應用材料 (AMAT) 2014 Q3 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, Mike.

Today we will discuss the results for our third quarter, which ended on July 27.

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 and our performance, products, strategies, opportunities, 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 these risk factors is contained in our most recent Form 8-K and 10-Q filings with the SEC.

Forward-looking statements speak as of August 14, 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.

Thanks Mike, and good afternoon.

In our third fiscal quarter, Applied Materials delivered earnings near the high end of our guidance.

We are demonstrating substantial progress towards our long-term financial model, having now improved operating margins for seven quarters in a row.

During this same period, we have stepped up our investments in research and development to create a pipeline of new products that will enable our customers' future success and drive long-term growth for Applied.

We are in the middle of the biggest changes in semiconductor and display technologies in decades, and these major technology transitions are enabled by materials innovation.

This plays directly to Applied's unique capability in precision materials engineering.

Our strong operating and financial performance is supported by sustained investment in capacity, and new technology by our customers.

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

We have focused our strategy and investment in areas that have the largest impact for customers, and generate the best returns for Applied.

We are driving execution of our strategic plan by focusing on alignment and speed, and we are placing a significant emphasis on getting the Organization ready to scale, by ensuring that we have the right talent in the right areas.

The actions we are taking benefit us today, and pave the way for rapid integration with Tokyo Electron.

The merger with TEL accelerates our existing strategy, by bringing together both companies' complementary strengths to create an expanded set of capabilities.

This will enable us to be a higher-value partner for customers, by delivering more innovative products faster, and at lower costs.

We are engaged in dialogues with regulators around the world consistent with our goal of closing the merger before the end of the calendar year.

During this phase, we have been advised not to provide details, or answer questions about ongoing discussion.

Turning to our market outlook, mobility and connectivity trends continue to drive significant growth, and accelerate technology innovation in both semiconductor and display.

In foundry, the broadening of spending this year and the build-out of the 28 and 20 nanometer nodes is fueling record performance for our transistor businesses.

The next major focus for foundries is finFET, and we believe this will provide a catalyst for a new wave of investment in 2015 as customers start to ramp this technology.

In memory, overall investment levels remain strong.

NAND bit growth is expected to be around 40% this year.

While the bulk of this incremental demand will be met by investments in advanced planar technology, customers are now publicly discussing their roadmap for 3D NAND to achieve cost parity with planar NAND.

Based on what customers are telling us about their future investment, we believe the bit scaling advantages of 3D NAND, combined with performance improvement, will fuel 3D NAND spending in 2015 and beyond, as more manufacturers move to this new technology.

As we have said before, this transition to 3D materials-enabled devices is very positive for Applied, expanding our available market by 35% to 50%.

In DRAM, we see supply tightening.

Lower power mobile DRAM shipments are expected to grow about 60% this year, and in parallel, there are indications that an enterprise-driven PC refresh cycle is underway.

As a result, DRAM investment is increasing.

We expect technology conversions to provide the 30% bit growth needed this year, while seeing strong potential for new capacity additions in 2015.

We anticipate overall memory spending being up approximately 30% in calendar 2014, and in addition, we believe we will grow our share with memory customers by more than 2 points this year.

Looking at the market as a whole, we maintain our view that 2014 wafer fab equipment spending could be up 10% to 20% this year.

We also believe that 2015 will be stronger than 2014, as the foundries ramp finFET, more customers invest in 3D NAND, and DRAM spending increases.

In display, 2014 is shaping up largely as expected, with strong investment in capacity and new technology.

This is being driven by mobility, where higher resolution displays are becoming a major battleground for smartphones and tablets, and TV, where average screen sizes are growing significantly faster than historic norms.

In the past two quarters, we booked over $600 million of display orders, which is over $100 million higher than we expected at the start of Q2.

In semiconductor and display, the major device technology changes that are taking place are enabled by materials innovation, and this provides a great opportunity for us.

Over the past 18 months, we have aligned the Company around our precision materials engineering strategy, to drive growth at Applied Materials.

Central to this strategy is the rapid development of enabling products, and we are very pleased with how our current portfolio and future pipeline are taking shape.

This quarter, our metal deposition product business delivered its highest revenue in 14 years.

Epi, one of Applied's first products, posted its highest sales for any 12-month period in our history.

