應用材料 (AMAT) 2014 Q1 法說會逐字稿

Welcome to the Applied Materials' earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead, sir.

Thank you, Brent.

Today we will discuss the results for our first quarter, which ended on January 26.

Joining me are Gary Dickerson, our President and CEO; and Bob Halliday, our Chief Financial Officer.

Before we begin, let me remind you that today's call contains forward-looking statements, including our current view of the Company's industries, our performance, products, chair positions, profitability, announced business combination with Tokyo Electron, and 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 risk factors is contained in our most recent form 10-K and other SEC filings.

Forward-looking statements speak as of February 12, 2014, and we assume no obligation to update them.

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 reconciliation slides, which are available on the Investor page of our website, at appliedmaterials.com.

Now I'd like to turn the call over to Gary Dickerson.

Gary?

Thanks Mike, and good afternoon.

In our first fiscal quarter of 2014, Applied Materials delivered earnings near the high end of our guidance range, while demonstrating momentum in revenue, orders, and market share.

This performance reflects healthy investment by our semiconductor and display customers, and major technology trends that are playing to our strengths in our precision materials engineering.

For Applied, 2013 was a transformative year.

We changed our spending profile and shifted more investment to product development.

We strengthened our organization and business processes in key areas.

And we started to prove the growth potential of our etch, inspection, and display businesses.

In 2014, every employee across the organization is focused on building our momentum for profitable growth.

We are driving performance improvements in our financial model, improving product time to market and cost, driving higher quality, and getting the organization ready for our merger with Tokyo Electron.

In recent months, we have taken significant steps forward with our preparations for the merger.

A joint Applied/Tokyo Electron integration team is developing the detailed plans to bring the two companies together.

We are delighted with the level of engagement, enthusiasm, and the strong working relationships that are already forming.

The progress this team is making gives us increased confidence that we will be ready to execute as soon as the merger closes.

Each company is meeting regularly with customers to ensure that we are aligned with their priorities.

Our discussions have centered on the value inherent in our combined ability to accelerate solutions for the industry's major materials innovation challenges.

The new company will be able to deliver more innovative products faster and at lower cost.

We will have broader and deeper R&D capabilities to address customer roadmaps more effectively and with greater speed.

By combining our field of technical capabilities and best practices, we can collaborate more closely with our customers to support the rapid development of new device performance and yield solutions.

And, through operating synergies in many areas, we can focus our R&D investments to deliver the cost of ownership and materials engineering innovations that really move the industry forward.

We remain confident that we will receive approval for the merger in the mid- to second half of this year.

And we expect to submit our S-4 securities registration statement after we filed Applied's form 10-Q for this past quarter.

Turning to our market outlook, we believe 2013 wafer fab equipment spending ended the year towards the midpoint of our range of $27 billion to $30 billion.

We expect investment levels to be stronger in 2014, up 10% to 20%, driven by higher spending in foundry and memory.

The foundries remain the biggest component of wafer fab equipment, as they ramp new factories to fulfill demand for advanced mobile chips and race to introduce new technology to enable devices with higher performance and longer battery life.

We expect foundry investment to grow 10% to 20% this year, which is very positive for Applied, as we have our strongest share positions at these customers, and continue to make gains.

Approximately half of total foundry spending this year will be focused on ramping 20-nanometer technology.

The build-out of this node creates tremendous pull for our products that enable transistor performance, and in our first quarter we generated record orders in Taiwan.

In addition, we recorded our highest ever quarterly net sales in epi, second highest shipments of medium-current implant tools, and our highest quarterly PVD orders in a decade.

Leading customers are also making significant investments in their pilot lines for FinFET.

This technology is enabled by materials innovation, and Applied has a broad and unique portfolio of products to enable this inflection.

We are collaborating early and deeply with our customers to ensure that they can quickly transition FinFET into volume production with the right performance, yield, and cost.

We also expect a stronger year of spending by NAND customers as mobility supports bit growth demand in the 40% to 50% range, and 3D technology is introduced.

We anticipate that total NAND investment will be around $7 billion, with incremental spending in advanced planar NAND and initial investments in 3D NAND.

The transition from planar to 3D NAND is enabled by materials innovation in thermal, deposition, and etch processes.

This plays directly to Applied's strengths in precision materials engineering and expands our total available market by about 25% for first-generation devices.

Overall, we are making significant gains in planer and 3D NAND.

In our first quarter, we generated our highest NAND net sales in the past 7 years.

Consumption of mobile DRAM is also growing, providing a good foundation for increased investments in 2014.

We expect DRAM customers to focus their spending on upgrading capacity to advanced nodes.

In logic, we anticipate investment levels to be flat to down relative to 2013, with a high level of focus on advanced technology.

Moving to the display market, we expect the TV unit growth rate to be low single digits for the year ahead.

However, average TV sizes are growing at 1 1/2 to 2 inches annually, which is significantly higher than historic norms.

This is driving area growth in the 15% range, which we believe is sufficient to support investment in three new gen 8.5 factories.

In mobile, screen resolution is becoming an important differentiator, and we see significant growth in higher definition screens that require low temperature polysilicon backplanes.

Consequently, we expect multiple gen 6 LTPS factories to be built in the next 12 to 18 months to support this demand.

Overall, we believe we have the potential to book $500 million of display orders over the next two quarters, although revenue patterns for the year may be uneven as this equipment is delivered.

In both semiconductor and display, materials innovation is the key to enabling performance gains and lower costs for customers.

FinFET, 3D NAND, cost effective device scaling, and next-generation displays are all enabled by precision materials engineering.

