應用材料 (AMAT) 2013 Q3 法說會逐字稿

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  • Operator

  • 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, 2013.

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

  • Please go ahead, sir.

  • - VP and IR

  • Thank you, Dustin.

  • Today we will discuss the results for our third quarter ending July 28.

  • In a moment I'll turn the call over to Mike Splinter, Gary Dickerson and Bob Halliday.

  • But first let me remind you that today's call contains forward-looking statements including the Company's current view of its industry outlooks, growth opportunities, product share and profitability targets and Q4 business outlook.

  • These statements are known to contain unknown risks and uncertainties that could cause actual results to differ material 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 earnings presentation, both of which are available on the Investor page of our website at AppliedMaterials.com.

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

  • - Chairman and CEO

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

  • Before we get to our earnings discussion, I want to make a few comments about the CEO succession plan that we released today.

  • I'm very pleased to announce that we have appointed Gary Dickerson President, CEO and a member of the Board of Directors effective September 1. I'll be serving as Executive Chairman and together with the rest of the Board will be supporting Gary as he leads our Company to execute on our strategy.

  • As President, Gary has proved to be an outstanding leader and partner focusing on applied new strategies for profitable growth.

  • Having worked side by side with him for more than a year now, I have every confidence that his vision and personal drive will translate into remarkable success in leading Applied Materials as our next CEO.

  • A top responsibility for any board is to ensure that there is a strong succession plan in place and that the Company can effect a smooth leadership transition at the right time.

  • I think we have done a very good job of this at Applied.

  • By making this transition now, Gary will be in position to prepare this year's annual operating plan, so we can keep up our momentum for profitable growth.

  • As this is my last earnings call as CEO, I'd like to say thank you to all of our investors and analysts for their support of Applied Materials over the years.

  • So, Gary, would you like to make a comment?

  • - President

  • Thanks, Mike.

  • I'm honored and excited to be given the opportunity to lead this great Company into the future.

  • On behalf of the executive team and employees I'd like to thank Mike for his decade of service as CEO.

  • Today, thanks to Mike's leadership, Applied enjoys a stronger foundation than ever before on which to build momentum for profitable growth.

  • I really believe that our opportunities have never been greater and I'm excited to have the chance to lead Applied Materials into a new era of growth and success.

  • - Chairman and CEO

  • Thanks, Gary, and congratulations.

  • Let's begin our earnings discussion.

  • We're pleased to report solid financial results for our third fiscal quarter.

  • We delivered earnings at the midpoint of our range with global appetite for mobile devices and larger TVs driving healthy demand for our semiconductor and display equipment.

  • As we outlined at our recent analyst event, across the Company we are building momentum for profitable growth.

  • Industry trends in semiconductor and display favor Applied Materials' leadership areas and at the same time we are seeing results from changes to the organization and our spending profile designed to strengthen customer collaborations and speed up product development.

  • We are increasing investment in 300-millimeter R&D and field technical resources to support our strategic priority of growing share and wafer fab equipment by winning at market inflections.

  • While we are stepping of our R&D spending to ensure we have the strong product pipeline we need to drive growth, we are equally focused on reducing operating expenses and organizational complexity to improve profitability.

  • We will provide an update on our progress later on today's call.

  • As the mobility build out gathers pace, device makers are engaged in a battle for leadership.

  • Consumers are making buying decisions based on battery life, features, form factor and visual experience, which means that our customers' ability to deliver winning products requires new device technology at the right yield and cost.

  • Performance improvements in mobile chips and displays are becoming increasingly dependent on materials innovation.

  • Applied is uniquely positioned to enable next-generation transistors and interconnects, 3D memory and high-resolution low-power displays.

  • In addition to robust demand for mobile devices, we are seeing strength in the TV market and as a result our display business booked its highest orders in over two years.

  • TV unit sales are growing and average TV sizes are increasing significantly faster than historical trends.

  • We anticipate an average increase of two inches in 2013 versus a typical annual increase of about a half an inch.

  • To put this in perspective, for every inch of growth, one new GEN 8.5 factory is needed to fulfill the incremental area demand.

  • Now let me turn to our outlook.

  • For the third year in a row, seasonal buying patterns are evident as consumers wait for new smart phone and tablet models to be released in the fall.

  • As a result, we are seeing a near-term slowdown in investment by our foundry customers as they focus on ramping new capacity installed over the past two quarters.

  • This will deliver product for the holiday season and readying their next generation of technology.

  • We expect investment levels to recover in the fourth calendar quarter.

  • Unit growths for -- of mobile devices is also driving healthy demand for NAND flash memory and [bit] growth for 2013 is expected to be in the 40% to 50% range.

  • The transition of 3D NAND technology into production is underway and we expect investment to accelerate in 2014 and 2015 as more manufacturers adopt this technology.

  • In the DRAM market, conditions are improving with average selling prices recovering to levels last seen in 2010.

  • As a result of increasing bit demand for mobile applications, combined with structural changes in the market and several years of under-investment, customers are taking actions to increase bit supply.

  • Today, these investments are primarily focused on technology conversions from the 3x to 2x node.

  • We expect some new capacity will be added if these favorable market conditions continue into 2014.

  • While mobility-related demand remains strong, PC sales are still challenged and consequently we are seeing some minor reductions in logic investment for the year.

  • Looking at industry investment as a whole, while there has been spending mix shifts towards memory in the second half of the year, we are maintaining our 2013 wafer fab equipment forecast of $27 billion to $30 billion.

  • We believe that wafer fab equipment investment will be higher in 2014, up 10% to 20% relative to this year.

  • This will be driven primarily by the foundries building out there 20-nanometer node investment in 3D NAND capacity and some increase in DRAM spending.

  • This is a spending mix that is favorable for Applied Materials.

  • In summary, the market environment in both semiconductor and display provides a firm foundation for profitable growth.

  • At the same time, major industry trends are playing to Applied Materials' strength and precision materials engineering, presenting us with an unprecedented number of opportunities.

  • Most importantly, I'm confident that we have the right strategy, the right talent and the right new CEO to take Applied to new levels of performance.

