應用材料 (AMAT) 2013 Q2 法說會逐字稿

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  • Operator

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

  • During the presentation, all participants will be in 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 16, 2013.

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

  • Please go ahead, sir.

  • - VP, IR

  • Thank you, Thia, and good afternoon.

  • Joining us on the call today are Mike Splinter, our Chairman and CEO; Gary Dickerson, our Company President; and Bob Halliday, our Chief Financial Officer.

  • Today we'll discuss the results for our second quarter, ended April 28.

  • Let me remind you that today's call contains forward-looking statements, including the Company's current view of its markets, industry trends, opportunities, growth strategies, share positions, technologies, cost structure, profitability and Q3 business outlook.

  • These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied, and they should be interpreted in that light.

  • Information concerning the risk factors is contained in our Company's SEC filings, including our most recent Form 10-Q.

  • Today's call also includes non-GAAP adjusted financial measures.

  • Reconciliations to GAAP measures are contained in today's earnings press release and in our quarterly financial highlights presentation, both of which are available on the Investor page of our website at AppliedMaterials.com.

  • Before we begin, I'd like to remind you that Applied will hold our 2013 Analyst Meeting in Santa Clara on Monday, July 8, just prior to SEMICON West.

  • Many of you have already signed up to join us, and we look forward to seeing you there.

  • If you'd like additional information about the event, please contact me using the number in today's earnings press release.

  • And now I'd like to turn the call over to Mike Splinter.

  • - Chairman & CEO

  • Thanks, Mike.

  • And good afternoon to everyone on the call today.

  • In our second fiscal quarter, Applied Materials delivered earnings that exceeded the high end of our outlook.

  • We fulfilled requests for accelerated delivery of orders from a number of our semiconductor and display customers, while carefully managing our spending.

  • At this point in the year, 2013 is shaping up largely as we have expected.

  • Demand for semiconductor equipment is healthy, utilization at our customers' factories is steadily increasing and investment in display is strengthening.

  • Across the Company we are building momentum for profitable growth.

  • Over the past two quarters, we have implemented measures to reduce our overhead costs and have redeployed spending to product development and our customer-facing technical teams.

  • These changes are enabling us to strengthen customer collaborations and increase our product development velocity.

  • We are focusing our R&D investments on key programs that support our strategic priority to increase our share in wafer fab equipment, while making targeted investments in display and other opportunities that expand our total available market.

  • We see further opportunities to reduce our operating expenses and organizational complexity to improve operating margins at current revenue levels and provide significant earnings leverage as volumes increase.

  • Bob will discuss these opportunities later in the call.

  • Major industry trends are expanding our served available market and play to our strengths in precision materials engineering.

  • We expect to grow our share of wafer fab equipment this year, while winning key develop tool-of-record positions that provide a foundation for additional share gains in 2014 and beyond.

  • We are also building momentum in display, customers are adding capacity, and we are seeing stronger order growth.

  • We are significantly increasing our share of the display PVD market, complementing our strong position in CVD.

  • In semiconductor, the mobility trend remains the biggest factor influencing industry growth.

  • The global appetite for always-on, always-connected mobile devices continues to strengthen.

  • And now the value of silicon being consumed by smartphones and tablets has surpassed that being used by PCs.

  • Around 200 million smartphones and 35 million tablets shipped in the first calendar quarter of 2013.

  • That's in line with expected annual growth rates of 35% for phones and 55% for tablets.

  • Demand for the advanced application and baseband processors used in smartphones and tablets is fueling investment by foundries as they add capacity at 28 nanometers, begin 20-nanometer pilot production, and accelerate the development of 3D transistors.

  • Transistor performance is the key battleground for our foundry customers.

  • In his latest earnings call, Morris Chang described how TSMC has differentiated offering in High-k/Metal Gate delivers better performance for their customers' products.

  • Applied's clear leadership in the transistor module enables us to help our customers solve their high-value device performance challenges, and we are earning share gains at the leading foundries.

  • The mobility trend also represents a tremendous demand driver for NAND flash memory.

  • With bit growth in the 40% to 50% range, and supply and demand relatively well-balanced today, we believe NAND manufacturers will increase their investment levels in the second half.

  • As sales figures for the first quarter clearly indicate, the PC market is navigating some challenging times.

  • And as a result, customers are reducing capital spending plans for logic.

  • Consumption of mobile DRAM has surpassed PC DRAM for the first time.

  • Manufacturers have been migrating capacity to mobile, and with tightening supply, prices have been rising.

  • To meet near-term demand, we are seeing some incremental investment, primarily focused on technology conversions.

  • We believe DRAM trends bode well for increased investment levels in the medium-term.

  • While there have been some shifts in customers' investment plans towards mobility, we maintain our view that 2013 wafer fab equipment will be in the range of $27 billion to $30 billion.

  • Reaching the high end of the range will require accelerated build-out of the 20-nanometer foundry node and a further uptick in memory investment.

  • Turning to Display, we see increasing demand from emerging markets, as well as 50-inch and larger models becoming a more significant portion of global TV sales.

  • This is driving healthy area growth, which we anticipate to be in excess of 10% for the year.

  • The potential for under supply in the second half is stimulating capacity investments.

  • We are receiving orders for new display factories in China, and expect this equipment to be installed in the fall.

  • Demand for mobile devices and touch screens remains robust, and investment continues, with focus on advanced technologies, including OLED.

  • With strengthening market conditions in our share gains, we are beginning to demonstrate the potential of our Display business.