Applied's differentiated technologies and precision film deposition, materials removal, materials modification, and interface engineering are enabling these key inflections.

To support our customers' roadmaps, we accelerated R&D in FY13 by increasing our annual investment run rate in 300-millimeter semiconductor product development by $200 million, adding more than 500 R&D engineers.

We are also investing over $150 million of capital in new lab capabilities.

These investments have driven market share gains in our served market, as well as increased our overall wafer fab equipment share in calendar 2013.

We are showing momentum in our traditional leadership areas, and over the past year we have started to demonstrate excellent progress in markets that are large growth opportunities for us.

In conductor etch, we have focused our strategy in the areas where we can deliver differentiated technology to address our customers' most pressing challenges.

We believe we gained around five points of overall etch share in 2013, and continue to build momentum at leading memory and foundry customers.

In wafer inspection and defect review, we believe we gained between 4 and 6 points of share last year.

We have made investments in R&D and field technical support, enabling us to increase our layer qualification in logic and foundry.

Our UVision Brightfield inspection product line delivered record net/net sales for the calendar year, and our new UVision 6 tool has recently been qualified by a leading customer for their most advanced node.

In addition, we are strengthening our leadership in the e-beam review market.

In display, our Pivot PVD tool continues to gain traction, complementing our clear leadership position in CVD.

In the past quarter, we secured 100% of the PVD and CVD business at the industry's largest metal oxide factory.

Through increased R&D investment and focused portfolio management, we are creating a strong pipeline of new, highly differentiated products to enable future inflections in logic, memory, and display.

Over the past quarter, we have seen a number of customers accelerating their qualification of some of our most advanced products.

This underlines the fundamental role of new materials engineering solutions in realizing next-generation devices.

As we look to 2014 and beyond, we are incredibly excited about the future.

We are uniquely positioned to apply our differentiated capabilities in precision materials engineering to enable major customer inflections and cost-effective device scaling.

This provides us with a great platform to build momentum for profitable growth.

We remain highly focused on execution to ensure we take full advantage of these opportunities and to demonstrate progress against our financial performance goals.

We are preparing the organization for our merger with Tokyo Electron, a combination that will enable us to accelerate our ability to address the major materials innovation challenges facing the industry and increase the value we provide customers and shareholders.

I will now hand the call over to Bob, who will provide additional details about our performance and outlook.

Thanks, Gary.

Over the last year, we have discussed our commitment to accelerating momentum for profitable growth.

This entails a commitment to grow, grow profitably, and accelerate our growth momentum.

To grow, we are aggressively rebalancing our spending towards semi and display products and technical field resources, focused on disruptive high-value products.

This quarter, we increased R&D to 64.3% of R&D plus SG&A, which was up from 57% a year ago.

We also increased our technical field resources by almost 20% in the same period.

To grow profitably, while making these investments, we are also driving improvements to our operating margins to achieve the profitability targets we have set out for the Company.

We are driving for return on these investments in the short, intermediate, and long term.

In the short term, Gary indicated some investments that are already giving us momentum.

In inspection, we leveraged our investment in the technical applications organization to increase our layer qualifications and market share.

In etch, we rapidly iterated new products to win market share in both planar and 3D NAND.

In the intermediate term, we see returns on our investments, including more epi steps utilizing new materials, our new CVD tool, which improves critical film control, and a new CMP tool, which enables higher cross-wave for uniformity.

In the longer term, our investments are targeting highly differentiated products in disruptive applications, some of which, such as selective materials removal, are billion-dollar opportunities.

Even while investing for future growth, we are striving to improve our operating margins, which increased in each of the past five quarters, benefiting both from revenue growth and our actions to improve the model.

This level of operating margin included R&D investment that is approximately 4 points above our history at similar revenue levels.

We are driving improvements in gross margins by delivering a greater mix of high-value products in semiconductor and display, and achieving materials cost reductions.

Our Q1 gross margins exceeded our original expectations, and based on current business projections, we now expect Q2 gross margins to be better than previously communicated.

Our current projections are that Q3 and Q4 gross margins will further increase, resulting in over 100 basis points of improvement for the year.

To further improve our model, we also reduced EES spending to below $25 million in Q1, down 40% from the same quarter last year.

Our goal is for EES to break even for the year.

To accelerate our growth momentum, we are revving up our product development engine.

As Gary mentioned, we are increasing our capital investment in R&D development tools by $150 million.

Moreover, we never stop critical development projects, including during holiday shutdowns.

We are also excited about our pilot manufacturing line, which has already reduced product development cycle times while improving our initial product costs.

Next, I'll summarize some of the changes in our Q1 results versus the prior quarter.

Orders of $2.3 billion were up 9%, as growth in SSG and AGS was partially offset by a push-out of display orders.

Net sales of $2.2 billion were at the high end of our expectations.

Non-GAAP gross margin of 42.5% was up by about half a point, due to our higher silicon mix.

Non-GAAP operating expenses were $550 million.

Our non-GAAP effective tax rate was 23%.

Non-GAAP EPS of $0.23 was in the upper end of our guidance range.

Cash from operations of $372 million was up substantially, reflecting good collections and higher net income.

We paid $120 million in dividends, and ended the quarter with cash and investments up $226 million to $3.1 billion,

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

SSG orders of $1.6 billion were up 13%, with increases in foundry and NAND offset by a decline in logic and DRAM.

SSG net sales of $1.5 billion were at the high end of our expectation, as increases in NAND and foundry offset decreases in logic and DRAM.

SSG's non-GAAP operating margin increased 3 points to 24.1% on higher volume and favorable product mix.

AGS orders of $597 million were up 9%, due mainly to an increase of 200-millimeter equipment orders.