  • Let me now hand the call over to Gary, who will provide more details about our strategy and the progress we are making against our goals.

  • Gary?

  • - President

  • Thanks, Mike.

  • Today I will focus on three areas where we are building momentum for profitable growth.

  • First, we are shaping a more competitive Company that can execute better, faster, and at lower costs.

  • Second, the major industry trends translate into positive momentum for our leadership business segments that are enabling the key technology inflections in the mobility war.

  • And finally, we have positive momentum in growth businesses that can drive significant incremental contribution to our financial performance.

  • As Mike discussed, mobility is the major driver in electronics and all our customers want to be the first to introduce new technology that will help them win.

  • Applied's capabilities in precision materials engineering are strategically important for our customers.

  • And this has resulted in them pulling us into much earlier and deeper engagements.

  • Today, our customer relationships have never been better.

  • And this, combined with our strong pipeline of new products, is providing us with significant opportunities to grow market share as new transistor, interconnect, memory and display technologies are adopted.

  • To realize these great opportunities, we are making changes to execute better, faster and at lower cost.

  • We have added very strong talent in management, product development and the field.

  • We've been implementing changes in our structure and business processes to improve the speed and quality of our execution.

  • We've been increasing R&D for products that can drive future profitable growth.

  • R&D spending as a percentage of combined R&D plus SG&A has increased from 55% a year ago to 62% today.

  • In line with our strategic priorities, we have increased focus on our semiconductor business.

  • By shifting overhead dollars, managing our product portfolio and improving productivity, we increased our annualized funding for 300-millimeter R&D and field support by almost $170 million since the start of the fiscal year.

  • All these actions are enabling us to create a pipeline of new, highly differentiated products that have significant pull from the industry technology leaders and will drive future profitable growth in our leadership areas and in other markets where we have a lot of room to grow our share and profit.

  • Our customers' war for mobility leadership is intensifying and materials innovation is their most significant lever to drive performance gains in transistor, interconnect, memory and display.

  • In foundry, the major battle is to introduce new transistor technology to enable enhanced performance and longer battery life for mobile devices.

  • This really plays to the sweet spot of our leadership in [Epi], implant, thermal, CVD, PVD and CMP.

  • Selective epitaxy combined with our implants and [anelle] technologies improves transistor speed by more than 30% while our integrated PVD metal gate delivers a 100 X improvement in device leakage and lower power consumption.

  • As a result, we expect to gain five to ten points of PVD market share this year.

  • In CMP we expect to grow share about three points in 2013 and see future market growth as foundries and 3D NAND customers integrate additional steps.

  • Looking ahead, two inflections that will have a positive impact on our business in 2014 are foundries transitioning to the 20-nanometer node and first-generation 3D NAND.

  • These new devices are very positive for Applied because the performance gains are enabled by our leadership in precision materials engineering, they grow our available market and we are in a strong position to gain share when these new devices ramp into volume manufacturing.

  • As foundries move to 20-nanometer technology, Applied's served market opportunity grows approximately 25% relative to the 28-nanometer baseline.

  • When FinFET transistors are introduced at the 1x node we expect our served market to incrementally grow by an additional 5% to 10%.

  • In memory, the 3D NAND inflection also leverages our leadership and precision materials engineering.

  • With the transition from planar to 3D NAND, the performance gains are driven by deposition and etch and as a result, we expect our available market to grow by about 25% for first-generation 3D NAND devices.

  • Another positive trend in 3D NAND is the adoption of Epi and thermal products, two areas where we have clear and sustainable differentiation.

  • Overall, we have a strong position in 3D NAND and anticipate our served market and share will grow as these factories ramp into volume production.

  • We are also building momentum in additional segments including etch, inspection and display.

  • We are focusing on areas where we have strong pull from customers, can help enable inflections and have sustainable differentiation.

  • The talent and investment we've added in these areas are resulting in positive market share momentum.

  • In etch our strategy has been to target areas of the market where we believe we have valuable and sustainable differentiation, and this has started to yield results.

  • In the quarter we secured important process tool of record positions in memory that provide a platform to drive significant gains in market share this year.

  • In inspection we've been investing in R&D and field technical support, enabling us to increase our layer qualification at logic and foundry customers, both at 28- and 20-nanometer technologies.

  • We expect to translate these qualifications into share gains for our Brightfield products this year.

  • Another area where we see positive momentum is display.

  • Displays have a huge influence on the desirability of mobile devices, affecting user experience, power consumption and form factor.

  • Advanced low-temperature polysilicon and metal oxide transistors are being used to deliver high-resolution LCD and organic LED displays that consume less power and have new form factors.

  • These high-resolution mobile displays increase the opportunity for our CVD and PVD equipment in this market by more than 30%.

  • In TV the introduction of 4K ultra high definition and OLED is driving more complex and capital-intensive manufacturing processes.

  • Our differentiated, large-area, precision-deposition equipment provides device performance and yield advantages.

  • We won 100% of the CVD and PVD business for the last two new TV factories.

  • And we anticipate our overall share in display PVD will increase by about 25% this year.

  • We see a pathway to grow display revenues to $1 billion or more with high operating leverage.

  • In summary, 2013 is shaping up to be a year where we are building momentum for profitable growth for 2014 and beyond.

  • We are making great progress in building a more competitive Company that execute better, faster and at lower cost.

  • We are bringing new talents and investment to key areas while implementing structural and process changes that improve the speed and quality of our execution.

  • We have positive momentum from the major trends in semiconductor and display markets that plays to the strengths of our leadership businesses.

  • And we have positive momentum in etch, inspection and display that we anticipate will drive incremental contributions to profitable growth.

  • We are very excited about our technology pipeline and laser focused on execution to make sure we take advantage of the great opportunities we have to drive profitable growth.

  • Now, let me hand the call over to Bob.

  • - EVO and CFO

  • Thanks, Gary, and good afternoon, everyone on the call.

  • Before I cover our results for the quarter I want to reinforce two very important points that Mike and Gary made.

  • One, our leadership in precision materials engineering creates a unique opportunity for us with our customers.