  • In solar, equipment industry conditions remain challenging.

  • We are significantly reducing our exposure to the current weakness in the market by substantially scaling back our investment.

  • We expect our quarterly operating expenses for EES to be below $25 million exiting the fiscal year.

  • Overall, as we look to the second half of 2013, we see spending spread across a broader base of semiconductor customers.

  • Memory investments look incrementally more positive, and demand in display is strengthening.

  • More importantly, at Applied, we are building momentum towards profitable growth.

  • We are focused on strategy execution and winning those critical tool selections that support share gains, while in parallel, making changes to the organization that will allow us to deliver stronger operating margins and increase our investment in attractive growth opportunities.

  • Before I hand the call over to Gary, I would like to officially welcome Bob Halliday to his first earnings call as Applied Materials CFO.

  • Bob brings a strong track record of results and a wealth of industry experience to this role.

  • He is already proving to be an outstanding leader for our global finance team.

  • Now let me hand the call over to Gary for additional comments about our growth initiatives.

  • Gary?

  • - President

  • Thanks, Mike.

  • And good afternoon, everyone.

  • As Mike outlined, global adoption of mobile devices drives growth in the electronics industry, and is also increasing the speed of innovation within the value chain.

  • Our semiconductor and display customers are striving to provide consumers with more capable mobile products.

  • And this is accelerating changes in device technology, better enabled by the Applied Materials core strength in precision materials engineering.

  • All this creates a great environment for us to execute our strategy and drive profitable growth.

  • Today we are building momentum by strengthening our team, and focusing our investments to deliver growth in revenue and operating profit.

  • We are building momentum by increasing share, and entering into earlier and deeper collaborations with our largest customers.

  • We are leveraging our strengths to help customers make major transistor and memory transitions that will happen in 2014 and 2015.

  • And we are building profitable growth in additional segments that will provide significant improvement in our overall operating margins.

  • In order to accelerate the execution of our strategic plans, we are strengthening our organization and business processes.

  • We are aggressively managing our costs to drive improvement in operating margins, and taking further steps to reduce overhead expenses.

  • We are actively managing our product portfolio by focusing on our best opportunities, and increasing funding for those programs that really move the needle for our customers and for Applied.

  • In addition, we continue to upgrade our product development engine to improve our ability to define winning products and increase the velocity of our development process.

  • Our customers are faced with increasingly complex device performance and yield challenges as they transition to new device technology and new materials.

  • This is driving significant pull from our largest foundry, logic and memory customers for earlier and deeper collaborations on our next-generation products as they focus on accelerating technology development and technology transfer into high-volume manufacturing.

  • These broader and deeper collaborations span our current areas of precision materials engineering, market leadership, and additional market segments, where we have a significant potential to grow share as future device technology is adopted.

  • Applied's position as the leader in enabling precision materials engineering technology is giving us insight into future device performance and yield problems that are critical for our customers.

  • In our early engagements, we see an increase in atomic-level customization of our precision films, combined with enabling technologies, including precision materials modification, materials removal, and interface engineering on Applied Materials' platforms.

  • This gives Applied a unique opportunity to solve some of our customers' challenges with new solutions that leverage our strong materials engineering technology portfolio.

  • Some emerging materials engineering examples include improving film stability in very high-aspect ratio structures, film densification, material selectivity for deposition and etch, and atomic-level interface engineering to improve device performance and yield by preventing corrosion and native oxide growth.

  • To support broader and deeper customer relationships, we are strengthening our technical teams in the field by moving key people into higher-impact positions and bringing new talent into the Company.

  • In semiconductor, key market inflections are growing our available market, while creating opportunities for Applied to demonstrate leadership and win share.

  • As the foundries start their transition to 20-nanometer technology, we see Applied's served market opportunity growing approximately 25% relative to the 28-nanometer baseline.

  • Our strongest positions are at the foundries.

  • And as they focus on new transistor technology, this plays to our strengths, and provides a great platform for us to grow share with our leadership products.

  • The architectural advantages offered by our EPHI, thermal, metal deposition, CMP and implant products, combined with our ability to integrate these processes, are enabling customers to solve major device performance and yield challenges associated with the move from oxynitride transistor schemes to High-k/Metal Gate glass devices.

  • In addition, we see increased urgency in the development of FinFET technology, where the interplay between deposition, annealing and implant steps is even more important.

  • When this FinFET inflection occurs, we expect our served market to incrementally grow by 5% to 10%, on top of the 25% increase, during the 20-nanometer transition.

  • Beyond our increasing opportunity in foundry and logic, we expect our served market to grow by about 25% on a wafer-start basis as memory customers transition from planar NAND to first-generation 3D device technology.

  • We anticipate shipping production equipment for 3D NAND in the fourth quarter of 2013 for the initial ramp of these new devices.

  • Another market that has potential for profitable growth is CMP.

  • We are seeing an increase in the number of CMP steps for leading-edge device technology.

  • We recently began shipments of new CMP technology that we anticipate will enable us to increase share starting this year.

  • And we've already secured new positions with large foundry customers.

  • We are also building profitable growth in additional segments.

  • Inspection represents a great opportunity for profitable growth.

  • And we are focusing on segments of the market where we are strong and have differentiated technology.

  • We are demonstrating solid momentum in wafer inspection.

  • And with recent wins at leading foundry and logic customers, we are very well-positioned for share gains in 2013 and 2014.

  • In etch, our strategy is to increase share in applications in foundry and memory, where we have valuable and sustainable differentiation.