AGS net sales of $507 million were in line with expectations.

AGS non-GAAP operating margin increased over 3 points to 24.9%, driven by favorable mix and the higher spares margins.

In display, orders of $79 million were below our expectation, reflecting a customer push-out.

However, we expect a solid year for both TV and mobile investments.

Display net sales of $159 million were flat, which was above our expectations, due in part to growth in pivot PVD revenue, which achieved a new record driven by share gains.

Display non-GAAP operating margin increased by 5 points to 17%, reflecting operational improvements.

EES orders of $40 million were flat, and net sales of $40 million were down 9%.

The EES non-GAAP operating loss declined to $10 million.

Now I will provide our Q2 business outlook.

We expect our overall net sales to be up by 3% to 10% sequentially.

Within this outlook, we expect SSG net sales to be up by 6% to 10%.

AGS net sales should be approximately flat.

We expect display net sales to be flat to down 15%, consistent with the uneven revenue patterns of this business, and EES net sales should more than double.

We expect our quarterly non-GAAP operating expenses to be in the range of $550 million, plus or minus $10 million.

We expect non-GAAP earnings per share to be in the range of $0.25 to $0.29.

In summary, we are investing for growth while improving our model and accelerating our new product pipeline.

We are very excited about our planned merger with Tokyo Electron, which will provide us with more strong products and technologies to enable our customers' roadmap, a larger install base of systems to service, substantial economies of scale, and a unique opportunity to return more value to our shareholders.

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

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.

Brent, let's please begin.

(Operator Instructions)

Harlan Sur, JPMorgan.

Good afternoon, and great job on the quarterly execution.

As you look at your pipeline for the next few quarters beyond fiscal Q2, I know there's been some concern about the potential for a pause in your SSG business, just given the strong order trends especially within foundry and NAND.

Obviously there will be some digestion qualification and ramps, but obviously you've not yet seen some of your DRAM customers transitioning to different nodes.

We haven't seen the tier 2 foundries, and your logic customer have been relatively muted.

So I guess the question is, how are you thinking directionally about sort of the near-term trajectory within SSG?

Obviously we only guided to the next quarter.

We think the year is pretty good.

As we said, the year is up 10% to 20%, as we do have very large customers, sometimes there's bumps along the R&D in any given quarter, but right now we see the second half pretty good actually.

So we think the year's pretty good, and the balance between the year's pretty good.

And we think our position within these inflections is really good.

Yes.

On the foundry customers, 20 nanometer ramp is going to be a major factor in terms of CapEx spending this year.

We also see all of the customers really focused on FinFET, the FinFET transition.

That's a huge strategic battle for all of the different foundry customers.

So we sort more technology buys this year as all of those customers race to be the first to have a cost-effective FinFET device with high yield.

So we see -- and we also see, as you mentioned, a broadening relative to the foundry investments that is positive for the year.

NAND is also up, both in planar and in 3D NAND.

3D NAND, really mostly focused on technology buys for those customers.

Great.

Thank you for that answer.

And then good job on the OpEx here on Q1 and on the guide for Q2?

Bob, how should we think about your OpEx trajectory, either on an absolute basis or relative to your sales growth as we think about the second half?

Yes, I think as we said, we're basically flat in the second quarter.

I think we had some R&D projects in Q1 which we continue to push those out.

We're always aggressively managing the balance between pushing products out faster, and so we had those battles we're always monitoring.

My guess is next quarter is the high 50 number.

After that, it could be up a little bit, but not big time.

Pretty close.

Great.

Thank you.

John Pitzer, Credit Suisse.

Good afternoon, guys.

Thank you for letting me as the question.

Congratulations on the good results.

Gary, I was wondering if you could just give us some of your insights relative to your 10% to 20% year-over-year growth range for 2014?

What of the variables that, in your mind, that drive that the low end versus the high end of the range?

Is it simply how in demand for 20 nanometer plays out as they ramp that capacity?

Or are there other variable that you are thinking about within that range?

Again, any one customer shifting at the end of the year can change that number a fair amount.

If a project pushes out one quarter, that makes a big difference in terms of the end result.

But if you look overall, again, on the foundry customers, certainly 20 nanometer ramping is a big factor in foundry, and that one, it looks like that is pretty much on track.

FinFET is a big, really strategic battle for our customers, and we see a lot of focus there from a technology development perspective, not so much significant capacity buying in 2014.

But definitely that's a factor in the overall -- and then we do see incremental buying if you go below the first three customers and a broadening of CapEx spending in 2014.

NAND flash, we see certainly good demand in that market, and so planar NAND investment is definitely picking up.

And on 3D NAND, I think it's well-known one customer is ramping capacity there.

But this is really another important strategic battle in the NAND business, and we see incremental spending from a technology standpoint really across the board for all of those different customers.

That transition from planar to 3D is a tough transition.

We've talked about that being really leveraging a lot of the technologies we have within Applied on the materials innovation.

But it is a tough technology transition.

So I would say one factor is really relating to how fast that yield ramps and the cost comes down, and also the adoption of those new devices with the end customers is another factor.

And then Gary as my follow-up, just focusing on memory overall.

Clearly DRAM orders were down pretty healthily in the quarter for you, but if you look at both DRAM and NAND and you combine that for you and you look at where you are today versus some of the peak levels you saw in April of 2010 or even April 2007, you seem to be down further from peak then some of your peers.

And I guess I'm just trying to figure out what's driving that?

Is it really based upon the fact that a lot of your share gains come at 3D and you are seeing more strength at planar capacity?

Or can you help me understand why you seem to be lower off of your peak then some of your peers in memory overall?