  • And, two, we are driving the necessary changes in the organization to capture this opportunity while improving the overall profitability of the Company.

  • To fund these changes and improve our profitability, we are significantly reducing the cost of doing business.

  • We are rapidly eliminating organizational complexity and reducing the investment in areas with lower returns and reallocating these dollars into our product pipeline for the highest value opportunities.

  • We are already seeing the shift in our financials.

  • On a GAAP basis, G&A as a percentage of R&D plus SG&A has decreased from 24.3% a year ago to 21.4% in Q2 to 17.9% in Q3.

  • At the same time, R&D as a percentage of R&D plus SG&A has increased from 54.8% a year ago to 58.5% in Q2 to 61.6% in Q3.

  • The net result is a 4% year-over-year decline in the spending while increasing R&D by 8%.

  • We will see fluctuations quarter to quarter but the trend is reflective of the systematic reallocation of our spending that is taking place.

  • This reallocation is driving incremental momentum with customers.

  • One simple leading indicator of this momentum is the number of our semiconductor evaluation tools is expected to increase more than 20% in the next two quarters.

  • In addition, a leading indicator of future spending is headcount, and our total headcount is down 6% or approximately 900 employees from a year ago, with most of that reduction coming out of EES and the corporate functions.

  • The Applied functional organizations are doing a great job of [rough] driving these rapid changes.

  • The teams are doing extensive benchmarking, quickly adopting best-known methods and working to improve the velocity of the Company.

  • I have been really pleased and grateful for everyone's efforts.

  • The dollar is getting reallocated into additional R&D investment are going into semiconductor and display.

  • These are businesses that have high share or they are growing share with strong product pipelines.

  • In SSG, we are extremely well leveraged to the transistor technology inflections occurring over the next few years.

  • It is possible that the great majority of our business units will gain or hold share this year.

  • The plan is pretty straightforward--get more efficient in the costs of doing business and invest in markets and products that we know very well.

  • The early results are very encouraging.

  • Overhead costs and solar spending are down substantially.

  • Investment in core SSG and display products is up.

  • We are gaining share most of those markets.

  • And other leading indicators like evaluation tools and our product pipeline are up.

  • These cost savings and harvested R&D investments will drive sustainable growth and profitability for Applied Materials.

  • The money we are reinvesting is going into our highest value opportunities--markets we know and businesses with very good incremental margins and high and/or growing share.

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

  • Orders were approximately $2 billion, down 12% sequentially on lower semiconductor equipment demand, partially offset by strength in display and AGS.

  • We generated net sales of approximately $2 billion, which was about as we expected.

  • Our non-GAAP EPS was $0.18 which was at the midpoint of our guidance.

  • Non-GAAP gross margin was 42.9%, down slightly due to a less favorable product mix within SSG, partially offset by less inventory charges and lower variable compensation.

  • Over the next two quarters we expect gross margins to decline slightly as products which traditionally have had lower share and therefore less scale become a larger percentage of SSG revenue.

  • Non-GAAP operating expenses were $535 million, below the low end of our guidance primarily due to reduced corporate spending.

  • Our effective tax rate was 23.9% on a non-GAAP basis.

  • We now expect the non-GAAP full-year rate to be between 24% and 25%.

  • Cash from operations was $364 million or 18% of revenue.

  • Our capital allocation priorities remain unchanged.

  • We returned $170 million to our stockholders in Q3.

  • We used $50 million to repurchase 3.3 million shares and paid out $120 million in dividends, reflecting the 11% quarterly dividend increase we announced in March.

  • We ended the quarter with cash and investments of just over $3 billion.

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

  • SSG orders were down 22% to $1.2 billion due to lower but comparatively strong foundry spending.

  • This reduction was partially offset by an increase in NAND, DRAM and logic orders.

  • SSG net sales declined 1% to $1.3 billion, with increases in NAND and logic offsetting most of the seasonal decline in foundry.

  • SSG's non-GAAP operating margin decreased to 22.2%, reflecting a less favorable product mix relative to Q2 and slightly higher operating expenses.

  • In AGS, orders were up 7% to $517 million due to improvements in customer utilization rates and wafer starts.

  • AGS net sales were down 4% to $497 million due to a slightly less favorable wafer start by device type than expected.

  • Non-GAAP operating margin was essentially flat at 23.3% despite slightly lower revenue.

  • Our display orders increased 31% to $256 million, with record orders in array PVD.

  • The increase was driven by TV fab investments in China and reflects our share gains with those customers.

  • Display net sales increased 27% to $160 million -- $161 million consistent with the order ramp we experienced over the past few quarters.

  • Display non-GAAP operating margin increased 4.6 percentage points to 21.1%, which is our highest operating margin at this level of revenue since the first quarter of fiscal 2008.

  • EES orders were $19 million and net sales were $45 million, up $7 million from Q2.

  • The non-GAAP operating loss declined to $15 million due to lower inventory charges and our cost reduction efforts.

  • Non-GAAP operating expenses were below $30 million in Q3 and we remain on track to lower OpEx to below $25 million exiting the fiscal year.

  • Now I will provide our fourth quarter business outlook.

  • Overall we expect the Company's net sales to be flat relative to the third quarter, with a little more risk than opportunity.

  • We expect our non-GAAP operating expenses to be in the range of $525 million plus or minus $10 million and non-GAAP earnings to per share to be in the range of $0.16 to $0.20.

  • Within this outlook we expect net sales from our semiconductor business to be flat to down slightly.

  • AGS net sales are expected to be flat to up slightly.

  • Display net sales should be down slightly, with EES net sales up slightly.

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

  • - VP and IR

  • Thanks, Bob.

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

  • Dustin, let's please begin.

  • Operator

  • (Operator Instructions)

  • Jim Covello, Goldman Sachs.

  • - Analyst

  • Good afternoon.

  • Thanks so much for taking the question.

  • I appreciate it.

  • Congratulations to both Gary and Mike.

  • Great job to both you guys.

  • - President

  • Thank you.

  • - Chairman and CEO

  • Thanks, Jim.