  • In the past quarter, we've received production orders from memory customers, and won new development tool-of-record positions that gives us momentum to deliver a significant improvement in etch financial performance.

  • In display, we have great momentum.

  • We are increasing our market share, and during the second quarter, we secured 100% of the CVD and PVD business for our new factory in China.

  • As the market rebounds, we see the potential to book more than $800 million of orders this calendar year.

  • The structural changes we have made to our display organization during the downturn provide us with strong operating leverage as volumes increase.

  • As the industry moves to new transistor technologies and OLED for mobile applications and TV, it's becoming more process- and material technology-intensive.

  • This plays to Applied's strengths in precision materials engineering for large area applications.

  • In TV, forte resolution and increasing average screen sizes create a number of engineering and manufacturing challenges.

  • Larger areas and smaller pixels make film uniformity and particle performance increasingly important.

  • Our CVD and PVD systems have clear architectural advantages in device performance and yield that enable us to deliver increased value to our customers.

  • Applied has been the clear leader in CVD for many years.

  • And now we are demonstrating excellent traction with our pivotal PVD tool, and expect to significantly grow our share in PVD in 2013 and beyond.

  • In summary, our semiconductor and display customers are in a race to deliver differentiated products to gain share and mobility.

  • This is driving a big push by customers to accelerate time-to-market of new devices and new materials.

  • These inflections create a great opportunity for Applied to leverage our leadership in precision materials engineering in earlier and deeper engagements with customers to solve their major device performance and yield challenges, and drive profitable growth.

  • We are building momentum by strengthening the Applied team and focusing our investment to deliver growth in revenue and operating profit.

  • We are very excited about the momentum we are building for profitable growth.

  • And we'll discuss our plans and opportunities in more detail at the Analyst Meeting on July 8.

  • Let me now hand the call over to Bob for further details on our performance.

  • Bob?

  • - CFO

  • Thanks, Gary.

  • I look forward to working with everyone on the call again in my role as the CFO of Applied Materials.

  • I've been a part of the Applied team for over a year now, and I'm extremely impressed by the depth of technology and talent we have across the Company.

  • I was immediately impressed with Applied's ability to design and build great products.

  • As a product Company, there are three legs on the profitable growth stool.

  • The first leg is the ability to design and build great products.

  • Applied definitely has that ability.

  • What also struck me was the economic power of these products.

  • Applied's integrated solutions combine superior hardware, chemistry and process support.

  • The economic value to customers can be great.

  • And the economic value of these strong products, leveraged off of a common platform, is also great for Applied Materials.

  • The second leg of our strategy for profitable growth is the ability to solve customers' high-value problems.

  • I have been increasingly impressed over the last year at our improved internal capability to learn and solve these problems.

  • The increasing ability to understand customers' high-value problems, combined with our ability to design incredible product, results in more products that hit the market requirements.

  • As I said before, products that hit the market requirements result in very good businesses for Applied Materials.

  • The third leg of our profitable growth strategy is our ability to fund growth and increase investor returns.

  • We've already taken a number of actions in recent quarters to redirect spending to fund new product development and strengthen our technical marketing capabilities.

  • These actions include steep reductions in solar spending, our daily integration synergies, the global workforce actions we announced in October, and a reprioritization of our R&D projects.

  • We are reinvesting that savings in product development to drive our growth.

  • Looking at our financials, R&D spending as a percentage of R&D plus G&A has increased from 53.3% in Q2 of last year to 57% in Q1 of 2013, and 58.5% in Q2 of 2013.

  • The next question is, can we fund growth and increase our profitability at all levels of sales?

  • In my first couple of months as CFO, I've had the opportunity to examine each of our businesses in greater detail.

  • And I see opportunities to lower our costs and improve our efficiency.

  • I plan to review our detailed operating model and timeline with you at our Analyst Meeting in July.

  • At this time, I'll share some initial perspectives on seven areas of our Business.

  • First, in EES, we have very aggressively reduced our losses.

  • Our non-GAAP losses in Q2 decreased to $34 million, and are down 40% from the same period last year, despite half the revenue.

  • We will continue to reduce our spending and losses.

  • Second, in Display, Q2 non-GAAP operating margins more than doubled from the prior year to 16.5% on slightly lower net sales.

  • Our display business has a very attractive business model, and managed to stay profitable throughout the worst downturn in its history.

  • We see significant leverage returning to this business in the up cycle.

  • Third, in SSG, Q2 non-GAAP operating margins were in line with the prior year when normalized for revenue, despite an overall increase in SSG R&D spending.

  • In SSG products where we have significant share, the operating margins are very good.

  • With increasing customer pull and a higher hit rate on product development, we believe that some of our lower-share products are on the verge of significant increases in operating leverage.

  • Fourth, in AGS, non-GAAP operating margins increased to 23.2%, up 3 percentage points relative to this same quarter last year.

  • There is an opportunity to grow AGS revenue and profitability.

  • Fifth, the efficiency of resource allocation can be improved between our businesses through a comprehensive product portfolio process.

  • We should have no sticky assets in the Company, and we are embarking on that process.

  • Sixth, in operations, the vast majority of our product cost is materials.

  • We plan to work aggressively across the Company to design for lower costs and also save money on existing products.

  • This will take some work, but it is another significant opportunity.

  • Seventh and finally, all of the functional organizations, including operations, supply chain, finance, legal, human resources, IT and facilities, need to be efficient and scaled appropriately for all of our business levels.