I think as we mentioned, NAND this last quarter for us was really the highest it's been in seven years.

So we have a lot of momentum there, both in planar and 3D.

And that one, we also think will be very strong for us going forward.

A lot of tough technology inflections.

We have a really great product around a lot of these critical processes.

We talked about some of that in the July 8 Investor Meeting, and that -- we're still very much on track with what we discussed.

In the DRAM market, one of the changes that are happening there is really in the periphery, were that's becoming more logic-like.

That's another one that really truthfully hasn't been there in the past because the periphery's behind, of course, where logic is.

But that is also helping us going forward in the DRAM business.

And we do have some momentum there in other products.

But overall memory for us has been better than it's been in a long time, and we have good opportunities to grow going forward.

Okay.

Thanks, guys.

Congratulations again.

Jim Covello, Goldman Sachs.

Thanks, guys.

Thanks so much for taking the question.

I appreciate it.

Guy, on 3D NAND your comments there, I appreciate it.

We've heard some companies say this week here at our conference that there could be two customers actually running 3D NAND wafer starts by the end of 2014, not just the one significant one.

Is that consistent with your view?

And if it is, we seem to have come a long way from six months ago when people doubted that 3D NAND was even going to work to some customers actually accelerating adoption.

Well, thanks for the question.

Just with the customer, another customer yesterday, and they are planning to convert one of their factories from planar to 3D NAND, but what I would also -- and all of the customers are very focused on this technology, the he opportunity for bit scaling, it's pretty compelling.

But what I would also -- so that's absolutely correct.

What I would also say is that this is a difficult transition.

Customers are making good progress in the transition, but I think it's somewhat too early to call in terms of actually how big this will be in 2014.

Certainly 2015, there is a lot of customers that are ramping or planning to ramp 3D NAND technology.

We're in calendar 2014, and a lot of things have to line up, really, for significant capacity expansions in this calendar year.

Again, it is very compelling, but you have also a tough technology transition, and then also adoption from an end-user perspective that still has to play out this year.

That's helpful, thanks.

For the follow-up, on the foundry side, again foundry is another topic that's gotten pretty contentious lately with some people very concerned about foundry spending for the year after TSMC guided to being down a little bit.

You are suggesting foundry CapEx is going to be up comfortably.

Do think that's more of a function of some of the other foundries beyond TSMC being more aggressive?

And I know Global Foundry has made some high-profile announcements.

What do you think, there's some spending happening that might be slightly different from publicly stated budgets?

Thanks a lot.

Thanks, yes.

I think we're not going to comment on anything our customers are saying.

But we certainly see a broadening of the CapEx spending in 2014 in foundry.

And as I talked about earlier, certainly we see very healthy spending on 20 nanometer in 2014.

Since that is a very critical strategic battle in the war for mobility leadership, all of our customers are very focused in that area, and technology buys [incents] that are also going to be a factor in 2014.

This is Bob.

I don't know if you sign up, Jim, but going back to what you said, and John, every year you try and characterize and get a feel for the year.

My 2014 character is two things.

One is, there's a lot of technology inflections coming, whether it is V-NAND or it's FinFET, and tough challenging ones.

They are compelling ones when they provide great value, but there's a number of real challenging technology inflections this year, number one.

Number two, the spending is a little broader than it's been the last couple of years.

So some of the foundries you see spending money.

You hadn't seen as much in the past.

So it's spreading out more.

What does that mean for Applied Materials?

I think the technology inflections are a great opportunity for us.

And where you see us gaining share particularly are on those inflections in the foundry and NAND.

As those inflections come to bear in DRAM, particularly in the periphery, we would do well in inflections.

So inflections are great opportunities for Applied, particularly as those inflections are going to more to materials innovation.

Terrific.

Thanks a lot, guys.

I guess one more thing I would say on this one is, I really, really believe that a really key theme is around the materials inflections.

If you look at what is happening in the foundry business, it is about transistor.

Interconnect is becoming more difficult, and that's all new materials enabling these changes in device performance.

The same thing is true certainly in NAND.

And if you look at DRAM, to keep scaling those devices from a cost-effective standpoint, there are also going to be major changes in the future around materials and devices that are also playing into the sweet spot of Applied Materials.

Thanks a lot.

Timothy Arcuri, Cowen and Company.

Thanks a lot.

A couple of questions.

First, Gary, how do you think about the trajectory of this year?

You just put up $1 billion in foundry orders, and you put of $1 billion in orders out of Taiwan.

Phase 1 of a large 3D NAND project is basically done now, and we're sort of waiting on FinFET to ramp.

So do you at all worry that there's this pause sort of in the middle of the year?

Or do think that there's enough other stuff happening?

Tim, Gary just waved at me to take this one first.

(Laughter) We have got to get one of those videoconferencing systems.

So here's what, I will see if I can help a little bit.

If you look at the last couple of years, there's been a little bit of seasonality where the big foundry customers in particular buy more heavily -- give you more orders heavily in the front of the year.

Get ready, so the -- used to be back-to-school, no it's more Christmas and Chinese New Year's.

So you probably are going to get a little bit of that waiting this year.

It does look like it's not going to be a big drop-off in the middle as people predict, because we have more spread of different customers.

So it's more spread out, as I said earlier.

The second one is that we have these technology inflections.

Now, those are the ones that you guys are poking at that are harder to read.

How big is 20 nanometer, and how soon are FinFETs ready?

What we see is customers aggressively pursuing those, and frankly aggressively pursuing them with some of our tools and our solutions.

The cutover from one node to another, we're not exactly sure of the smoothness in that cutover.