  • - Analyst

  • First question, just relative to the near-term environment, and this isn't specific to Applied because we've had the same questions as an industry for the competitors as well, it seems like what we were hearing at SEMICON West doesn't quite match what's happening in the very near term.

  • Was that just a function of us misinterpreting the comments at SEMICON West to be nearer term or have there been some pushes since those meetings relative to what we're looking at in terms of the third and fourth quarter today?

  • - Chairman and CEO

  • Maybe I can comment from the industry standpoint.

  • I think the foundry spending profile was quite predictable and pretty much in the third calendar quarter is following what's happened very similarly over the last three quarters.

  • I think there's a fair difference as we look into our Q1 or into the fourth calendar quarter.

  • We think foundry spending will pick up as they start driving towards their 20-nanometer nodes and -- or it might be teen nodes for some suppliers and we'll have a little broader investment by a broader number of customers.

  • I think if there's any modest surprise, it's around a little higher memory investment in the second half of the year, Jim.

  • But I think the foundry spending was pretty predictable.

  • - Analyst

  • And then, as a follow-up, how long visibility do you have into the memory piece?

  • Theoretically, memory spending is picking up over the next several quarters.

  • How much confidence do we have that that's a one or two quarter phenomenon versus a two or three or four quarter phenomenon, in terms of better spending there to go along with the seasonal recovery in the foundry?

  • - Chairman and CEO

  • I think the hedge is what's going to happen with the PC market exiting the year and going into 2014.

  • If it was just the mobility market, we can see the compounded annual growth rate of bits per box.

  • That's been pretty aggressive.

  • And -- but it's tempered by what's been happening in PCs.

  • So if I knew what was happening in PCs, I'd be more confident that we'd say that you could think of a four -- especially in DRAM, a four quarter run, but I'd be quite hesitant to say that today.

  • Flash memory I think is a different story.

  • There's technology investments here that need to be made, and I think we're seeing them being made both in 3D NAND as well as in planar NAND.

  • - Analyst

  • Terrific.

  • Thanks very much.

  • - Chairman and CEO

  • Thank you.

  • Operator

  • Krish Shanker, Bank of America Merrill Lynch.

  • - VP and IR

  • Okay, Dustin, maybe we'll move to the next questioner and hope that Krish polls again.

  • Operator

  • Tim Arcuri, Cowen and Company.

  • - Analyst

  • Thanks and congratulations, guys, to both Gary and Mike also.

  • - VP and IR

  • Thank you.

  • - Analyst

  • A couple things.

  • First of all, Mike, you talked about things snapping back in fiscal Q1, January quarter.

  • Can you give a sense of how much you think revenue will snap back in January?

  • Are we talking a few hundred million dollars?

  • - Chairman and CEO

  • Well, I don't think we're ready to forecast our Jan -- our Q1 yet, Tim.

  • There's a lot of moving parts, so -- but we do -- I would say that we're quite certain about foundry spending coming back to previous levels.

  • - Analyst

  • Got it.

  • Okay.

  • And maybe a question for Bob.

  • Bob, if I look at SSG gross margins, they're down about 300 basis points on flat revenue.

  • Also it sounds like SSG margins are going to hold back overall margins a bit even as revenue grows here into January.

  • If you look back five, six, seven years ago you guys are having definitely a lot more success now, gaining share in these two big markets that you're focused on at SSG.

  • But back years and years ago there was some effort to seed the market by, I don't want to say giving way tools, but pricing tools very low.

  • And so, is there any metrics that you can give us to hold our hand that you're not doing the same thing this time, and that in fact margins will come back in SSG as we get into next year?

  • Thanks.

  • - EVO and CFO

  • There's a lot of moving parts, Tim.

  • In terms of -- I think a single biggest thing that's having an impact in the next couple quarters is mix.

  • We're actually gaining share in some -- in one or two segments, one in particular that's -- we haven't gained share a long time.

  • I think we will gain share, but without the scale, the margins are lower.

  • I think in our strong businesses the margins are holding up pretty well.

  • So I think it's mostly a mix issue.

  • You got a little bit of issues too out there with mix of customer type.

  • And I can't point to any explicit impact of the weak end, but it's probably in the background, in terms of how aggressively customers negotiate.

  • So, overall I'd say we're probably going to be still in the ballpark, but there's a bunch of mix issues right now we're sorting through.

  • - President

  • Let me -- on the areas where we're growing share, in inspection, that's actually one of our highest margin businesses.

  • We -- as I talked about earlier we definitely have momentum there, very strong pull from customers in all markets for current and future technology.

  • Again, one of the major cases I've ever seen in my career of customer pull for products.

  • We have a lot of momentum in foundry and logic.

  • We are increasing layer penetration at 28-nanometer, 20-nanometer, and also at FinFET with the technology leader on that particular device.

  • We have really strong pull from customers on the unique imaging and dfac capture capabilities, especially for patterning applications.

  • We're ramping investment, R&D in the field, and as I said, a lot of momentum there.

  • The other thing I would say about the inspection business, is we have the best eBeam technology in the world, very strong in terms of eBeam review.

  • And we can leverage this technology for growth in new markets.

  • But overall inspection is one of our highest margins, one of our most profitable businesses.

  • In etch, the good news is that we're making tremendous progress in share this year.

  • We're penetrating new applications in foundry, planar NAND, and we are extremely well positioned in the first customer that's ramping 3D NAND.

  • So, we're making very significant penetration, strong growth in the business.

  • The margins there aren't as good.

  • They're not really different from where they were, so there's no change in terms of the pricing behavior there.

  • It's just as we are ramping, especially with new customers where we haven't been for a long time.

  • Those initial margins are not great.

  • The other thing I would say in Etch is that we are working with technology-leading companies, all of the technology-leading companies on very differentiated products that have potential for significant share growth for us in the future.

  • So certainly we're penetrating today, as I said, in foundries and planar and 3D NAND but we also have very, very strong technology around some of the key future inflections in the Etch business.

  • - Analyst

  • Great.

  • Thank you.

  • That was very, very helpful.

  • Thanks, Gary.