  • Now I'll cover our second-quarter results and comment on changes from the prior quarter.

  • Orders grew 7%, led by strong demand for our semiconductor and display equipment.

  • We generated net sales of approximately $2 billion, which was just above the high end of our guidance, led by strength in silicon systems.

  • All segments other than EES were at the high-end, or exceeded our revenue expectations.

  • Non-GAAP gross margins was 43.2%, up 3.4 points, driven primarily by the increase in revenue and lower inventory charges.

  • Non-GAAP operating expenses were $567 million, in line with our guidance, with G&A expenses down slightly relative to Q1.

  • We plan to reduce the G&A and manufacturing overhead components of our spending over time, both in absolute dollar terms and as a percentage of non-GAAP operating expenses.

  • We will continue to update you on our progress.

  • In Q3, we expect our non-GAAP operating expenses to be in the range of $550 million, plus or minus $10 million, which includes a shutdown in the first week of July.

  • Our effective tax rate was 24.9% on a non-GAAP basis.

  • We still expect the full-year rate to be between 24% and 26%.

  • Cash from operations was $224 million or 11% of revenue, reflecting severance payments related to our previously announced workforce reductions, and higher working capital requirements associated with the increase in revenue levels.

  • We used $100 million to repurchase 7.5 million shares, and returned $108 million in dividends.

  • The first payout at our recently increased dividend level will occur in the third quarter.

  • Our capital allocation priorities remain unchanged.

  • We will continue to invest in attractive opportunities in our core businesses, increase the dividend in line with the growth of the Business, and utilize share repurchases to manage dilution and return excess cash to shareholders.

  • Cash and investments ended the quarter at $2.85 billion, up slightly from Q1.

  • Next I will comment on our Q2 segment results as compared to the prior quarter.

  • SSG orders were up 14% to $1.55 billion, primarily driven by increases in NAND and DRAM.

  • Foundry again represented the majority of our orders, and remained highly concentrated.

  • SSG net sales increased 33% to $1.3 billion, at the high end of our outlook of up to 20% to 35%, driven by foundry and stronger DRAM spending.

  • Non-GAAP operating margin increased to 25.5%, driven by the higher revenue.

  • In AGS, orders were down 12%, to $481 million, due to the seasonal effect of service contract renewals and a slightly lower than anticipated improvement in customer utilization rates and wafer starts.

  • AGS net sales were up 10% to $517 million, at the high end of our outlook.

  • Non-GAAP operating margin increased to 23.2%, due to higher revenue and our cost management initiatives.

  • Our display orders increased 41% to $195 million, reflecting the investment in new TV fabs in China, along with share gains in multiple product lines.

  • We expect orders to continue to increase in Q3.

  • Display net sales increased 46% to $127 million, above our outlook of flat to up 25%.

  • Non-GAAP operating margin increased to 16.5%.

  • EES orders were $39 million, and net sales were $38 million.

  • EES posted a non-GAAP operating loss of $34 million, and we wrote off the remaining goodwill for the Solar business in the quarter.

  • We are lowering our spending in EES.

  • And the non-GAAP OpEx run rate is below $30 million per quarter exiting Q2.

  • As Mike mentioned, we expect to reduce EES quarterly spending to below $25 million exiting the fiscal year.

  • Now I will provide our third-quarter business outlook.

  • Overall, we expect the Company's net sales to be up slightly from the second quarter, and non-GAAP earnings per share should be in the range of $0.16 to $0.20.

  • Here's my conclusion -- we have very good product development people and IP.

  • If we can get a high hit rate on understanding customers' high-value problems and move fast internally, we can significantly increase profitability.

  • Mike, Gary and I see a clear path to profitable growth.

  • And we look forward to sharing more of it with you in July.

  • Now let me turn over the call to Mike Sullivan for questions.

  • - VP, IR

  • Thanks, Bob.

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

  • Thia, let's begin.

  • Operator

  • Terence Whalen, Citi.

  • - Analyst

  • The EES OpEx run rate is targeted to be about $25 million year-end.

  • Any sense for where that was this quarter?

  • Thank you.

  • - CFO

  • Yes, we exited the quarter, as I mentioned, at $30 million.

  • And it might have been a touch over that before the quarter, but we exited $30 million going down the rest of the year.

  • - Analyst

  • And then my follow-up question is on the gross margin side.

  • You said that part of the positive variance in gross margins was due to fewer inventory reserves.

  • Can you help us understand going forward whether you see that trend continuing?

  • Or any insight on gross margin going forward would be helpful.

  • Thank you.

  • - CFO

  • Yes, gross margins were pretty good this quarter.

  • The year-on-year comparison was aided by a couple things.

  • We had some inventory reserves last year.

  • And then this year we had a good drop, so we had incremental revenues, which dropped through the gross margin line.

  • If you look at our overall sales and expense and profitability guidance for next quarter, it implies reasonably positive gross margin opportunities next quarter also.

  • Operator

  • Edwin Mok, Needham and Company.

  • - Analyst

  • First, just in terms of guidance, can you help at least directionally how you think about the four segments that you guys have?

  • - CFO

  • I'll give it a shot, Edwin.

  • Most are up a little bit.

  • I think our sales will be up somewhat, and I think it's pretty much across the board.

  • - Analyst

  • Okay, that's helpful.

  • How about your booking trends?

  • This quarter your bookings was quite a bit above your revenue, but next quarter you're just guiding for modest increase in revenue.

  • Does that mean that there is some softness in booking, or how do you think about that?