The two things that make us feel better are, one, is some more customers buying for different nodes right now.

And, two, they are really aggressively pursuing these technologies because they're very compelling.

And, three, they're aggressively pursuing them with us.

So is there a little bit of a bubble in here somewhere?

Maybe, but it's hard to read because of the inflections.

Got it.

Okay, thanks.

And then maybe just, Gary, relative to the proposed merger, and I don't know if you can even answer this question, but are you saying any customer blowback?

Not from their tone or anything like that, but from them it maybe trying to shift share to other vendors in an attempt to sort of prepare for when this merger closes?

Are you seeing any of that?

Well, Tim, the key thing for our customers, they are all in really strategic inflections for their business.

If you look at the foundry customers, ramping 20 nanometer successfully is critically important.

Transitioning to FinFET technology is critically important.

This transition from planar to 3D NAND, all of those things are involving, really in the sweet spot for Applied Materials.

And I traveling through Asia probably every other week now, meeting with a lot of customers.

We still see tremendous pull from customers as these are the strategic issues, strategic inflections that are facing our customers.

And we see very strong pull, and still confident in our ability to grow the Company.

And certainly we also see a great opportunity in the combination with Tokyo Electron to accelerate our products, and the combination again we believe will help us address these key material innovation challenges for customers that are the key strategic issue for this industry.

Tim, maybe I can jump in on this one a little bit.

There is the theory put forth that customers might be concerned about that, but if you look at the track record Gary and I have been 10 years, and Gary for 18 years before that at KLA, we believe the win-win for customers and ourselves is to aggressively invest into new products which really help them get to the next device and help yield device performance.

That is the win-win.

So if you look at Varian where we went from 30% margin to 75%, it was because we got better solutions.

If you look at Applied what we are doing are aggressively putting money into products and technical resources in the field, and that's to help the customer.

So there's a long body of evidence that that's our track record, to help customers do a better job with their devices.

Okay, guys.

Thanks a lot.

Patrick Ho, Stifel Nicholas.

Thank you very much, and also congrats on the quarter and the outlook.

Maybe a first question in terms of the [EEV] story out there.

With further delays that are likely to come on that front, have you revise your etch and deposition market outlooks, given that you are going to see increased double and multiple packeting techniques?

Well, I think definitely that that provides a growth opportunity, and as I talked about earlier, we are gaining share in etch, especially in foundry and the NAND business.

So we have really good momentum there.

We are seeing strong pull from customers also in the deposition area.

Hard mask is an area where we have a pretty strong position.

And then we have new technologies, some that we talked about around selective material removal and some other areas that are coming out of the technology pipeline that also create opportunities for us.

So absolutely we look at this as a good opportunity for Applied.

Okay, great.

And maybe just a question on the memory side on the NAND side.

Customers have to make that difficult choice between migrating on the planer side as (technical difficulties) transitioning to 3D NAND.

How are you guys helping them along in that transition?

And what are customers doing in terms of making that challenging decision of extending their current technology versus going full tilt into 3D NAND?

Yes.

All of the customers are very focused on trying to make this transition from planar to 3D because it is compelling.

If you look at the big growth opportunity in the transition from planar to 3D NAND, that is a big focus for all of our customers.

And we talked about first generation.

So you have a certain number of layers that you are building up when you go to 3D NAND.

That first generation for us, we see about 25% increase in our total available market.

And we are also gaining share in the initial customers that are transitioning into 3D NAND.

One of the things we talked about at the July 8 Investor Meeting is where are the critical deposition steps as you are making this transition?

And we talked about our position in that inflection, and that, we're still pretty much on track, Patrick, with what we talked about last summer.

Certainly the inflection is around thermal deposition and etch.

We have some very strong products.

That's where a lot of this investment is going for our customers, very strong pull.

The first generation for us is going well, and we believe there are more opportunities going forward.

Great.

Thank you.

Terence Whalen, Citi.

Great.

Good afternoon guys.

This question relates to the timing of completion of the merger.

Can you update us on what your expectation is for that time?

How that has changed, and what milestones we can look for in the coming couple of quarters?

Thanks.

Nothing has really changed relative to what we've talked about previously on the economics or the timing of the merger.

We are moving through the regulatory process.

We mentioned that we'll be filing the S-4 after we file our 10-Q later this month.

So I would say we're still on track with what we had discussed before, mid- to late 2014, relative to the approval and the close.

Okay, great.

And then switching gears a little bit.

I think you mentioned you had record revenue levels in epi medium-current implant and also PVD.

Maybe just focus on epi and PVD, now that you've seen sort of initial installations of 3D NAND and also of FinFET for foundry, what are your expectations for growth of the epi segment in 2014?

And perhaps of PVD as well.

Thank you.

Yes.

I think if you look at where the industry is going, the performance gates are really being driven by new materials.

So if you look at the focus in foundry, it's how do I add more features, better performance, but I also have to have low power and battery life.

So what we're seeing, and the same thing is true again as you make the change from planar to 3D NAND.

As we talked about, it very focused on materials innovation.

If you look at future memory devices, like MRAM, very PVD-intensive type of a process, many new materials.

And I really think that these are major changes for the customers, major changes in device architecture, many new materials, and we really see that continuing.

If you look at where do people go beyond first-generation FinFET devices?

We really see more epi steps, more PVD, many new materials.

When I am talking to the customers, this is the key challenge for them.

How do they keep driving Moore's Law and make that cost effective?

And materials, if you look at what has happened with the planar to 3D NAND change, it's less litho-intensive and really focused on materials.

We see that trend continuing going forward.

Thanks.

Best of luck.

Stephen Chin, UBS.