  • Operator

  • Stephen Chin, UBS.

  • - Analyst

  • Thanks.

  • I also want to share my congratulations to both Gary and Mike.

  • - Chairman and CEO

  • Thank you.

  • - President

  • Thanks, Stephen.

  • - Analyst

  • Just a follow-up question on planning for 2014, wafer fab equipment spending to be up 10% to 20%.

  • I was just wondering if you could share your latest color on how you think that may trend across memory foundry logic?

  • Is it memory and foundry are up, but maybe logic not up as much next year?

  • - Chairman and CEO

  • Certainly.

  • Maybe I can just run it down briefly for you, Stephen.

  • I think if we'd say that wafer fab equipment spending is up 10% to 20%, we think logic spending is probably going to be down as a percentage of the total.

  • DRAM will probably be flat as a percentage of the total.

  • NAND and foundry up a bit as ahead of that 10% to 20%.

  • And I think you can relate that to what's happening in the end market, as well, and with the technology inflections in 3D NAND, and then the continued build out in the mobility area in the foundry space.

  • - Analyst

  • Thanks, Mike.

  • And then a follow-up question.

  • I think Bob called out that the number of evaluation tools are about 20% higher.

  • Maybe you can talk about where those evaluation tools are at.

  • Are they mostly etch and inspection tools?

  • Is that what's giving you some of the confidence that you could continue to gain share in those two new areas?

  • Thanks.

  • - President

  • Well, certainly in the Etch market, as I talked about earlier, we have some very, very strong technology around some major inflections.

  • And we're penetrating logic, foundry, memory customers with that new technology.

  • So that certainly is one of our major areas of focus.

  • We also, in other areas like CVD, we're bringing to market new technology targeted at inflections.

  • And we also have very strong pull from technology-leading customers for these products.

  • And so we believe in CVD we'll build momentum for share gains in 2014 and 2015 with some of these new products and new applications.

  • So, that's another area.

  • But I would also say that, as I mentioned, we're increasing 300-millimeter R&D by $170 million run rate, well, along with some on the field support.

  • And that really is translating into a great technology pipeline.

  • So it's certainly not just etch and CVD.

  • There other areas where we have disruptive technology, but those are two of the prime areas.

  • - Analyst

  • Thanks, Gary.

  • Operator

  • John Pitzer, Credit Suisse.

  • - Analyst

  • Good afternoon, guys.

  • Let me add my congratulations to both Mike and Gary.

  • For my first question, guys, I want to go back to one of the presentations at the Analyst Day over a month ago where you talked about WFE spending being $37 billion, I believe, out in 2016.

  • I think I understand the positive impact of capital intensity on that number.

  • I'm wondering if you can help me understand how you think about square inches of silicon growth and/or the profitability of your customers over time relative to that number.

  • And I guess what I'm really trying to get at is we've seen this pretty significant big shift down in the consumer market from the high end to the midrange to the low end, which probably doesn't reverse itself.

  • I'm curious as how that dynamic impacts your longer term forecasts on capital spending.

  • - Chairman and CEO

  • Thanks, John.

  • That was a long question, but -- and a little further out question, I think.

  • How we tried to describe it at the Analyst Day was, we really are looking at process complexity increasing over these next few nodes to create the -- we talked about the number of increased steps in 3D NAND and those that would favor us.

  • We also talked about the increased steps for vertical transistors, FinFETs.

  • Everybody is racing in that direction and how much more difficult it is going to be to create these 10-nanometer or 7-nanometer patterns that our customers are going to be driving towards at that time.

  • That's by far the biggest effect.

  • And then the second part of it is really a continued build out of the smart phone and mobility, mobile tablets, over that period of time.

  • We expect that growth rate is going to continue that way until essentially all phones are smart phones.

  • And I think we explained that that -- in the event that there's just a significant amount more silicon that's being employed in one of those smart phones -- and those are by far the biggest effects that get us up to $37 billion wafer fab equipment spending range from where we are today.

  • Also, I think you know there's been pretty significant under-investment in DRAM over the last few years.

  • We certainly don't think DRAM is going away as a category.

  • And as the mobile build out happens, it's going to return to a little bit larger bit growth than we've seen in the last few years.

  • - Analyst

  • That's helpful.

  • I'll make my follow-up short.

  • At Analyst day you also talked about some development tools of record on 3D NAND.

  • Samsung in the last couple weeks had given us little bit more insight into their 3D NAND performance metric at the Flash conference this week.

  • Curious as if the DTORs have turned into product tools of record yet?

  • If they have, how are you faring and if they haven't, when do you expect that to occur?

  • - President

  • We're very, very positive on the -- our opportunity as the first customer ramps from planar to 3D NAND.

  • We're seeing significant increase in market share, especially in Etch, but our overall TAM and market share is definitely going up in that planar to 3D NAND transition.

  • So, I would say that the overall increase that we talked to -- talked about, around 25% in terms of the applications, or the total available market, is about what we expected.

  • To be honest, we're doing even better in Etch in that transition than we had anticipated.

  • - Analyst

  • Perfect.

  • Thanks, Gary.

  • Appreciate it.

  • Operator

  • West Twigg, Pacific Crest Securities.

  • - Analyst

  • Hi, thanks for taking my questions, and congratulations to both Gary and Mike.

  • Just real quickly, I had a follow-up on the foundry orders, the 20-nanometer foundry orders in particular and wondering given the conviction that 20-nanometer foundry spending should rebound, are you seeing orders beyond the first large customer yet?

  • - President

  • On 20-nanometer orders, we're certainly seeing orders from more than one customer at this time, and maybe I can help you -- our view is that by the end of 2013 there will be about 30,000 wafer starts of capacity in the 20-nanometer range and we expect that growth rate up to over 100,000 in 2014.

  • So, I think we'll see acceleration as we approach the end of the year and then into 2014.

  • - Analyst

  • And are you viewing 20 nanometers the same thing as the 16, 14 nanometer, the FinFET extension?

  • - Chairman and CEO

  • Yes, this is always a confusing thing, West, is that everybody seems to be naming their own dimension.