Epi remains a key enabler for next-generation transistors, and we believe the applications for epi technology will grow significantly in the future.

We are gaining share in both etch and CVD, and expect our combined revenue in these markets to grow by approximately 40% in calendar 2014.

We are also building traction with our selective material removal technology, and now have tools at five large customers.

Across the Company, we are driving actions that allow us to move faster and scale the organization.

We are strengthening our teams and processes in the field, product development, and operations.

This is enabling us to see inflections first, and deliver solutions to our customers faster.

We are in the process of making changes to our structure to better align the field, R&D, service, and operations, while getting ready for our combination with Tokyo Electron.

To drive repeatable success, we have trained over 3,500 engineers and technologists across the Company, while investing in the development of our general managers and marketing capabilities.

As technology transitions get harder for our customers, we are seeing strong pull for our service business.

We have made significant changes in our service organization to deliver better device performance and yield, as well as more competitive costs for our customers, as they ramp complex new device technologies.

By building our capabilities in areas that help customers ramp new technologies faster, and at lower cost, we anticipate AGS will deliver high single-digit revenue growth this year.

As Bob will explain in a few minutes, we are converting our focus on alignment, speed, and scaling, into superior financial performance.

The progress we are making towards our 2016 financial model is driven by strong demand for our most enabling product, in transistor and interconnect, improving performance in our businesses that are growing the most, including etch, CVD, and display, and actions we have taken to limit our exposure to the downturn in the solar market.

To summarize, Applied has great opportunities, as we are uniquely positioned to apply our differentiated capabilities in precision materials engineering, to enable major technology transitions.

We are only at the beginning of these inflections.

The ramps in finFET, 3D NAND, and new display technology will be the next of multiple waves of investment by our customers.

We remain highly focused on execution, to ensure that we can take full advantage of these opportunities, and can rapidly scale the organization, when we merge with Tokyo Electron.

Our teams around the Company have already accomplished a great deal.

The progress we are making towards our strategic and financial goals would not be possible without the hard work and passion of our global employees.

Now, Bob will provide additional details on our performance and outlook.

Thanks, Gary.

As Gary discussed, we have aligned the Company around a growth strategy that is creating a pipeline of differentiated products to enable our customers' success, as they make unprecedented technology transitions.

Before I get into the detail of our third-quarter results, I'll spend a few minutes talking about our focus on execution, how this is translating and will continue to translate into stronger financial performance.

Let me provide some details about how we are executing better and faster in key business, how we are making sustainable improvements in our operating model, and how these improvements are translating to stronger financial results.

Here are a few examples of better, faster execution across the Company:

In SSG, market share gains are being helped by a significant reduction in our product development cycle.

In AGS, we are driving profitability improvement with the introduction, of new device performance and field service products, and tighter alignment with SSG.

In display, we reduced our factory overhead costs and inflation cycle time.

In EES, we expect to be above breakeven, and cash flow positive this year.

And for the Company as a whole, we have been reducing our tax rate with the implementation of a more efficient tax structure.

Now let me give you some examples of the sustainable improvements we are making in our operating model.

We have increased resource allocation for SSG and display, areas where we have superior opportunities to grow revenues and margin.

Within SSG, we have increased our focus on the products that are most enabling our customers, and where we have great opportunity to grow.

These areas include epi, CVD, etch, inspection and PVD, and we are relentlessly focused on reducing materials and overhead costs.

For the year, we are on target to achieve a 2% reduction in material costs.

Our strong execution is translating into improved financial performance.

On a non-GAAP basis, Q3 gross margin was at a six-year high, and our full-year gross margin could be up 2 points, approaching 44%.

Q3 operating margin was at a three-year high.

The full-year results could be up by 6 points.

The fiscal year tax rate could be down by 1 point or more, and is making progress towards our 22% target.

And operating cash flow was at a two-year high.

Our focus on execution, alignment, and speed is translating into stronger financial results today, enabling us to make solid progress toward our long-term model, and getting the organization ready for our combination with Tokyo Electron.

Now, I will provide more color on our third-quarter results, as compared to the prior quarter.

Orders of $2.5 billion were down 6% sequentially, driven by SSG orders which tend to be seasonally lower this time of year.

Compared to the third quarter of last year, orders were up 24%, and our book-to-bill ratio was greater than 1 for the seventh consecutive quarter.