  • And what are the moving parts between foundry, logic, et cetera?

  • - President

  • Edwin, as you know, we don't give the bookings guidance.

  • We continued the overall CapEx guidance of flat to down 10%, as Mike talked about earlier.

  • We're incrementally more optimistic.

  • Part of what happens in CapEx depends on just a few customers in foundry and memory spending later in the year.

  • So overall, the key message, I think for us, is around the transition in transistor technologies, as Mike talked about earlier.

  • That's the key battleground in mobility.

  • And that opportunity in the transistor inflection starting in 2014, also 3D memory, those are extremely positive opportunities for us to grow overall share.

  • Operator

  • Tim Arcuri, Cowen and Company.

  • - Analyst

  • First, Bob, just based on the answer you just gave, can we assume that revenue in SSG will be up?

  • I know you don't want to talk about bookings, but revenue will be up.

  • Is that right?

  • - CFO

  • Let me give you a little more color then I gave Edwin.

  • If you look at where the increase is, the increase is more concentrated in SSG and Display, and less so in solar and AGS.

  • So yes, of our mix, SSGs should do relatively well of the four.

  • - Analyst

  • Great, okay, thanks.

  • And R&D was up to a record high.

  • I was going back to my model and I couldn't find anything this high.

  • I know that you talked about 450 being less than $100 million in fiscal 2012.

  • But you haven't talked about what 450 will be this year.

  • Is the increase due to 450?

  • And maybe you can give us some sense of what the spending will be on 450 during this entire fiscal year.

  • Thanks.

  • - President

  • Just as we said last quarter, really no net increase in 450 spending in our current plan.

  • The key focus for us are around these technology transitions in the transistor and 3D memory.

  • Those are big opportunities for us, as Mike talked about.

  • The increase for us is about 25%, and the gate-last technology another 5% to 10%, and FinFET technology about 25% opportunity increase for us in the first generation of NAND flash technology.

  • So those are the areas where we're really focused on in terms of our R&D investments.

  • - Chairman & CEO

  • Yes, Tim, I'd add to that, we're seeing really good customer pull right now for the new products that we have in a number of areas.

  • But even in inspection and nets, which have traditionally been weak for us, customers are really pulling on us to offer new and better solutions.

  • As we go through the transistor change to 3D.

  • We have some really good capability there that, I think, is quite differentiated.

  • - President

  • We are also increasing our investment in application support in the field.

  • In our PDC business, we had the second highest bookings quarter -- orders quarter -- in the history of PDC, and the highest-ever orders quarter for our Brightfield business.

  • So we're making investment in R&D.

  • But we are also making investments in the field in application support, and also focused on earlier and deeper collaborations with customers as they go through these device transitions.

  • - Chairman & CEO

  • Thanks, Jim.

  • Operator

  • Krish Sankar, Bank of America Merrill Lynch.

  • - Analyst

  • This is Thomas Yeh calling in for Krish Sankar.

  • Just maybe some more color on the overall order sustainability heading into the second half.

  • Qualitatively, you noted order strength driven partially by memory.

  • I was wondering if you saw any pull-ins related to that.

  • And wanted to get your perspective on maybe first-half versus second-half and what that might imply for the run rate heading towards the second half.

  • - Chairman & CEO

  • Thomas, maybe I can start with the market, and then let Bob or Gary talk a little bit more specifically about order sustainability.

  • What we're viewing on WFE for the year is that second half will be stronger.

  • We think about 55%, 45% range there.

  • If you think about that relative to last year, we said this year that WFE will be flat to down 10%.

  • And year over year, when you're thinking about that, most of the down is in foundry because of the supply chain changes there.

  • So I think the thing is, that foundry is still a major part of the overall make-up.

  • But in the second half, we're seeing some increased spending from, in particular, memory, primarily from NAND flash.

  • But we're also seeing a little bit of pick-up in DRAM as there are some supply constraints there with, in particular, mobile DRAM.

  • - Analyst

  • Thank you.

  • And Gary, you mentioned expectations for the total served available market increasing by 25% with the transition to 20 nanometers.

  • Can you highlight which particular product segments within SSG that could provide the most areas of opportunity for you?

  • - President

  • Yes.

  • The transistor, as we talked about before, is really the sweet spot for Applied Materials.

  • That's where we have the strongest positions.

  • That includes epi, and the annealing, the Implant business.

  • CMP is actually also an area that's growing through these new transistor technologies.

  • So, those would be the areas that are going to grow the most.

  • And PVD is another one that's going to grow as we go to next-generation transistors.

  • Operator

  • Jim Covello, Goldman Sachs.

  • - Analyst

  • Mike and Gary and Bob, you guys referenced the fact that some of the logic spending is coming down commensurate with some of the weakness in the PC segment.

  • Do you think we have felt the brunt of the impact there already?

  • I noticed some of the big logic customers are significantly under spending their stated budgets.

  • Do you think that we've seen the worst of that in terms of order shipment declines, or do you think some of that could still impact the second half?

  • - Chairman & CEO

  • Well, we believe that we have.

  • But of course, we have to be able to see what the trend is like for back-to-school sales, in particular.

  • Certainly at this point, utilization is moving up.

  • We expect spending in logic to move up modestly in the second half.

  • And part of the reason we kept our overall WFE forecast flat was that we saw some increase in foundry spending, we saw pretty much a commensurate decrease in logic spending.

  • That was our -- that's our best estimate at the current time, Jim.

  • So that's kind of where we are.

  • - Analyst

  • Makes a lot of sense.