Great, thanks.

Hi Gary and Bob.

Nice results also.

My first question was just a follow-up on the reported foundry orders in the quarter.

It looks like Applied's orders from foundries was significantly stronger than Tokyo Electron's reported foundry orders.

And I was just wondering is that because Applied has this extra month of January in it, and the month of January was a very strong foundry order month?

Or is there something more complex to that?

Thanks.

Yes.

We think we're doing very well as a Company with foundries, particularly in Taiwan, because if you look at what they're doing, Stephen, it's 20 nanometer devices, big spending early part of the year, and then later in the year it's FinFET.

20 nanometer devices use PVD tools big time for things like metal gates.

They use epi tools big time.

So the inflection that is going on at the foundry play very well to our strengths.

If you look at PVD, very strong share there, very high share in epi.

It's a growing market.

The question we just got asked about epi, everything we see empirically about the epi market is good and the directional element of the epi market feels very good.

So I think the products we offer and services for foundries are very compelling at this point.

And I think that helps Applied Materials more than other companies.

And maybe as my follow-up question on 3D NAND, maybe you could share some more color on Amex's share of etch versus deposition in this 3D versus planar transition.

It sounds like Applied is doing quite well in etch and 3D NAND.

But just curious how Applied's deposition momentum is in 3D NAND.

Is it just as many incremental wins as etch?

I just couldn't tell from the color, Bob.

Thanks.

Yes.

On the 3D NAND, I think one thing if you go back and look at what we discussed at the July 8 Meeting, basically what we did on the deposition side was lay out many of the critical steps across the largest customers, and we talked about winning 75% of those steps.

We feel very much on track with what we talked about July 8.

We have some very, very good products that provide customers with better device performance and yield, and certainly that is a critical element for them as they make this transition.

But we also have very good cost of ownership relative to other choices that they could make there.

So deposition, we look -- this year will be very strong for us.

CVD we believe that ZNAND will be strong.

Additional share gains for us in foundry.

So 2014 for the CVD business also will also be very strong for us.

Thanks, guy.

Tom Diffely, DA Davidson.

Maybe not a question on that topic.

You talked about some nice share gains last year.

I'm curious, did any of that come at the expense of Tokyo Electron?

There's really very little overlap if you look at the products that we have.

TEL is track, batch furnaces, web clean.

There's really, really very little product overlap between the two companies.

Yes, I can't think of any.

Because the only place we normally have similar products is etch.

We are focused on conductor etch, they're in dialectric etch.

Okay.

And I was wondering if you could give some broad strokes on how you think the TEL market share went last year?

We are two separate companies.

We don't have enough insight into them to comment for the them.

Okay.

And finally, you gave us the kicker.

You've got the 25% increase you got going to 3D NAND.

Do you have a similar number for going to FinFET, 14 nanometer FinFET?

Yes.

It's a similar number.

It's in the same range.

Okay.

If you look at the transition from 28 to the FinFET device node, it's a similar number.

And as Bob said, as you go beyond even first-generation FinFET, we are seeing some really strong pull for more materials innovation, more stuff like epi increasing as you go beyond first-generation FinFET.

All right.

Thanks.

Krish Sankar, Bank of America Merrill Lynch.

Hi.

Thanks for taking my question.

Congratulations on the good execution, guys.

And two quick questions.

First, Gary, you mentioned about a $7 billion in NAND (inaudible) and the overall (inaudible) $31billion to $34 billion.

I'm kind of curious, of the $7 billion how much do you think is 3D NAND, or of the $31 billion to $34 billion, what percent of your spending is 3D NAND and FinFET where you're seeing this technology inflection?

What I would say on both of those, if you look at the FinFET investment, a lot of technology buys there.

And then you have, certainly technology buys across the board in the 3D NAND transition from planar.

So it's probably 25%, 30% if you look at both of those technology transitions.

It could be higher, depending on the adoption, the rate of adoption.

But it's in that range somewhere.

Got it.

That's very helpful.

And then as a follow-up, I had a question on the clarification on the numbers you guys gave in September post the merger.

The 17% tax rate post the merger, were you incorporating in Netherlands?

Is that just as simple as reincorporating in Netherlands, or do you need to ship a certain amount of revenue out of Netherlands or have some employee, a certain number of employees there?

Mostly incorporating in Netherlands.

So just reincorporating is good enough?

You don't need any revenue out of Netherlands?

Our substantial operations are not in the Netherlands.

Got it.

Thanks.

Mahesh Sanganeria, RBC Capital Markets.

Thank you very much.

Again, going back to the foundry, definitely you reported a pretty good numbers, much better than your peers.

I'm just trying to understand the linearity of 20 nanometer and 40 nanometer.

Since 20 nanometer is going to be a smaller node, is it fair to say that the capacity addition for 20 nanometer is almost complete, and the next round of foundry orders will be more along the line of FinFET?

We still see 20 nanometer being a significant amount of 2014 CapEx.

The other thing is that a lot of the tools are similar for 20 nanometer and FinFET, and clearly a lot of the back-in-the-line stuff.

Yes.

And do you see multiple customers doing 20 nanometer, or most customers will focus on 16, 14, or FinFET technology, and there's going to be just one customer on 20 nanometer?

Yes.

As Bob said, typically what happens is the customers buy the tools for multiple technology nodes.

So when they're buying for 20 nanometer, some of those tools are also going to be used as they go forward in FinFET, some will stay as a previous technology node.

We don't really see significant production buys only for FinFET technologies in 2014.

Okay.

Thank you very much.

Edwin Mok, Needham & Company.