Backlog was almost $3 billion, with SSG backlog at a new six-year high, and display backlog at a five-year high.

Net sales of $2.3 billion were near the midpoint of our guidance.

Non-GAAP gross margin increased to 45.5% in Q3, which included 0.8 points in nonrecurring benefits.

Even excluding these benefits, gross margin improved by [1 point].

Non-GAAP EPS of $0.28, was near the high end of our guidance.

Our operating cash flow was $584 million, or 26% of revenue.

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

SSG orders of $1.6 billion were down 6%, with decreases in DRAM and foundry more than offsetting small increases in (technical difficulty).

SSG net sales of $1.5 billion were down 7%, and slightly below our expectations, due to some changes in the timing of customer fabs.

SSG's non-GAAP operating margin increased 1.4 points to 28.7%, reflecting favorable mix.

SSG's operating margin performance was at the highest level in almost three years.

AGS orders of $552 million were up 3% sequentially, and up 7% year over year.

AGS net sales of $567 million were slightly higher than expected, an increase of 14% year over year.

AGS non-GAAP operating margin decreased slightly to 27.2%, and remained near the highest level in seven years.

Display orders of $296 million were the second highest in the past six years.

Display net sales of $119 million declined, in line with our expectations, while backlog grew at very high levels in anticipation of this.

Display non-GAAP operating margins increased by over 4 points to 22%, including a benefit from the sale of some previously reserved inventory.

Display's operating margin was the highest in the past three years.

EES orders were $66 million, while net sales increased to $103 million.

EES non-GAAP operating income was $25 million, including the benefit of a favorable litigation outcome.

Now I will provide our fourth-quarter business outlook.

We expect our overall net sales to be flat, plus or minus 3%.

Within this outlook, we expect SSG net sales to be down 1% to 7%, AGS net sales flat to up 4%.

We expect display net sales to be up over 60%, and EES net sales should be down approximately 35%.

Non-GAAP gross margins should be approximately 44%, which would be up almost 2 points year over year.

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

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

In summary, our strong financial performance, and the progress we are making towards our long-term model, is being supported by sustained investment by our semiconductor and display customers, our precision materials engineering strategy, which is focused on enabling major technology transitions for our company, and our focus on improving execution, alignment, and speed.

With that, 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.

Mike, let's please begin.

Jim Covello, Goldman Sachs.

Good afternoon, and maybe in the case of Gary, maybe, good morning.

Thanks for letting me take a question.

A couple of them.

There's a couple of new DRAM fabs that are being built out, and then of course there's a much-discussed build-out from one of the other foundries, who's trying to play a little bit of catch-up on finFET.

Could you give us a little bit of perspective on the timing for new orders for those projects?

I know in particular on the foundry project, different equipment suppliers have seen those orders at different times.

So I'm wondering how much of that is still on the converse, as how much of that you might have already seen, and then same thing on the DRAM side?

Thanks.

Sure.

The big drivers of technology, as I said quite early is that finFET VNAND, so if you look at finFET, still very positive, we think it's a little more heavily weighted to early 2015 than late.

If you look at the NAND some of that (technical issues) DRAM was a pickup (technical issues) question.

That is helpful.

Thank you, and then if I could follow up, you guys done a terrific job on the gross margins.

I think that you had commented at SEMICON that it was the highest gross margin -- quarterly gross margin in six years and then you did another nice bump up this quarter.

What are the biggest incremental drivers of gross margin from here?

Is it just volume?

Mix?

Or lower component costs?

Or how would you categorize the bridge between where you are today and wherever you might be able to go, so it's been very impressive so far.

Yes.

There's two sets of opportunities, Jim.

The one that is most disruptive and sexy and attractive is the new disruptive products that are really invaluable to the customers.

And those frankly are starting to come, especially next year, we'll see more of that.

The progress we made to date is just managing things tightly.

If you look at our gross margins across virtually every segment, AGS, solar, display, and semi too, so it's blocking and tackling.

Traditional operating costs, traditional [drill] costs, better mix, driving better mix into revenue sales, and better mix between segments.

I think these systemic things just grinding away at mix, cost issues, positioning, and heading on the right products is going to help us, quarter in and quarter out, for the next several years.

I think the disruptive new products coming out more next year, so we do have two opportunities there.