  • And for my follow-up, you guys have mentioned customer pulls in a number of areas.

  • You specifically talked about, Mike, even some of the areas where you traditionally haven't had the strength.

  • I've heard you guys comment over the last 9, 12 months that some of the greatest pull from customers is in the process diagnostics area.

  • Is that still number one on the list of where you're seeing the customer pulls?

  • - President

  • Jim, as I mentioned, we had our second highest orders quarter in the history of PDC last quarter, and our highest ever in wafer inspection.

  • Operator

  • Mahesh Sanganeria, RBC Capital Markets.

  • - Analyst

  • Since you've been talking about the transistor technology, I have a question on your exposure.

  • If I divide the wafer fab equipment into front end of the line and the back end of the line, what's the overall spending split?

  • And how is your exposure different because you have higher transistor exposure?

  • - Chairman & CEO

  • I don't know that -- I think one of the things that Gary has been alluding to is how fast certain areas are growing for us.

  • And we think the complexity around the transistor is going to grow significantly to be able to make these advanced 3D -- there's a huge race to get to FinFET and advanced transistors in logic.

  • There's a huge race to get to 3D in devices and NAND flash.

  • And I think that's where we see the big growth.

  • The exposure is growing fast there.

  • I think about 25% in each of those areas.

  • So, that's really also in our sweet spot and our strength area.

  • And that's where we're also investing a lot of our new R&D dollars there to ensure that we can be there with the solutions our customers need.

  • - Analyst

  • And then my follow-up is on the OpEx.

  • You said in your next quarter OpEx guidance, you include the one week of shutdowns.

  • So, will the OpEx increase in Q3?

  • - CFO

  • The overall OpEx guidance was $550 million, plus or minus $10 million, which is down from Q2's $567 million.

  • We get some benefit from the shutdown.

  • But we're also managing other expenses pretty tightly too.

  • - Analyst

  • Okay, thank you.

  • - CFO

  • Welcome.

  • Operator

  • Stephen Chin, UBS.

  • - Analyst

  • Maybe a follow-up question, Bob, on the last point about just trying to deliver higher operating margins and higher revenues.

  • Just listening to your seven observations, is it fair to assume this is mostly going to be done from, say, more efficient OpEx management, and maybe less so from higher gross margins, since there still going to be three big silicon customers?

  • - CFO

  • Well, I think it's -- I'll do below the -- I'll do the gross margin line from the -- I think we can get efficiency and cost savings on both expense line and the cost of goods sold line.

  • And I think the opportunity is half and half, to be honest with you.

  • I think R&D efficiency is also going to drive the faster product development, and to a certain extent, it will be self-funding through efficiency.

  • I think on the gross margin line above that, people sometimes ask me about the question, can you increase your peak operating profit?

  • Versus, say, 2011, when we did all 30?

  • So if you look at gross margin then and you look at gross margin today, we have a few things going in our favor.

  • One, we have good mix between the segments, where our future growth will be more in semi versus solar, for instance, in 2011.

  • Secondly, we will -- I think we'll drive this cost reduction, which I spoke of just a minute ago.

  • And thirdly, as we start to get some traction in some of these high-value businesses, I think those have favorable pricing components.

  • So, I would say the gross margins look okay.

  • It's a combination of mix between segments, some potential mix between products, cost of goods sold reductions, and pricing.

  • You commercially negotiate all that stuff.

  • - Analyst

  • Okay, thanks for that.

  • And maybe a question, Mike, for your early thoughts on 2014 with the fab equipment spending.

  • Even if we assume end-market demand for electronics to stay normal, with all these silicon technology transitions that you're talking about happening, 3D, FinFET, 20-nanometer, can we assume you're investing this year for another strong year in wafer fab equipment spend for next year too?

  • Thanks.

  • - Chairman & CEO

  • Thanks, Stephen.

  • I don't think we've really formulated a detailed view on '14, but maybe just a couple of thoughts.

  • Assuming that, let's say, we can have another 30%-plus year growth in smartphones, and a 50% growth year in tablets, I think the foundry spending is flat to up, maybe up a little bit more than that, because of complexity, increases in the 20- and 16-nanometer and the push to advance transistors.

  • And then I think we're going to see an investment cycle in NAND flash.

  • Not quite -- we don't precisely have that pegged yet on exactly how the cycle will go, but I think it will certainly start in 2014.

  • So in general, we'd be a positive view on 2014.

  • And the downside is where is logic spending going to end up?

  • - President

  • But I would also say, relative to where are we investing, we are absolutely focused on these technology transistors -- the technology transitions.

  • The transistor is a key battleground in mobility.

  • 3D NAND is also a key battleground.

  • So, the opportunities for us are significant, and that's the focus of our R&D dollars.

  • Operator

  • Satya Kumar, Credit Suisse.

  • - Analyst

  • I was wondering if you could give a little bit more color on your estimates for tablets for the year.

  • You mentioned it's between $27 billion to $30 billion.

  • I was wondering if you could give some color on the mix between DRAM, NAND and logic?

  • And specifically within NAND flash, I was wondering what part of the spending are you seeing happening in the first-half versus the second-half?

  • - Chairman & CEO

  • Sure, thanks, Satya.

  • So first of all, I think one of the big trends is in and around foundry.

  • Spending has been quite concentrated, as Bob alluded to.

  • And we think in the second half, foundry spending will be roughly flat, but spread out among a wider array of our customers.

  • We think that's an important factor as you just start to think about what's going to happen here in the second half of the year.