  • So we're lumping all that 22, 20, 16, 14 into one bucket for -- so that we can obviously hide the specific name of the customer.

  • - Analyst

  • That makes sense.

  • - Chairman and CEO

  • It's a big cate -- it's going to be a big category and a big -- over the next few years, the biggest part of the growth in wafers and in spending.

  • - Analyst

  • This part is a little tricky but do you think that that, given that that would include the FinFET extension, would -- do you think demand would be stronger in the back half of 2014 than in the first half?

  • - Chairman and CEO

  • I think it's probably a bit too early for us to judge that right now.

  • I think right now our estimate really is that foundry spending will be up a little bit ahead of the overall 10% to 20% that we're thinking.

  • - Analyst

  • Okay.

  • And then just finally one thing that caught my attention was on the eBeam comment that you could leverage growth for that technology, new markets.

  • And I'm wondering if you could give us an idea of what new markets are you talking about?

  • Moving it into inspection or maybe even into litho?

  • - President

  • Yes.

  • Again, I really believe that we have the best eBeam technology.

  • We haven't really capitalized on that as much as we could.

  • But we've just introduced a new product in eBeam Review that's getting very strong pull and acceptance by customers.

  • And definitely, I think we can leverage that into litho and we also can leverage that into eBeam inspection.

  • - Analyst

  • All right.

  • Very helpful.

  • Thank you.

  • Operator

  • Mehdi Hosseini, SIG.

  • - Analyst

  • Yes.

  • Thanks for taking my question.

  • The first part of the question is for Mike.

  • You had an interesting comment about 20 nanometer and below, the size of the market could be about 100 K. I'm trying to better understand the thought process behind it and want to get your view on the assumptions behind it.

  • Outside of Korea, I'm sorry, outside of Taiwan, Koreans are going to have risk production starting in December and then at some point in 2014 they're going to have [pilot line].

  • The same thing with global foundry.

  • So if the risk production for 2014 is not going to happen until December, what gives you the confidence that 20-nanometer and below, which you've got to have 2014 in it, could be as big as 100 K unless you're making an assumption that 20 will dominate the 100 K?

  • And I have a follow-up.

  • - Chairman and CEO

  • Well, I think we have confidence that we get over 100 K by the end of 2014, because the device makers need a refresh on technology.

  • So there will be a strong push to get that capability from the foundry suppliers.

  • And whether we call it 20 -- or as I said 2016, 2014, it will -- the suppliers will -- the foundry suppliers will meet the demand and we think there's a need for more than 100,000 wafers.

  • And what we can see already from how the customers are lining up to buy product, it looks quite real to us.

  • - Analyst

  • Are you implying that the device makers would for the first time would go from risk production to volume production in less than two quarters?

  • - Chairman and CEO

  • I think they have more than two quarters to do that actually.

  • - Analyst

  • So that means that 2014 especially for foundry could be pretty much back-end loaded?

  • - Chairman and CEO

  • I think 2014 probably would be back-end loaded.

  • I agree.

  • But certainly 2016 is the major focus for most of our customers.

  • And most of them are planning pretty aggressive buys in 2014 for those nodes.

  • - Analyst

  • And, Gary, for you, you highlighted your confidence in gaining market share in Etch.

  • What's the confidence there that gross margin there is not going to be sacrificed like what we're seeing in the process diagnostic?

  • - President

  • Well, number one, I wouldn't say that gross margin is being sacrificed in the process diagnostic space.

  • That's actually one of our highest gross margin businesses in the whole Company, very good gross margins, very profitable.

  • And if I look out over the next few quarters, that business is extremely profitable.

  • In terms of the Etch business, we have confidence in share based on what's happening with customers.

  • We have strong pull in foundries for new applications and extremely strong pull in NAND technologies both for planar and especially as I said earlier for 3D NAND.

  • So that is very strong.

  • We know what the pricing is there.

  • Again, it is -- that one is at the lower end in terms of our gross margins today but there's a lot of leverage as we grow that business.

  • Also, as I said, we have very strong technology around future inflections.

  • We're working with all of the leading semiconductor companies in areas that have potential for extremely high growth.

  • So that's why we're optimistic on that business.

  • Mike, you could also maybe give some color.

  • You've been in this for a while.

  • And maybe give a perspective on where we are today versus where we've been over the last ten years.

  • - Chairman and CEO

  • I think on the opportunities for share gain, Gary, I don't think we've ever had greater a opportunity and how well we're positioned towards the real key inflections.

  • When you look across what needs to be done just -- and logically have to get to help our customers get to FinFETs and production over the next 12 months, and I think we have significant products there.

  • We have to help reduce the -- or improve the performance of interconnect.

  • And I think we have great products there.

  • Transistors are now being defined by -- with metal gates.

  • We see a big shift there as we move from gate first to gate last across the industry.

  • And then in 3D NAND, we got 3D NAND in time with, really, I think game-changing applications.

  • So, as I said I don't think we ever been in better position here.

  • - President

  • I would say again on etch, that is one of our lowest -- lower gross margin products today.

  • As we're growing that business with new customers, that's going to be a drag on our overall margins, but the incremental profitability there is very, very good.

  • And we have tremendous traction around some of these major inflections and a very strong technology pipeline, good team.

  • So we have a lot of confidence that we're going to build this business into a strong contributor to profitable growth.

  • - VP and IR

  • Thanks, Mehdi.

  • Operator

  • Terence Whalen, Citi.

  • - Analyst

  • And I echo my congratulations to both Gary and Mike.

  • This question is on 3D NAND.

  • Gary, I think you said that the engagements with the customers are shifting fundamentally, occurring earlier and also developing more depth around the technology inflections.

  • My question is does this translate to better visibility or not in terms of actual slots?

  • And also in terms of 3D NAND specifically why would you have two customers up and running in terms of revenue?

  • Thanks.

  • - President

  • So in terms of visibility, one particular customer is leading the pack relative to the transition from planar to 3D NAND.

  • They are very positive on the reliability and cost and moving forward very quickly.