One is very systemic and one is coming out.

Yes.

What I would say also Jim is that the -- as we've talked about, these transitions are really in the sweet spot for us, with all of the precision materials, engineering technologies, and products that we have.

And really the customer pull is stronger than we've ever seen.

Our percent of the TAM increases as some of these materials-enabled devices start to ramp, so as Bob said, that's the key strategic issue for our customers.

And that's really what gives us a great opportunity to grow our business over the next few quarters and over the next few years.

Very helpful.

Thanks so much.

Good luck.

CJ Muse, ISI Group.

I think first question was, hoping to get an update on integration efforts with TEL.

You provided some great info at SEMICON and prior to that.

We would love to get an update there.

Yes.

Thanks for the question CJ.

On the merger, we are absolutely convinced that this is the right strategy to bring more value for our customers, drive innovation with better products, faster and lower cost.

I think, as we continue to work together, we're more and more convinced of that, and that really is accelerating our existing strategy in materials innovation, and really focused on the key challenges, the key strategic challenges, that our customers have, so that's been going very well.

The integration planning has really been tremendous.

We talked as you said, last month a lot about that.

Relative to the organizational structure.

We are aligned on the culture and the mission, vision, and values, the operating rhythm.

And what I've seen is just continual building of those relationships and excitement of all the key people on both sides, so really just tremendous progress ahead of where we thought we would be at this point.

I agree with Gary.

I think on the mechanics integration, which seemed to be a question, it's going actually really well, better than I would have expected.

And engagement by the teams has been really good.

Working relationships have been strong.

The rhythm of it, in terms of operating organization, how we will be do business together.

It's been pretty darn positive.

I think we see line of sight to the synergies.

Pretty damn good, I'd say.

That's great and if I could ask a follow-up, it looks like revenues came into the low end of the range, and the culprit was silicon.

At the same time your backlog actually grew there, I think 4%.

So I'm curious, how should we think about the timeframe of recognizing revenues there, and does that suggest a strong January quarter, and/or does that kind of bleed into the first half of 2015?

Yes.

We do have really strong backlog actually, and (technical issues) we've been talking about the display backlog in orders for a couple of quarters.

We're going to start to give some significant benefit from the display backlog in terms of the revenue line next quarter.

SSG backlog will help us next quarter, but I think some of that benefit will also go into fiscal (technical issues).

Great.

Thank you.

John Pitzer, Credit Suisse.

This is Farhan asking a question on behalf of John.

My first question is regarding the breakout of orders within SSD, did you provide a breakout between NAND, DRAM, foundry and logic?

I may have missed it on your commentary.

We didn't provide --

Yes.

It's in the press release, Farhan.

So we can definitely pointed out to you later.

Okay.

That's fine.

Okay.

And then in regards to 2015 expectations you talked about significant ramp in 3D and also on DRAM side.

Your persisting that there could be a pick-up as capacity additions may possibly resume.

From in terms of your outlook for 2015, what segments do you expect to grow more, if you could just give us a sense of, is their strength more in foundry or is it more in memory?

Well, so first of all, 2015, we think will be an up year, as we talked about before.

The major changes that are happening in 2015, we see that the investment in finFET technologies are going to pick up a fair amount.

It should be, our current forecast is something like 50% of the foundry business will be investing for those technologies in 2015, and we see foundry investment maybe up slightly in 2015.

The memory business for both NAND flash and DRAM, we see both of those being up, and also, as we talked about before, we see 3D NAND investment in 2015 increasing significantly from where we're at in 2014.

So those are the major drivers.

Thank you.

That's all I had.

Timothy Arcuri, Cowen and Co.

A couple things.

Bob, I wanted to ask about the performance of the Company this calendar year versus what your financial model is, and I understand that the financial model is a 2016 model, so maybe the answer is just time, but this year you're going to do -- if like WFE is sort of in the low 30s, maybe it's 32 billion, I think is what you are now saying.

You're going to do somewhere in that $1.10 range if you assume that the January quarter is not like heroically up or down, and your financial model has you doing $1.50 at 30 billion WFE, so my question is what is going to happen or sort of what has to happen to get from where you are this year to where the financial model says you'll be, because there still seems to be a big gap?

So, I've got to check the math.

I think if you go $1.50 it's 30 billion, frankly.