  • We think logic spending comes up from reasonably low levels in the first half of the year.

  • And then we'll see growth in both DRAM and NAND spending.

  • But we don't think they exceed 25% of the overall wafer fab equipment spend.

  • That's putting them together.

  • And I think some customers have fungible spending there.

  • We see positive trends in NAND and mobile DRAM, so I think it moves up from sub-20 in the first half of the year on memory.

  • - Analyst

  • And Mike, I guess on NAND, are you seeing much wafer capacity additions in the back-half?

  • Do you have an estimate for how much wafer capacities that you think is being added in NAND flash this year?

  • - Chairman & CEO

  • I don't have a precise estimate.

  • I think there is still -- there's capacity expansion within existing fabs.

  • That's everybody's first move, because 3D NAND isn't ready yet, and I don't think we'll see big expansions until we get to 3D NAND.

  • And then as I said, we'll see a build investment cycle in NAND.

  • But I think most of that is next year.

  • - Analyst

  • All right, thank you.

  • Operator

  • Vishal Shah, Deutsche Bank.

  • - Analyst

  • Mike, I just wanted to better understand the mix between 28- and 20-nanometer bookings that you see in the foundry space between the first-half and the second-half.

  • - Chairman & CEO

  • Well, the first-half is pretty much all 28-nanometer.

  • So we see 20-nanometer starting to pick up in the second half of the year.

  • It's still pilot production in the second half of the year.

  • So, maybe if you add up across the industry you get between 25,000 and 50,000 wafers.

  • But I think the key thing is working with customers on those real technology and yield problems as these new technologies get into production.

  • That's really where our focus is with customers, it's what -- why they're calling us and why we're excited about not only the rest of this year, but the subsequent years.

  • - President

  • The other thing I would say is, it's very difficult actually to -- customers don't buy from one generation.

  • So even though the tool may even initially go into 28-nanometer production, certainly they're looking forward to what are they going to do in 20-nanometer, 16-nanometer.

  • And that's actually helping us pull some of our inspection tools, CMP tools, and other products into 28-nanometer orders.

  • - Analyst

  • That's very helpful.

  • I guess the reason I was asking you is if there is any chance from your standpoint of conversations with your customers that 20-nanometer production may get pushed out a little bit, just as these customers try to solve the new problems.

  • And then you also mentioned that you had a really strong order quarter in the PDC business.

  • Are you seeing that strength from the foundry segment, or is it coming also from memory space?

  • Thank you.

  • - Chairman & CEO

  • Well, first of all, I don't think we're seeing anybody slowing down on 20 nanometers, or thinking that this is going to be a small note.

  • Quite the contrary.

  • They want to get this next generation of shrink into production quickly, get the yields up, put in the three 3D transistor as quickly as possible.

  • This is a real race.

  • And Gary on the --?

  • - President

  • On PDC, the strongest order pull that we're seeing right now is from foundry and logic customers.

  • Operator

  • Jagadish Iyer, Piper Jaffray.

  • - Analyst

  • Two questions.

  • First, Gary, you talked about the same growth on the front end.

  • How much effect will be visible in 2013, and how should we reconcile this with the share gains you alluded earlier in your prepared remarks?

  • In the Silicon business?

  • - President

  • Oh, go ahead, I'm sorry.

  • - Analyst

  • No, I just wanted to find out how should we reconcile this with share gains that Mike alluded in the prepared remarks?

  • As you talk about the same growth in the front end, how much will be visible this year, and how should we think about it going forward?

  • And then I have a follow-up, please.

  • - President

  • So the two major transitions that we're focused on right now are the 20-nanometer gate-last transition.

  • That's going to really be more in 2014, maybe at the end of 2013.

  • And the other one is in 3D memory.

  • And certainly that's also more of a 2014 story.

  • - Analyst

  • Fair enough.

  • And then, I think you guys mentioned about the strength in the Display segment.

  • Can you help us there whether there is broad-based ordering in the Display segment?

  • You did allude to a major Chinese LCD factory coming up.

  • Are you seeing any other factory's Ogen 8.5 coming up in probably the second half of this year or potentially on the horizon?

  • Thank you.

  • - Chairman & CEO

  • Jagadish, you asked about factories larger than 8.5?

  • Okay.

  • Anyway, I think we're seeing very strong orders in Display right now.

  • We are projecting $800 million for the year, which is doubling over last year.

  • And we're seeing most of the build-out from multiple customers in China.

  • And no factory is above 8.5 at this time, although we believe as the TVs get larger, above 60 inches, and they become a significant part of the overall mix, that we will see customers move to Gen 10 and Gen 11.

  • - President

  • Thanks, Jagadish.

  • Operator

  • Mehdi Hosseini, SIG.

  • - Analyst

  • Mike, question for you.

  • You mentioned second-half bigger than the first-half.

  • You mean shipment and revenue.

  • It doesn't really say much about booking.

  • Because, given lack of visibility into spending in 2014, bookings could be down or flat into the second half, correct?

  • - Chairman & CEO

  • Well, I think that's unlikely.

  • But I think we're projecting -- when I look at our backlog, I think that's unlikely.

  • Our backlog has been growing.

  • I think it will grow into the third quarter.

  • But it's not that far ahead of what we think shipments and revenue will be in the second half of the year, especially if our 55%-45% second-half, first-half mix comes out to be relatively accurate.

  • - Analyst

  • So I'm confused.

  • Are you saying that both revenue and bookings will be up in the October quarter?

