應用材料 (AMAT) 2015 Q2 法說會逐字稿

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  • Operator

  • Welcome to the Applied Materials earnings conference call.

  • (Operator Instructions)

  • As a reminder, this conference is being recorded.

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

  • Please go ahead, sir.

  • - VP of IR

  • Thank you, Kyle.

  • Today we will discuss the results of a second quarter, which ended on April 26.

  • Joining me our 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 Applied's current view of its industries, performance, products, share positions, profitability and business outlook.

  • These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements and are not guarantees of future performance.

  • Information concerning these risks and uncertainties is contained in Applied's most recent Form 10-Q and 8-K filings with the SEC.

  • All forward-looking statements are based on Management's estimates, projections, and assumptions as of May 14, 2015 and Applied assumes no obligation to update them.

  • This webcast 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 Investors page of our website at Appliedmaterials.com.

  • Also, as reminder, Applied will hold its next analyst meeting in San Francisco on Monday afternoon, July 13 preceding the SEMICON West trade show.

  • We hope to see many of you there.

  • And now I'd like to turn the call over to Gary Dickerson.

  • - President & CEO

  • Thanks, Mike, and good afternoon.

  • In our second quarter of FY15, Applied delivered our highest quarterly revenue in the past three years and earnings near the top of our guidance range.

  • These results reflect robust customer investment in both semiconductor and display, and most significantly, that Applied is delivering the enabling products and services our customers need as they transition complex new devices into volume production.

  • The magnitude of the technology change facing our customers is unprecedented and this creates incredible opportunities for Applied Materials, now and in the future.

  • Our core competencies and unmatched talent in materials engineering provide a great platform for profitable growth.

  • Applied has a compelling strategy, we are investing in that strategy, and making meaningful progress towards our goals.

  • The traction we are demonstrating is made possible by our employees' relentless focus on moving the Company forward and their tremendous passion to create value for customers and investors.

  • Over the past few years, we have been driving significant changes are across the Company, strengthening our capabilities and processes, while aligning the Organization to take advantage of our best opportunities.

  • We have are aggressively shifted spending within the Company to better support our customers, provide additional fuel for product development, and improve our financial performance.

  • By increasing investment in key areas, we have created a pipeline of differentiated products that will accelerate Applied's growth and we are already seeing a positive impact.

  • Starting with our semiconductor equipment business, the trend is clear: we are winning market share.

  • Over the past two years, we have increased our overall share in wafer fab equipment around 1.5 points and, based on our current view of customer spending, we expect to build on those gains this year.

  • Our traditional leadership businesses, where we have high share, remain strong, and in 2014, we added around 3 points of share in both PVD and epi.

  • We have our strongest momentum in the areas of the market that represent large growth opportunities for us.

  • Our combined revenues in CVD and Etch were up over 50% year-over-year, significantly outgrowing the market.

  • This past year, we gained 2 points of share in CVD, and we have highly differentiated products in our pipeline that will expand our addressable markets.

  • We are very excited about how our new products are positioned and will provide more details about our progress at our analyst meeting in July.

  • Since 2012, we gained 7 points of market share in Etch, including 12 points in Conductor Etch.

  • In the past two quarters, the installed base for our latest generation Etch system has grown from 10 chambers to more than 160.

  • This is one of the fastest adoption rates for any new Applied product, and customers are telling us they see technical advantages in uniformity and defect performance.

  • We believe our technical position is getting stronger and this provides a foundation for future share gains.

  • We are also driving growth in our service business, where we delivered our highest ever quarterly revenue and we are on track for a record year.

  • At both the leading and trailing edge, our customers face incredible challenges as they strive to bring new innovations to market, faster, and more efficiently.

  • By helping our customers solve their device performance, yield, and cost challenges, we believe that service can be a meaningful component of our long-term growth.

  • We have adapted our strategy, strengthened our team, and are bringing together capabilities from across the Company to deliver expanded service offerings that provide more value for our customers.

  • Service and spare parts revenues have grown more than 17% from this time last year.

  • During this period, we have significantly increased the number of tools under service contract which we believe is one indicator of our growth potential.

  • Turning to display, we expect 2015 to be a third consecutive year of double-digit revenue growth and to increase our overall share by about 2 points.

  • As we've highlighted before, our revenue and margin profiles in this business can be uneven.