This year, it's about a 31.6 billion to 31.9 billion WFE.

But if you look at -- we've got a gain of -- we said in the model we are going to get to 19.9% wafer fab equipment and SSD, we ended last year at 19.1% we haven't forecasted it this year, but the year before it was 17.7%, so we gained 1.4% through last year, in wafer fab equipment.

We continue to be optimistic that we'll get to the 19.9% from the model.

The second thing is gross margins.

I think at the 30 billion model we were at like 44 or 45 and the quarter just ended, and we did 45.5.

This year will probably be around 44.

So it's a little higher volume -- 31.6 billion versus the 30 billion model, so we are actually getting there.

OpEx I think in the 30 billion -- I'm doing this from memory, Tim.

I think it was like a 2.2 or something like that.

2.1.

So right now, we are trending to be about 220 on about $100 million extra expense.

Still over 450 span in our numbers, and we got some managed expenses and inflation a little bit, we're off about 100.

Tax rate, we said would be 22% in that model, and right now we're running a full year, I think we're going end up around 23% or 24%.

So, and I feel pretty good about the 22% getting there.

If you look at -- I think we're about 70% of effect.

We've got to get a little more share gain, a little more gross margin, manage that expense a little bit, taxes a little bit.

With respect to math, I guess we are a delta you're right, but those are the levers and I think we're about 65%, 70% there.

You're right.

It is delta.

Awesome.

Okay.

Thanks, Bob.

And then just a follow-up on the fourth calendar quarter, if you look at the numbers that Semi puts out, the right rate for Q1, WFE was $34 billion -- $33 billion or $34 billion, and Q2 is like $30 billion.

Then most companies, including you, are guiding Q3 down just a touch, so maybe you're in the $30 billion range.

If the full year is going to be $32 billion, than the fourth quarter has to be a pretty good quarter to get you to $32 billion for the year.

Is that what you see right now, that the fourth quarter is going to be up pretty sizably in SSG?

Yes.

We haven't guided to Q1 yet, but we think Q1 is probably stronger, fiscal Q1 is probably stronger, which is a (technical issues) [number], it's been that way pretty often in the recent past.

And, if you think about, as we talked about earlier, Tim, about technology transitions and VNAND and finFET -- there's still a little bit in the middle of this year, but they still look very committed to those.

So my guess is that the fiscal Q1 for us or the calendar Q4 for the industry is probably positive.

Awesome.

Okay Bob.

Thanks so much.

Harlan Sur, JPMorgan.

Given the complexities, both process development and yield ramps associated with some of these next-generation technologies, it looks like your take rate and attach rates on services are growing nicely.

I think you guys said that you anticipate high single-digit percentage growth this year.

Given what appears to be a continuation of this complexity trend, would you expect similar type load of growth going forward?

And at this type of growth rates, are you driving OpEx leverage?

Yes.

We definitely see opportunities in the service business, as customers are going through dramatic technology transitions in foundry and memory.

It really creates a great opportunity for us.

We've done a lot in terms of aligning our service strategy to those opportunities.

We have changed the organization structure, so there's tighter alignment between SSG and AGS.

So we're really focused on those device performance and yield and cost challenges, as customers are making those transitions.

We're seeing good response from customers, so strong pull for those types of capabilities.

As customers are making these transitions, getting the particles to the level they need to be, to get good yield, edge die yield, uniformity, all of these things are harder and harder.

And we're aligning our Company, and our strategy, and our structure, to really provide more value for our customers, and drive those opportunities.

So we see, as we said, the single-digit revenue growth this year.

But we really see this, as you talked about, as a great opportunity for us to continue to drive the service business going forward, and we see a lot of leverage also, as that business grows.

Great.

And then on the selective removal platform, I think it SEMICON you pegged this as about $1 billion opportunity.

You talked about tools are being placed with five large customers.

What technology nodes are your early customers looking to use this solution and high-volume manufacturing, and is it more targeted for front-end focused or back-end focused applications?

Thank you.

Yes.

Thanks, Harlan.

So we've already seen some cases were customers are putting the selective removal technology into production, but we really see this more, as you go forward to some of these future device technologies.

Especially, we've seen adoption of this in memory.

And there are a number of different -- potential opportunities in patterning.

You have things like pattern collapse.