  • - Chairman & CEO

  • I'm not making a projection for October quarter at this point.

  • Just talking with what the information we have today, looking first-half, second-half.

  • We don't see a scenario if spending is 55% of the total, that bookings would be down in total in the second half.

  • I mean, quarter to quarter there can be shifts.

  • - Analyst

  • Okay.

  • And one question for Gary.

  • I'm going to ask you what I asked last quarter.

  • You're talking about the share gain and everything.

  • But can you please explain to me in a simple way, other than ASP, what is it that you're doing to enable you to gain market share in an oligopolistic environment?

  • You only have one competitor in each segment.

  • So what is it other than ASP that enables you to go and actually gain market share without giving up much margin?

  • - President

  • Yes.

  • The key thing for us is to focus on the key high-value problems for our customers.

  • If you look at display for instance -- this concept applies to all of our different businesses.

  • We're focused on the key device performance and yield challenges of our customers.

  • So as they go to larger panel sizes and smaller pixels, the particle requirements are increasing from 10 to 100 times to get equivalent yield.

  • So our focus there is on how do we have an architectural advantage that delivers better particles than our competitors?

  • The same thing is true as you go to larger panel sizes.

  • Customers, if they -- if we have a certain uniformity on our product, they can sell the panels into their own brand.

  • If they have a worse uniformity, they go to an OEM brand at a much lower margin.

  • So the leverage in yield and the leverage in device performance for our customer is significant.

  • And that is the strategy that we're pursuing that is growing share in the Display business today.

  • The same thing is true in the Semiconductor business.

  • As our customers move to new transistor technologies, as they move to new 3D memory technologies, these transitions, as you go to FinFET or other devices, are extremely difficult.

  • They have big challenges in trying to drive time-to-market for these products.

  • And it is the key battleground for our customers in mobility.

  • Our products that enable those transitions and the architectures, that's where we're focused.

  • That's why we are increasing our R&D spending.

  • That's why we are increasing the technical support of our customers in the field.

  • And that's the formula, at least for me, and 30 years in this industry, that's the same formula I've seen work in every one of these different businesses.

  • - Analyst

  • Thank you.

  • - VP, IR

  • Thia, we've got time for just two more questions, please.

  • Operator

  • Patrick Ho, Stifel Nicolas.

  • - Analyst

  • Following up on that comment you made about the drive towards 14 nanometers FinFET with the foundries.

  • Customers have talked about accelerating that from 20 -- from 28 through 20, and possibly even skipping some of the 20 and going straight to 14-nanometer FinFET.

  • How do you rationalize what the customers are looking for there?

  • And from what process segments do you see an expansion at the 14-nanometer node?

  • Is it the same ones as 20?

  • Or do you see areas like CVD also growing faster than the marketplace?

  • - President

  • So, the first transition that will make a tangible difference to our growth in share in revenue is really 20-nanometer gate-last.

  • And then customers will move to FinFET technologies at 16 and 14 nanometers, where there's still more incremental opportunities for us.

  • The really big areas of focus for us are around the transistor, as I talked about earlier, with epi, anneal, implant, PVD.

  • And there are more CMP steps as the customers move to FinFET technology.

  • So those are the ones that, with these transistor technology changes, that are the real big opportunities for us.

  • I would say also, I talked a little bit about combining the precision films with precision materials removal, material modification, and interface engineering.

  • And we're certainly seeing more of those types of issues, where combining these precision materials engineering technologies could provide our customers with a real device performance and yield advantage.

  • And also be very positive for Applied Materials as we combine these technologies on our platforms.

  • - Analyst

  • Great, that's really helpful.

  • Bob, a question for you on materials cost reduction that you talked about on the call.

  • Is it more the design phase that you're going to be working on, helping to reduce that front?

  • Or is it the supply chain?

  • Or is it a combination of both?

  • - CFO

  • It will be both.

  • We're going to do both.

  • And some of the things were going to do to enable both is getting tighter alignment across the organization between operations, the business units, the guys who control the releasing of parts to the suppliers.

  • So there's a path to do this.

  • I would say that we'll get incremental progress on both, and it will be cumulative.

  • The good thing about materials cost reduction is as you start to build the momentum, it's an annuity payment, right?

  • You get it every year on equipment, you get it on spare parts.

  • So it's an annuity payment that every year goes up.

  • If you had several points of cost reduction, it's cumulative over time.

  • - Analyst

  • Great, thank you.

  • Operator

  • Ben Pang, B. Riley & Company.

  • - Analyst

  • Two quick ones.

  • First, relative to the $27 billion to $30 billion you referenced for spending.

  • What's your served available market for 2013?

  • - Chairman & CEO

  • Roughly half.

  • It's 51% or 52%, I think, of that total.

  • - Analyst

  • Okay.

  • And then in terms of the 3D NAND, you mentioned some early shipments second half of this year.

  • Is it easy for the customers to deploy that for planer if they want to?

  • Or are there significantly different configurations for the tools?

  • Are they locked in if they make a decision on 3D NAND right away?

  • - President

  • Yes.

  • The customers that are making those early transitions are really focused on the 3D NAND technology, and they are very different.

  • Some of these steps are very different than what you see in planer NAND.

  • - Analyst

  • Thank you very much.

  • - VP, IR

  • Thanks, Ben.

  • And appreciate your questions.

  • 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.

  • And we would like to thank you for your continued interest in Applied Materials.

  • Operator

  • Ladies and gentlemen, thank you for participating in today's conference call.

  • You may now disconnect.