  • While we see some margin headwinds in 2016, due to customer mix and a weak yen, overall market trends remain a positive.

  • As the display industry introduces new technologies, customers' manufacturing processes are becoming more complex and capital intensive.

  • We have invested in a strong portfolio of products aimed at enabling next-generation TVs and mobile displays.

  • One example of this is organic LED, which expands our served available market.

  • We recently received a large order for our OLED Encapsulation tool, and in 2015, we expect to book about $200 million in this new application.

  • Overall, our growth trajectory and semi and display is supported by a sustained period of industry investment in both capacity and technology.

  • Even after recent customer announcements have been taken into account, we still believe 2015 wafer fab equipment investments will be up slightly over 2014, driven by increased memory spending.

  • Sustained NAND bit growth in the 35% to 40% range, similar to 2014, enables these customers and to maintain their investment levels.

  • We expect 3-D NAND to represent more than 40% of NAND investment in calendar 2015 and installed capacity should exceed 120,000 wafer starts per month by year-end, which is only around 10% of total NAND capacity.

  • This inflection not only increases our available market, but is also enabling us to gain share.

  • Based on the positions we have won, we believe that in the transition from planar to 3-D NAND, we will increase our served market share by at least 5 points at these customers.

  • In DRAM, supply and demand remain well-balanced and we anticipate bit growth of 25% to 30%.

  • We are expecting this to translate to an increase in customer spending of 15% to 25% relative to 2014.

  • These investments are primarily focused on 20-nanometer upgrades for mobile DRAM with some capacity additions.

  • In foundry, the leaders are engaged in a fierce battle to ramp FinFET technology at the right yield and cost.

  • The intense pressure for our customers to accelerate volume production of their FinFET devices is a major area of focus for Applied, and creates a great growth opportunity over the next few years.

  • In summary, our customers are making incredible advances in technology, enabled by materials innovation, and this plays directly to Applied's strengths.

  • Across the Company, we are making meaningful progress towards our growth goals and driving opportunities to accelerate our strategy.

  • Going forward, we are prioritizing three areas to further improve execution.

  • First, we feel very positive about our new product pipeline and our ability to drive growth at Applied.

  • In the near-term, as we ramp these new products, we see some effects on our margins, particularly in cases where rapid adoption has exceeded our expectations.

  • Bringing a margin performance back in line with our financial model is a major Company-wide focus.

  • Second, we will continue to actively manage our product portfolio to ensure we are deploying our investments and resources towards our most promising growth opportunities.

  • In the past two weeks, based on our view of future market potential, we have taken actions to further lower the breakeven level of our solar business.

  • And third, we are taking additional steps to optimize our structure, making sure that the Organization is aligned to major areas of value creation for our customers and that we have the right talent in the right areas.

  • Now, let me hand the call over to Bob, who will provide additional details about these priority areas in our financial performance.

  • - CFO

  • Thanks, Gary.

  • I'll add my comments about how we're doing in the transition underway at Applied Materials.

  • Gary talked about how we've moved money from headquarter functions and underperforming businesses to higher growth opportunities, notably in Etch, CVD, display, and AGS.

  • We've also strengthened the linkages between SSG and AGS for growth.

  • SSG plus AGS revenue grew 20% in FY14.

  • We expect both businesses to outpace WFE in 2015.

  • Focusing on the total lifecycle of our products, we'll increase both our revenue and profit growth.

  • When excluding EES, Applied's trailing four-quarter revenue was the highest in seven years.

  • Now let's look at profitability.

  • You'll recall that our non-GAAP gross margin was 40.9% in 2012.

  • It grew to 42.1% in 2013, and reached 44.1% in 2014, or 43.6% when excluding non-run rate items.

  • Our progress was trending ahead of plan.

  • This year, we've faced some headwinds due to mix and the higher initial cost of fast-ramping new products.

  • In Q1, our non-GAAP gross margin was 42.3%, and in Q2, it increased to 43.2%, which was nearly 1 point better than our forecast.

  • We expect gross margin to be flat to up a little in Q3.

  • Looking ahead to FY16, gross margin remains a key challenge to financial model performance.

  • Within SSG, if we have similar demand in new product ramp [pens], we could experience gross margin headwinds in the first half.

  • In display, Gary mentioned some of the margin challenges associated with the strong mobile ramp, along with yen-based competition.