As you're going vertical to the -- through the taller 3D types of structures with the tighter design rules; that's where you start seeing the current technologies running out of gas, and an opportunity for us to implement the selective removal technology.

So we do see some, already, layers going into production with this technology.

Certainly we'll see it ramping next year, and then probably the year after that, even stronger adoption.

Thank you.

Romit Shah, Nomura.

Very solid results.

The spending environment has been under a little bit of pressure recently, but we're seeing, what I think is at the higher level of stability in your revenues, compared to some of your peers.

And I'd love your perspective on that.

Is that just seasonal, or do you see your business as inherently being less cyclical?

Yes.

I think generally the semi industry is a little less cyclical, a little more seasonal, as you go to more and more consumer products per chip versus [the] (inaudible).

So I think that's true and I think a lot of people believe that.

The display business, half of it or 60% of it, is cyclical, big [TD] size, 4 TD capacity added.

I think you're a little bit more systemic growth on the smaller screen sizes.

Phones, and iPads, things like that.

So net-net, between semi and display I think we are trending more seasonal versus cyclical historically, and then the other thing that's going pretty well for us, the service business, looks like it's going to get some growth.

And also the solar business, the growth is moderate, but the profitability is going up.

Helpful.

Thanks.

And SSG revenues were a little bit lighter, but margins were a lot better.

Bob, you mentioned mix.

I was hoping you could provide a little bit more color on what was it within the mix that drove the better margins there?

Yes.

A couple things.

One, I think the revenue side I was actually, in hindsight, relatively pleased.

We had strong bookings, revenues were a little under what we thought, but there were things that transpired in the quarter that happened there, that we managed it pretty well.

And then if you look at our peers, our guide and our actuals -- our second quarter, our third quarter and even our third quarter, our fiscal fourth quarter we compared pretty well actually.

For the revenues in SSG and the company are holding up okay.

If you look within SSG revenue, which you asked me on the margin, we're making some progress in most of the products in some margin, it's cost reduction, it's efficiency, it's selling more update products; it's all of the execution things you think about everyday, for those projects trend up a little bit.

What we are very optimistic about is that the money we've invested last year is -- couple years really, in R&D and SSG.

Because we put heavier weighting of that this year on 300 millimeter products versus 450 last year.

We think those are going to give us some more lift on opportunities in the revenue and gross margin line.

Thank you.

Krish Sankar, Merrill Lynch.

Thanks for taking my question.

The first one I had is for Gary.

If you look at the three big technology inflections next year, 3D NAND, finFET, and multi-patterning DRAM.

In your WFE assumption, which do you think, in terms of dollars, which do you think is going to the biggest?

Do you think 3D NAND or finFET?

In terms of dollars, the finFET -- or the foundry spending is going to be higher than 3D NAND.

And what we see in both the finFET and 3D NAND is a real strong transition to both the finFET as a percentage of that spending, and also 3D NAND, as a percentage of the NAND flash spending.

So, in both cases, we think that the spending for those new technologies are going to be around 50%.

And as we have said before, that's very positive for us, because we have great products and enabling new transistor technologies, and 3-D NAND is really materials-enabled versus litho-enabled, so it's very heavy in areas where we have a very strong position.

So, in both cases, we see about half of the spending next year being those new technologies.

Foundry is about 2X the total spending versus 3D NAND, so that would mean that the finFET is more heavily a percentage of our revenue versus 3D NAND.

Got it Gary, that's very helpful.

And just as a follow-up, you mentioned in your prepared comments about capacity additions in DRAM next year, despite technology changes this year.

So next year, when you look at capacity additions, can you try to quantify or help us quantify, in terms of wafer starts or what do expect for DRAM capacity adds to be in calendar 2015?

Yes.

What we see in DRAM next year is up some, versus 2014, but if you look at 2013 to 2014, the WFE spending really is going up pretty dramatically.

We have it up in the 30% to 45% range in terms of total WFE spending in DRAM.

And we see it up slightly, maybe less than 5% next year, is our current view.

And on the capacity versus technology, we see it much heavier weighted in capacity buys, versus technology buys in 2015, but that's our current view.

Got it.

That's very helpful.

Thank you, Gary.

Steven Chin, UBS.

Just wanted to follow-up on the segment operating margin.

Maybe to start with, if Bob you can share some color on the rising unallocated corporate expenses?

