.

We're going to be seeing rapid changes here, so customers have to invest in those areas that are really making the transistor.

Got it.

Thank you.

And of course, that includes in plant, Medhi, to your point.

Krish Sankar, Bank of America Merrill Lynch.

If you look at the sales guidance for SSG for October, this level of sales last seen was sometime in the '08, '09 timeframe but you also added Semitool and Varian to it, but the numbers are still low.

So I'm just trying to get a sense of is there something more bigger like market share loss, or is it more a function of seasonality?

And if it's seasonality, is it the magnitude of depth that should get used to going ahead?

If you adjust for Varian, you'd have to look back probably closer to Q4 '09 to see this kind of quarter.

And I would say what you're seeing is hyper seasonality this quarter where you've got not only the typical pattern that we've been talking about.

But you can see, if you look from the peak to the bottom, you've gone almost 11 -- we had about 33% of our SSG quarter was in our Q2.

14% of our full-year will be in our Q4, so you've got a major delta between the high and the low, and I think that's really seasonality.

In fact, in the first half of the year, there is a lot of observation about how we were outpacing the rest of the industry, so you're really seeing more timing and seasonality -- and for this kind of move, share's not a factor.

All right, and then in a follow-up, look at the big picture view, last year, NAND CapEx actually exceeded DRAM spending.

But the NAND market size is still smaller than DRAM.

I was wondering that, from your view, when do you think the NAND as a market will get bigger than DRAM?

I think this really is a totally dependent on solid-state drives.

And this has been something that we've been expecting to take off for some period of time.

Hasn't taken off.

I think our next hope is that solid-state drives will take off in the Ultrabooks.

We've been quite disappointed that tablets and smartphones haven't accelerated the use of flash capacity.

It's been really DRAM per box has been very modestly increasing.

Right now, our estimates are that the NAND business is $26 billion, $27 billion.

DRAM is $28 billion to $30 billion.

So they're pretty close right now.

So if one of them had a surge, it would pass -- of growth, it would pass the other.

So it could happen even next year.

Got it.

Thanks, Mike.

Thanks, George.

Patrick Ho, Stifel Nicholas.

Mike, I think obviously with the marketplace and the uncertainty there, 28-nanometer demand continues to be strong.

With some of the foundry push outs that you've seen, what's the issue that's probably driving it?

Is it more just the digestion period, timing of that?

Is it yields?

Or is it some concerns on the macro front, even though the demand for those products appear to be strong?

I believe that it's primarily digestion.

And where they have to meet their peak demand.

They have to have -- they have to have these products in production to meet their peak demand over these next three months to be prepared for holiday selling season, so I believe that's primarily it.

There are some facility issues we know that have pushed out some of the equipment demand.

I think the only thing that would slow down a recovery or a bounce back where they're putting on capacity again getting ready for next year and -- is a macroeconomic slowdown that's more pronounced than what we have today.

We have to remember, if we look back to the first half of 2012, foundries were short of capacity.

It has spurred a lot of talk about customer-owned capacity and the like.

I don't think that foundries want to get into that situation again if they can avoid it.

So we're confident that we're going to see a step-up of buying near the end of the year and into next year.

Great.

Just my follow-up question in terms of the cost structure, the restructuring and the cost savings efforts that you have put in place, obviously you're putting also a lot more effort into the product development side, particularly with the opportunity for 20-nanometers.

How are you rationalizing the targets that you've previously stated versus probably the need to increase or better maximize the investments needed for next generation nodes?

By targets I'm assuming you're talking about the talking -- the models that we have --

Yes.

As you know, we took the models down in recognition of the fact that we have this additional spending already.

We're looking wherever we can at places where we can further reduce costs so that we can expand the spending further on critical programs without moving away from the existing business models.

And that's our plan for the time being.

Basically I just want to be clear.

You've got leverage that can move around to keep things in line?

Yes.

Because as I already talked about, we've already seen a shift of spending towards SSG and away from some of our non-semi businesses as we restructure, particularly as we restructure our EES segment.

Great.

Thank you.

Vasanth Mohan, Piper Jaffray.

This is Vasanth calling for Jagadish Iyer.

I have a question regarding the display.

Based on your revenue guidance, it looks like we might be looking at a new bottom in revenue for display.

Can you give us an idea of what the environment is like?

Do you expect a surge in the January quarter?

You also mentioned that you'd still be profitable despite hitting a new low?

Can you give us more color on this?

I wouldn't describe it as a new low.

We had a period during the '09 where we were lower, but certainly, if you look through normal operating conditions, the midpoint of the guidance would be slightly below the lowest previous quarter in there.

I think it's a reflection of how that organization runs and how we've been able to basically invest in the new products that they've needed.

They've done a great job in taking share in these new mobility markets, while at the same time, as we've said, taking down there operating spending.

So they are very focused on the being breakeven in a difficult environment, and that's currently what we see.

Is the weakness related -- have anything to do with the problems that companies are having with --

No.

This is really about basic television infrastructure build out, primarily in China, and the timing of that.

Which has been impacted by the macroeconomic conditions.

And also the largest market for televisions now is China, and China's been much softer than expected as people set their plans.

I think a number of our customers felt they'd be ramping up capacity in China at the back end of this year, and now it looks like that will be sometime in '13.

Thank you.

Edwin Mok, Needham and Company.

George, I think you mentioned that you expect silicon order to be 60% to 65% front-end loaded for this fiscal year.

If I take that number, using your 60% I get to around $1 billion of orders in the fourth quarter.

So with lower orders sequentially, what gives you confidence that business will rebound beyond the October quarter?

Confidence that Q1 will rebound if we have a very low order quarter in Q4?

Is that the question?

Yes, you got it.

Again, it gets back to the comments Mike made earlier, which is foundry is going to have to come back.

And as you know, when foundries are ordering we typically go to almost a turns business where the first half of the year, many of the orders were turning about 70% in the quarter, booked and shipped in the quarter.

So you can't always see the or use the prior quarter as predictive as we used to be able to do in the good old days.

Great.

That's all I have.

Thank you.

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

A replay of this call will be available on our website beginning at 5.00 PM Pacific Time today.

Thank you for your continued interest in Applied Materials.

This concludes today's conference call.

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