  • However, leaders throughout the Company are intensely focused on gross margin improvement.

  • Based on our gross margin initiatives, we believe we can achieve year-over-year improvement in FY16, but we expect it to be below model performance for the year.

  • We are equally focused on managing operating expenses.

  • Quarterly non-GAAP OpEx should be around $575 million through the end of this year.

  • We have a number of new products to launch, which require additional support, but we will stay focused on our cost structures and continue to optimize our portfolio investments.

  • Last week, we further reduced our solar spending and we will continue to monitor the market closely.

  • Looking to our overall model, we continue to believe the non-GAAP EPS of $1.70 is the right level of profitability for the Company, when WFE spending is at $33.5 billion.

  • With the merger pending, we were unable to take certain actions, including share repurchases.

  • Next week, we will begin the buy back stock under our three-year $3 billion repurchase authorization.

  • We plan to be opportunistic and we could execute the program in under two years.

  • As the buyback and other initiatives take hold, we believe that we are on a path to $1.70 in 2017, assuming WFE demand of $33.5 billion.

  • We'll share our detailed model with you at the analyst meeting in July.

  • Now I'll summarize our second-quarter results as compared to the prior quarter.

  • Orders of $2.5 billion were up 11%, led by SSG.

  • Net sales of $2.4 billion were up 4%, which was above our expectations.

  • Non-GAAP gross margin was 43.2%, which was better than expected due to a favorable customer mix.

  • Non-GAAP operating expenses were $579 million, in line with guidance.

  • Non-GAAP EPS of $0.29 was $0.01 above the midpoint of our guidance.

  • We ended the quarter with approximately $4.2 billion of cash and investments and about $2.8 billion of this was offshore.

  • In SSG, orders of $1.7 billion were at a three-year high, and were up 19% on increases in foundry and NAND.

  • SSG net sales of $1.6 billion were up 8%, at the high end of our expectations.

  • SSG's non-GAAP operating margin grew by almost 3 points to 26.8%, driven by higher volume and a favorable product mix.

  • AGS orders of $641 million were down 7% sequentially due to a seasonal decline in service contract renewals.

  • AGS orders were up 19% from the second quarter of 2014.

  • AGS achieved record net sales of $646 million.

  • The 11% increase was driven by growth in spares and services along, with 200-milimeter equipment.

  • AGS non-GAAP operating margin was 26.3%.

  • Display orders increased slightly to $120 million, and net sales declined to $163 million as expected.

  • Display non-GAAP operating margin decreased to 24.5% on lower volume.

  • EES orders were $50 million, and net sales grew to $73 million as expected.

  • EES posted a non-GAAP operating loss of $4 million.

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

  • We expect our overall net sales to be up 2% to 6% sequentially.

  • Within this outlook, we expect SSG net sales to be up 3% to 8% sequentially.

  • AGS net sales should be up 2% to 7%.

  • We expect display net sales to be approximately flat.

  • EES net sales should be approximately $50 million.

  • We expect non-GAAP earnings per share to be in the range of $0.31 to $0.35, which would be up 18% year-over-year at the midpoint.

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

  • - VP of IR

  • Thanks, Bob.

  • (Caller Instructions)

  • Kyle, let's please begin.

  • Operator

  • (Operator Instructions)

  • Jim Covello, Goldman Sachs.

  • - Analyst

  • Hi, guys.

  • Good afternoon.

  • Thanks so much for taking the question.

  • Bob, first question is on the margins.

  • If I think about what's going to be necessary to get you back in line with the target model, what -- of the three, mix, scale, or lower component cost, how would you rank order those drivers in terms of the importance of getting your margin model back to where you want it to be?

  • - CFO

  • I'd say said in the short to intermediate term, which is the next year and a half maybe, mix hurts us the most quarter to quarter.

  • In terms of the second one, probably margin costs because most of our component cost -- most of our product cost is materials.

  • And then the third one is the scale issue, which is like overhead absorption.

  • Now, longer term, if you can make progress on that, those are time sequenced also.

  • - Analyst

  • Okay.

  • That's helpful.

  • And then, if I could follow up, Gary, on the 3D NAND ramp, it really seems like that's gaining some incremental traction in the back half of this year.

  • What is it that's finally making customers feel more comfortable to ramp the 3D NAND?

  • Is it that yields are where they need to be?