(Technical difficulties) 10% to 20%, I felt that (technical difficulties) obviously we're early in the year, but Bob Gary, what you think will drive the upside, downside?

Is it just (inaudible) customer, or is it specific, a few big project that might not happen or happen this year?

How do you kind of think about potential upside, downside to that range?

Upside, downside on the (multiple speakers) a little bit.

I think, I'll give you the characteristics, then the potential upsides, downsides.

The characteristics, Edwin, as I said earlier.

Spending a little bit more diverse.

You've got more, foundry customer spending money, some more memory customer spending money.

That is a good thing.

And some of those people are not all at the same technology inflections.

So that diversity gives you a little bit incremental confidence.

Second thing is, the other big thing going on this year is the technology inflections between planer NAND and V-NAND and between 20 nanometer and FinFET.

That is what everyone is debating.

We see a lot of push for those.

What would make the year bigger?

I don't know.

If it was a bigger production buys of 20 nanometer or earlier production-worthy FinFETs.

That would be the foundry issue.

Now, I do think the spread out to multiple foundry customers gives you a little bit of push-in on the volatility.

The second one on V-NAND, I think it's going to be a pretty good NAND year.

We see it in planar and 3D, the rate of transition from one to the other, it's a little hard to predict.

What I will say is common to both FinFET and V-NAND, if you look at the device benefits of V-NAND long term, very -- 3D V-NAND, very compelling, FinFET, very compelling.

But there was a lot of incentive for customers to aggressively push to those for the absolute device benefits and the competitive benefits.

Those things would make you feel a little bit more optimistic that spending will be good.

Great.

Actually that was really good color.

And then I guess one question I had on the Tokyo Electron merger.

I think you guys talk about the benefit, including some synergies, especially on the revenue side synergy.

I was wondering, how do you -- how do we think about that?

Is this something that you believe -- we should kind of think about all the technical synergy you can get, and therefore those who start ) to drive incremental revenue that we should expect after the merger is done immediately in 2015?

Or is this something that the techno-synergy will eventually lead to newer product or better product, that might, as we know in semi space it takes one or two years just to get the product into a customer hand and get qualifying ramp.

How we kind of think about the timing of those revenue synergy income?

Yes, that is a good question.

There is a limited amount that we can do right now relative to really understanding a lot of details around the technology synergies between the two companies.

But what I would say is that the big challenge facing the industry, as I talked about before, is materials innovation.

Materials innovation is really driving performance gains in logic and memory.

And we really think that will increase in importance going forward.

So to -- I really -- innovation is also connecting dots.

And to the extent that TEL has some very good complementary technologies, that we can work together in providing new solutions, we do think there is a real opportunity there.

And this is the strategic issue facing the industry, is how fast do we make these technology transitions into these new devices?

You see it today with FinFET and 3D NAND being really difficult challenges.

So we're pretty excited, as I talked about earlier, the interaction we've had with the TEL people so far has been very positive, very enthusiastic.

We would love to get working on those technology synergies.

And so we're looking forward to the close when we can start getting into more detail.

Great.

Thanks very much.

Vishal Shah, Deutsche Bank.

Hi.

This is Chad Dillon on the line for Vishal.

Thanks for taking my question.

You've been very focused on getting share in the inspection market over the past year.

So I was hoping you could discuss where you think your share is at 20 nanometer, and how it compares to 28 at this stage of new node ramp?

Yes.

We have very, very strong pull from customers.

As we talked about earlier, we are making investments in both in terms of product development and also in terms of applications support.

We've had a lot of momentum in foundry and logic, as we talked about.

We had record inspection sales in the last calendar year, and we have a very strong position in e-beam review.

And that business is pretty sizable, and we are really extending our leadership in e-beam review pretty much across the board at all of the different customers.

In the foundry business, the momentum there has been very good.

That is part is of what is contributing to our record in the foundry in the last quarter.

The layer penetration for us is increasing over the last year, really across the board.

We also talked about in logic having a customer adopting the UVision 6 for their most advanced technology nodes.

So we are pretty optimistic.

Great.

And then as you progress through 2014, what's your expectations for the first half/ second half mix of WFE spending if you break it down between memory versus foundry/logic?

So you've got two questions buried in there.

Wafer fab equipment spending first half/second half, and the second is the break down between them.

So if you look at -- I think the halves in total are pretty equal.

In terms of the mix, pretty equal too.

You have inflections going on.

That makes it a little harder to predict.

We think that the foundry could be pretty strong in the back end too if we get either 20 nanometer to have some legs or FinFET to come in.

So we are looking at both to be pretty even through the year.

Maybe 3d NAND's a little bit heavier on the front end.

Thank you.

You're welcome.

Mehdi Hosseini, Susquehanna.

Yes.

I have two questions.

One for Bob.

Going back to the slide that you had post-announcement for the Tokyo Electron merger, the $2.40 earnings based on $37 billion WFE.

How should I think about [sensitivity] of the model, or different scenarios in case, or worst case scenario, we don't hit the $37 billion of WFE?

That is a good question, Mehdi.

If you go back to the Analyst Day we had July 8, we put a couple different models up for 2016 for Applied Materials.

We had a $37 billion model, which was a 25%, 26% operating margins, and a $30 billion model, which I think was about 22%, 23%, I don't know.

It was in the low 20%s, a little less, a couple of points less.

And the models were not as important to me as what the message was.

The message was, we are not running the Company to a $37 billion wafer fab equipment number.

We are managing Applied and we're going to manage the combined company to a reasonable sort of mid-cycle number of around $28 billion, $30 Billion.

Our cost structures will be built up around that, our investments will be built around that, our flexibility will be built around that.

That's how we will manage the company.