  • Visibility there relative to moving from development tool of record positions to production tool of record positions is very clear.

  • That's happening and as I said we are very positive on what's happening in that transition and maybe even it's a little better than what we had expected.

  • Relative to the other customers, the timing for the transition from planar to 3D NAND is a little behind the first customer.

  • I don't know that we want to comment right now on exactly when that transition would happen but definitely behind the first customer.

  • We are working with those other customers on the technology development and we're also very optimistic in our opportunities as those customers make that transition.

  • - Analyst

  • Terrific.

  • That's very helpful.

  • My follow-up question is related to the China regional breakdown information you've shown for both revenue and orders.

  • We saw a pretty significant increase in revenue sequentially in the July quarter and also a decent increase in orders.

  • My question is, is that -- what is that reflective of?

  • Is it reflective of display or is it actually reflective of some orders and shipments into China perhaps for an international customer?

  • Thanks.

  • In 3D NAND?

  • Thanks.

  • - Chairman and CEO

  • I think that was the China display orders.

  • We have got some big TV business in China.

  • - Analyst

  • Terrific.

  • Thank you.

  • Operator

  • Vishal Shah, Deutsche Bank.

  • - Analyst

  • I wanted to share my congratulations to both Gary and Mike.

  • Gary, I wanted to just understand -- better understand your thoughts on restructuring given in the EES business.

  • Your targets for the next year, do you have any plans or change in your thought process given the progress you've made so far?

  • - President

  • Well, we've made significant cuts in OpEx there in the last year.

  • I think it's on the order of about $120 million in the run rate, OpEx cuts in the Solar business.

  • The web business is actually doing very well.

  • We don't talk about that very much, but that business is exceeding our expectations and pretty profitable.

  • Relative to the Solar businesses or any businesses within the Company, we're not married to any particular business.

  • We have operating profit goals that we have for businesses.

  • Businesses that meet those goals, we're going to invest and grow.

  • Businesses that don't meet that threshold, we will not continue in those business over the long term.

  • - Analyst

  • Great.

  • Thank you.

  • And then you had talked about $800 million of orders for the Display business.

  • Can you share -- and you also mentioned today that you see a path to above $1 billion of revenue and record margins in that segment.

  • So can you share your thoughts on how we should think about display spending in 2014, and also whether you can see double-digit growth in that segment in 2014?

  • Thank you.

  • - Chairman and CEO

  • I think we're very encouraged by the level of orders right now in this phase of the cycle.

  • They're really showing our share gains in PVD in particular.

  • As you know we've always been strong in CVD.

  • But right now we see that TV investment is going to continue.

  • We've been pleasantly surprised by the growth in the size of TVs, but at Gen 8.5 this 55 to 60 plus inch TVs are very, very cost effective now.

  • We think in the marketplace were going to see the prices come down, and continue to see this very fast expansion in size of TVs.

  • And then if you look in our display business we have the foundation of the Mobile business.

  • That corresponds to the rest of our mobility products so that's really creates the floor on the revenue in our Display business.

  • So, I think with the growth in PVD share we're going to see a significant performance next year.

  • And I think Bob loves this business, because he just thinks that we're going to be able to get great leverage on the bottom line here as we amortize that infrastructure.

  • - EVO and CFO

  • It is a good business model.

  • These folks manage really tightly in downturns and really optimize the business in the upturn.

  • So I like the business.

  • - VP and IR

  • Thanks, Vish.

  • Operator

  • Edwin Mok, Needham and Company.

  • - Analyst

  • Thanks for taking my question.

  • Follow-up question on display.

  • If I look at your booking year to date has been pretty up -- is it a lot higher than your revenue year-to-date?

  • Why are you guiding down for the October quarter?

  • - Chairman and CEO

  • Just lead time issue, Edwin.

  • I think you're going to see continued strong orders over the next few quarters.

  • But as you know, this business is quite lumpy with long lead times.

  • We're working those down but it's still from the time our customers order till the time they start up their factories, it's oftentimes over a year.

  • So it's all about lead time versus the orders.

  • - Analyst

  • I see.

  • Okay.

  • Great.

  • And then a question for you, Bob.

  • If I look at your OpEx guidance for the coming quarter and I contrast that against what your longer term targets, right, it seems like your OpEx guidance is already at the long-term OpEx target of $2.1 billion, right?

  • I guess a two-part question.

  • One is there any one-time savings you're realizing this quarter, or are we done with OpEx?

  • And the other part I want to figure out is, how much more do you think you can spend in R&D versus potential total OpEx?

  • - EVO and CFO

  • I think we've made pretty good progress.

  • There are two -- there are three buckets, I guess, of OpEx.

  • There is the cost of doing business stuff, which is all the support functions, and there is the R&D investment, which is what you choose to invest in.

  • And we have a lot of good investment opportunities right now, Gary talked about.

  • The third, which is the field, a lot of that is pushing some of our growth with the technical marketing guys in the field.

  • So I think in the R&D and the technical marketing guys as investments, and the rest is the cost of doing business.

  • The cost of doing business, I can sort of seal the next two years sustainably, keep improving our performance in that area and I can see that road map to (inaudible).

  • I think on R&D investments, those are choices we select.

  • And I think if you think of that -- those type of investments it's like a pipe.

  • What you're seeing in the short-term right now is we're really optimizing the investments that we're halfway down that pipeline of products.

  • What we've done now is we have increased the diameter of the pipe by funding, but we've also increased the velocity going through the pipe.

  • So in terms of spending I think the cost of doing business, we'll keep improving that over the next two years.

  • I think the velocity of stuff out of the pipeline in terms of R&D I'm pretty excited about.

  • Once those things start to hit -- and right now we are optimizing things, we're halfway down the pipe, whether it's inspection or etch.

  • But we have some very aggressive plans right now for stuff coming out of the pipe.

  • So when those come out of the pipe, which will be over the next year or two, what you'll see is the revenue line will start to grow, the OpEx spending as a percentage of that goes.

  • So right now we're spending on R&D a little bit higher than our revenue line.

  • We are funding with the G&A stuff.