Is that mostly the merger with Tokyo Electron and does that go away after the merger is completed, so maybe there's room for additional operating margin improvement from that corporate line?

If you look at GAAP versus non-GAAP, we have a couple of points of spread in our GAAP and non-GAAP CVC tax income.

Generally the spend is getting tighter but there's about -- most of that is the Tokyo Electron.

And then, we also have the corporate sometime bonus plans.

I think a lot of that you're looking at is the non-GAAP related (technical issues) costs.

Okay.

Thanks.

And then maybe a follow-up question on the improving gross margins.

How much are gross margins benefiting from this diversification of spending by the customer base, especially in foundry?

The question is can gross margin possibly see another tailwind as customers, not named Intel or TSMC or Samsung Memory, become a bigger piece of your sales?

Let me go back and give you an answer here before I give you more color, Steven.

What we've done to date, is we've done a lot of good blocking and tackling.

In places like DES, where we have kept the costs down, run it back as a breaking business, but raise gross margin, that contributes to the confidence.

If you look at display, it reduced their overhead cost, getting valuable products, the whole mix of things has been done well.

If you look at AGS, trended up a little bit with gross margins there too, so it's all of the blocking and tackling across the Company.

So you can't take it as a heroic thing, you just look at just good blocking and tackling and execution and broad range of activities.

Within SSG, specifically where you're talking about, there's things -- blocking and tackling has probably helped us some.

The second thing that helps and hurts periodically in quarters is just mix of the individual products, so we're actually gaining share in etch, which we are talked about, and we are very pleased with.

But the gross margin is a little bit lower in these early etch pools, and it's not pricing, it's just etch is always a little bit lower for us in the last 20 years.

So the mix within quarters, once in a while, goes up and down but the systemic thing in SSG -- the blocking and tackling is getting better.

New products are coming which will help with SSG, you're timing mix quarter to quarter, which is plus or minus.

Now, the question you're asking is mix between customers.

We don't typically talk about mix between customers.

The configurations, the difference, the mix product feels different, but generally we think we are in line of selling more valuable set of products to all of them.

Thanks, Steven.

Sundeep Bajikar, Jefferies.

Would you please provide your perspective on Applied's display business in China?

What's your outlook for new investments in the display technology from China over the next year, and how would you categorize the competitive landscape over there for display equipment?

As part of that, perhaps also help us understand, is there any major synergies between Applied's display business and semiconductor business in China?

Thanks.

Thanks, Sundeep.

The business in China for display is definitely very strong.

And as we've talked about before, our customers are going through transitions in amorphous silicon, to LTPS, to metal oxide, and organic LED types of display technologies.

Our market share performance in display is really exceeding our expectations.

We have very strong products, as customers are ramping these new factories, and ramping these new technologies.

So we're -- China is a big percentage of our business right now, I think we recently announced an order where we had 100% market share in one of the big factories there.

So overall we are very, very optimistic about display.

We talked also about the last two quarters having more than $600 million in orders.

So the overall momentum there is very good, and as Bob talked about, the team is really outstanding.

There executing really well in terms of their new product introductions.

They've cut their install cycle times down dramatically, a lot of different things they are doing there, not only from an innovation standpoint, but also from an execution standpoint.

Okay.

That's very helpful and just a follow-up -- how much exposure doesn't Applied have to flexible OLED display?

If you see a product and technology ramp in flexible display, say in the next 6 to 12 months, is there a chance we would see impact in Applied's fundamentals?

We do have products, so OLED with the current displays -- the TAM opportunity for us goes up by about a factor of 2. And so that's a very good opportunity for us with existing technologies.

We also have some new technologies that we are seeing traction, with some of these flexible products, that are being -- the early ones, that are being adopted by customers.

And we have opportunities there with new business; we're seeing the early indications of that, but we definitely do have opportunities there also.

I think Gary, on that one, it also grows our addressable market, with flexible.

Absolutely.

Great.

Thank you very much.

Patrick Ho, Stifel Nicolaus.

Maybe first question, in terms of the share gains you have generated over the past year or so, as we look at 2014 versus 2015, as finFET and 3D NAND ramp even higher next year, how much of the share gains will we see realized in 2015, given that Bob, I think you mentioned some of the new products that are out there?