We have had good alignment with Tokyo Electron, that they agree that that's a good way to manage a company in this industry.

And if we can do that and achieve low 20%s in a $30 billion wafer fab equipment, I think you'll have great confidence that a $37 billion happens, we will be in our model.

Okay.

And then one clarification question for Gary.

During your last conference call, you told us that in the top in the area of 3D NAND, opportunities per wafer start would increase by 30%.

And I'm assuming the (inaudible) opportunity.

And today you're talking about 25% increase.

What am I missing here?

Well, so there's really a range in terms of how much the CapEx increases for us.

There's first-generation versus second-generation 3D NAND.

It's in the range on the first generation, 25%, 30%.

These are -- it's difficult to call that closely in terms of what that exact number is on the first generation, but it's pretty significant.

If you look at some areas, some areas are out more than 50%.

Some specific markets for us are up a significant amount.

But the first generation is in that range, and of course as you know, they're going to keep going vertical to drive bit scaling beyond the first generation.

So the increase there is more.

So it's really the starting point, and sometimes people will talk about 3D NAND overall.

We're trying to be specific around first generation, what that number will look like.

Can I ask you a follow-up?

Sure.

Go ahead.

I'm a little bit confused because I understand the number of stacks goes up, the number of the steps goes up, obviously capital intensity's going up.

But we were Phoenix this past Friday, and one of the memory manufacture with the goal of having a 3D pilot line sometimes in the next 24 months is also talked about very prudent CapEx, capital intensity actually going down in FY15.

So help me reconcile the two different messages from your customers and from your equipment suppliers.

What am I missing here?

They're talking about capital intensity on the management going down after 2014, but equipment industry is saying something different.

Let me take a shot at it, then Gary will give you a better answer than I can.

I get asked this question a reasonable amount.

I get asked the question of, well Gee-Whiz Equipment Company was talking about overall capital intensity going up, number one, and number two, they do in their overall terms.

The first question I typically get asked is overall.

Well, then you have got to look at the mix.

If you go look within foundry, within NAND, within DRAM, and logic, then let's pick foundry where we talk a lot about their biggest (inaudible) share.

I don't think anyone doubts capital intensity is going up.

If you go look at how much it cost to build a 50,000 wafer fab equipment, the cost has gone up.

So within that statement, it's gone up.

If you look at logic, it's gotten more expensive.

And what you have to parse out on that one, for instance, is Greenfeld versus reuse, and reuse is a bigger issue in logic.

If you look at V-NAND, it's going up for first generation in total, but it's very much going up where we play, which is deposition, etch, and thermal.

If you look at lithography, which has been really driving the cost bus for NAND the last number of years, it's going down.

The next generation of V-NAND is probably 50 nanometer lithography versus 10 nanometer.

So it's reuse of the existing lithography.

So they can be very prudent in NAND and make total CapEx because the big cost of lithography has been eased.

What they're doing is much more cost effective for them to use things like etch, deposition, and thermal.

I think then when you go to DRAM, which is the final market, the cost has been moderate, but the cost has been somewhat obscured because you haven't had a lot of new Greenfield fabs.

So measuring is a little bit harder.

As you look at next generation, though, the capital intensity of a new (inaudible) fab is going up some, particularly because the periphery is becoming more logical.

I can [have] all the same capital intensity as foundry and logic have.

So I think you've got to look in the mix between customer type, the mix between Greenfield and reuse, and then you look at the mix within equipment type.

And I think those things are consistent with what we've said, particularly the NAND question you asked.

Okay, thanks, Mehdi.

And Brent, I know we're running a little bit over, but if we have one more on the line we will go ahead and please try to help.

Ben Pang, Northland Capital.

Thank you for squeezing me in.

First on the etch share gain, you commented on 5% share gain on the concentration on conductor etch.

Does that imply your conductor share gain is like 10%?

Yes.

I think if you do the math, that's pretty close.

Okay.

And then in terms of your wafer fab equipment outlook, a lot of technology transition, et cetera, and kind of broadening of the base.

Does that imply that the spend is going to be, I guess, less tied to the utilization rates and kind of the end demand for semiconductor this year?

I'm sorry, Ben, I lost you on that one.

Your voice faded on me for a second.

Could you just quickly repeat it?

I guess if there is, I guess, a base case for semiconductor growth in the high single digit type situation, and your utilization rates are kind of not great right now.

Do you see a big impact to the pattern of wafer fab equipment spending this year on those type of dynamics?

Since it's mostly technology transitions, I would assume that it doesn't matter whether the utilization rates move up and down a little bit, or the semiconductor demand gets caught a little bit.

That might not actually impact the spending on these technology transitions.

Is that the right way you guys are -- that I should try to think about this?

Well, the truth's probably somewhere in the middle.

I think there's a lot of majority in there to what you say.

Because in the foundry, big technology inflections spreading out to multiple customers, I think there's going to be substantive spending driven by capacity, but also technology.

I think DRAM, where you see DRAM prices pretty good, that would imply that you might have a little upside because utilizations probably run pretty tight.

As you remember, they had that fire in China last year at Hynix, too.

So DRAM might play (inaudible), actually.

We're actually going to sort through how much capacity is added between planer and V-NAND, and how much more that it might increase their sales, because if it's got better endurance and reliability they may increase their addressable market for flash devices.

So the short answer to your question is, I think you're probably right, and I think the trends are okay on that.

Great.

Thank you very much.

Thank you, Ben, for your question.

And we would like to thank everyone for joining us this afternoon.

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

Thank you for your continued interest in Applied Materials.

Thank you.

This concludes today's conference call.

You may now disconnect.