  • But as we get that pipeline flowing the R&D will probably stay more constant, the G&A will get optimized in the revenue will grow, so the margin will go up.

  • - Analyst

  • Great.

  • Very helpful.

  • Thank you.

  • Operator

  • Jagadish Iyer, Piper Jaffray.

  • - Analyst

  • Yes.

  • Thanks for taking my question.

  • Congratulations, Mike and Gary.

  • Two questions.

  • How should we be thinking about 3D NAND orders sustainability in calendar 2014 given that capital intensity is very high and the customers, besides one customer, are looking at second half 2015 or into 2016?

  • How should we think about this as one customer tries to debug the yield challenges as well as the retention challenges and things like that?

  • And I have a follow-up.

  • - President

  • I don't want to talk for any specific customer relative to what their plans are.

  • What I would say is that what we're hearing is that they're pretty positive in terms of the progress they've made on that particular device.

  • And I think it's pretty well known that that first phase is ramping, and certainly if that is successful, they're going to continue to be fairly aggressive.

  • - Analyst

  • Okay.

  • And then as a follow-up then.

  • Mike, given your commentary that 2014 WFU spend is going to be up 10% to 20% and Gary's commentary about the increasing SAM opportunities, how should we think about silicon system orders overall for calendar 2014 in terms of looking at it vis-a-vis calendar 2013 and how should we be looking at its overall profitability?

  • Thank you.

  • - Chairman and CEO

  • Maybe I should let Bob answer this question.

  • But I would just say that with our share gains and with the mix of spending, at least the way we think of it now, with foundry growing a bit faster than the mean and NAND flash growing faster than the mean, these are two good things for Applied Materials.

  • So, we're not trying to forecast our full 2014 right now, but I think the growth and the mix and the share gain are all heading in our direction.

  • - Analyst

  • Thank you.

  • Operator

  • Patrick Ho, Stifel Nicholas.

  • - Analyst

  • Thank you very much.

  • Gary, congratulations, and well deserved.

  • Mike, also congratulations, and all the best wishes going forward for you.

  • - Chairman and CEO

  • Thank you.

  • - Analyst

  • You're welcome.

  • First, in terms of the process control opportunities you see ahead, you've talked a lot about the share gain opportunities.

  • How do you see the TAM particularly on the foundry and logic side increasing as you go from 20 nanometers to the 16- and 14-nanometer FinFET nodes?

  • - Chairman and CEO

  • Well, I think that the TAM more than likely will go up as you go to those different technology nodes.

  • I think the key thing for us -- the really key thing that moves the needle for us is our layer qualification.

  • That's one of the things that we watch very, very closely.

  • And what we talked about was a significant increase in the layers when you look at the 28, 20 and also we are working very closely with leaders in FinFET technology.

  • So that layer qualification for us has went up something like 30% in the -- this year.

  • And that, we believe, is very positive for us, gives us very positive momentum from a market share perspective.

  • - Analyst

  • Great.

  • And my follow-up question for Bob in terms of the operating model and specifically with the AGS business.

  • I think this is an opportunity you've mentioned in the past where you can improve the overall margins of that business segment.

  • One, what kind of improvements have you made to date and, two, what are some of the longer-term efforts or initiatives you want to put in place to get it -- to get those margins higher in that segment?

  • - EVO and CFO

  • Sure.

  • I think the opportunity on AGS is a pretty good revenue opportunity, which drops down -- a high percentage of that drops down.

  • So, if you look at that business we sell a lot of spare parts for our own tools.

  • So I think we can probably hold better share in that business.

  • And that's a function of sourcing, correct pro -- optimizing programs with customers and internal alignment on how that.

  • You do that when you first design the tools and then also as the tool is released.

  • I look at that as a really good opportunity, because the drops from profit in that business is pretty good.

  • It's also a really good cash flow business, frankly, because the operating expenses, once you've set up the infrastructure, are pretty low incremental costs.

  • I like that business a lot.

  • I think we've got to implement some of these things which we're working on right now.

  • We're getting good coordination internally.

  • We just keep -- have to keep chopping away at it, hacking away at it or building on it, maybe that's the right word because I think it's more of a building revenue thing on this side.

  • - VP and IR

  • Thanks, Patrick.

  • And, Dustin, I know we've run past the hour, but would you please poll Krish Sankar and see if he might -- be back on the line?

  • Operator

  • And Krish's line is open.

  • - Analyst

  • Yes, hi, can you hear me?

  • - Chairman and CEO

  • Yes.

  • - Analyst

  • Sorry about that audio technical issue.

  • Congratulations again to Gary and Mike.

  • Two quick questions.

  • One, Mike, you mentioned about DRAM capacity adds next year.

  • I know there was one, two, three DRAM customers out there.

  • Do you expect one or more than one customer to add capacity?

  • And I had a quick follow-up for Bob.

  • - Chairman and CEO

  • We would expect one or two to add, and a third one to optimize their overall capacity.

  • - Analyst

  • Got it.

  • That's very helpful.

  • And then a quick one for Bob.

  • Bob, you spoke about the increase in eval tools next quarter.

  • I just wanted to figure out are these one year evals, and how will it affect the expenses over the next year or so given that you won't be generating revenue from them but still supporting them?

  • - EVO and CFO

  • Yes.

  • Most of our are approximately one year, still be somewhat of an incremental expense on there, but the leverage on these things is pretty high.

  • Because, remember, when you put an eval tool into a fab, the customer makes just as big an economic commitment as we do.

  • So it is a really positive indicator that they're going to buy your tools in some volume.

  • So we kind of like high-leverage eval tools.

  • The cost of these is not used -- it's sort of in the marketing bucket we talked about, in terms of investing.

  • So -- and most of these are in our forecast.

  • - VP and IR

  • Great.

  • Thanks, Krish.

  • - Analyst

  • Sure.

  • - VP and IR

  • Thanks.

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

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

  • Pacific time today.

  • Thank you for your continued interest in Applied Materials.

  • Operator

  • Ladies and gentlemen, this concludes today's conference call.

  • We thank you for your participation.

  • You may all disconnect.