How much of more will we see that impact -- hit the Company's top and bottom line in 2015?

Yes.

We think a few things slated for us in 2015, Patrick.

One, we think we could gain share.

The addressable market for those products is growing fast, and we think we'll gain share.

Those markets tend to be around CVD, etch we think will do well, some CMP steps are being added, believe it or not, we're in some of those structures.

So it looks pretty good for us.

The second thing is mix of customer spending should play a force for us, number one.

Number two some of our tools that we are offering in there will play for us, and then three, within the mix of that customer spending its more -- first point of mix was between customer, and second was in the type of products they're buying.

3D and finFET are more heavily weighted, so that's where we're gaining share.

But I think all of those will play for us usefully on the architecture opportunities in 2014.

Great.

And maybe a specific question for you Bob, looking at the last several quarters, you have done a really good job in terms of inventory, as well as DSOs and the supply chain.

If you can give some of the examples of what you've done on those fronts, to improve the balance sheet metrics, as well as cash flow generation.

Yes.

You know some of the stuff isn't glamorous.

I think the whole company has been through this stuff.

If you think of some of the stuff we've told you today, whether it's the display tools, we structured the money on, the inventory pulled forward, some of the stuff is a customs audit and career.

It's just a lot of good blocking and tackling going across a wide range of people in the company, and it feels like it's building momentum.

That's a good thing.

In terms of higher-level principles, we're taking more strategic deals with supply chain, I think, in terms of the ramp, IP, cost, and sourcing opportunities.

I think we are starting to subsegment our supply base into people who have high IP versus low-cost opportunities.

I think we are tackling a little differently.

I think if you look at our new products, as we're going to ship into new products, we're taking a deeper view of the IP opportunities in those new products.

We have stable differentiation ourselves.

I think we are probably taking a more strategic view of it, and that's developing and looking better and better.

In terms of the balance sheet, it talks about inventory receivables, I think we are doing better.

It's a big opportunity to be honest with you, but I think inventory, how we manage our inventory, impacting end service (technical difficulty), we made some progress; I think we can continue to make progress.

Great.

Thank you.

Mike, I just -- we are running a little low on time, I wonder if we could have one more question on the line.

Mahesh Sanganeria, RBC Capital.

I just wanted to follow-up on the flat-panel display, again.

You had pretty high level of orders.

I think you have to go back to 2008 to get to those levels, and historically, those have been very lumpy.

Can you give us a sense of what the yearly land rate are you thinking of right now?

This year and next year and 600 to 700 kind of range?

Or some help on that would be good.

What we talked about in our financial model was to get to $1 billion run rate in the 2016 model, and we feel really good about the progress we're making.

We also talked about, as these new technologies are introduced, LTPS, metal oxide, organic LED, some of these flexible substrates; all of those are great for us, from a TAM growth perspective, and some cases as much as 2X larger TAM, versus where we're at today.

So the market, we have really good pull, relative to the total available market.

And also, our market share is growing pretty significantly, in the display business, so we are very optimistic.

From a model standpoint, we're still on track with what we talked about in the 2016 model, around $1 billion is that goal.

And then, one question on SSG.

You talked a little bit about the memory growing 3% this year and maybe DRAM growing 5% this year.

So is it fair to say that this year's growth primarily coming from memory and next year growth maybe more driven by the foundry?

Well, so if you look at the wafer fab equipment spending in 2014, we still have the view that it's up 10% to 20% versus 2013.

The areas that are growing are foundry, the NAND flash, and also DRAM.

All of those areas are up a fair amount.

In the foundry case, it's more a broadening of the customers that are spending, but all of those are up a fair amount.

And our current view, based on what we're hearing from customers is that 2015 is going to be a stronger year than 2014, and we see still strong spending in the foundries in 2014, and incremental improvement in the memory business.

But within that, you also have, as we talked about, major technology transitions that are happening in the foundry and in NAND flash that are very positive for us.

Mahesh, we are still guessing at 2015, obviously, but if you asked my opinion, and Gary said they're all up, probably the biggest percentage growth of those three is probably NAND.

Okay.

Thank you very much.

That's very helpful.

Thank you.

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

A replay of this call will be available on our website beginning at 5:00 PM Pacific time today.

Thank you for your continued interest in Applied Materials.

This concludes today's conference call.

You may now disconnect.