  • Is it that the opportunity in enterprise solid-state drives is bigger?

  • Is it just the customers trying to make sure one doesn't get too far ahead of the other?

  • What's really -- why are we starting to see this infection because it's been a while in the making?

  • Thank you.

  • - President & CEO

  • Yes.

  • Good question, Jim.

  • The yield was certainly a big challenge.

  • This is the biggest change and memory technology in decades, going from planar scaling to 3-D, so that was a big, big challenge.

  • All of the customers were focused on making the transition, as we had discussed before, but the yield is getting to the point where more volume is going towards 3-D NAND.

  • All the customers have been focused with heavy technology investments in that area, but more customers now are moving to that technology and to manufacturing, so that certainly is a big transition.

  • And what we said for Applied Materials is that the transition from planar to 3-D NAND is really good for our business because planar is more litho intensive and 3-D NAND is more in the sweet spot of materials engineering types of technologies, etch, deposition.

  • We have additional epi steps there.

  • So we talked about the opportunity for us on an equivalent wafer-start basis going up 35% to 50%, and what we're seeing, we are very optimistic, more towards the top end of that range relative to the opportunity for us in growth.

  • And the other aspect is not only is about TAM increasing, but we believe that we will increase, as I talked about in the script, our share of that TAM.

  • So that's another incremental growth driver for us within Applied.

  • So we see the 3-D NAND ramping, certainly in 2015, and then really, of the majority of spending in NAND in -- beyond 2015 is really towards 3-D NAND.

  • We also said that the capacity for 3-D NAND is really 10% of total NAND capacity by the end of this year, so there's still opportunity as customers make that transition and really good tailwinds for us in terms of TAM and market share.

  • - Analyst

  • That's really helpful.

  • Thank you so much.

  • Good luck.

  • Operator

  • C.J. Muse, Evercore ISI.

  • - Analyst

  • Good afternoon.

  • Thank you for taking my question.

  • First question, can you walk through your latest thoughts on linearity first half, second half in terms of you and industry shipments?

  • - CFO

  • Sure.

  • We think the second half is a little stronger than the first half.

  • And we think, particularly, we think foundries up second half versus first half.

  • I'm doing revenues.

  • DRAM is a little softer, NAND is stronger, and logic is about neutral.

  • - Analyst

  • Very helpful.

  • And as a follow-up, as you look at the handoff from a DRAM to NAND, going first have to second half, can you walk through what your intensity looks like in one sector versus the other?

  • And also, how we should think about the implications to gross margins?

  • Thank you.

  • - CFO

  • Yes.

  • If you look at historically -- in the last year or so, our share in DRAM versus NAND overall is comparable.

  • If you go look at the transition, though, at NAND, as Gary said earlier, the growth of 3-D for a Company like Applied is, we said 35% to 50% increase.

  • In the greenfield, it's probably a little more even.

  • And if you look at our share gains, they are about 5 points in that transition, so we gained 5 points of that TAM.

  • So the transition from a DRAM to NAND, 2D NAND is somewhat better for us.

  • The transition of 3D is substantively better that for us.

  • - President & CEO

  • The other thing I would say is that we're gaining share in memory in both NAND and DRAM.

  • Last quarter, what we had discussed was we had our highest DRAM orders since 2010.

  • We actually exceeded that this quarter.

  • So for the last two quarters, the DRAM business for us is up significantly, and we are gaining share in both of those different areas.

  • Operator

  • Timothy Arcuri, Cowen & Company.

  • - Analyst

  • Thank you.

  • A couple things.

  • Bob, first a question on OpEx.

  • Did I hear you say that OpEx will be down $35 million quarter on quarter between April to July?

  • - CFO

  • No.

  • I said it'll be about $575 million.

  • - Analyst

  • Oh, $575 million.

  • Okay.

  • All right.

  • Then to follow on to that, if you look at that element relative to your financial model, that seems to be the area where, given where your revenue is, that's the line item of that's the most out of whack, so either you have to grow revenue without growing OpEx, or you have to cut OpEx to bring that in line to where revenue is.

  • So can you just talk about that?

  • Can you talk about which of those two you think is more likely?

  • Thanks.

  • - CFO

  • Sure.

  • Yes, the model was a 2016 model, so we actually see gross -- we actually see revenues growing next year.

  • We think this is probably a little under a $33-billion for WFE.

  • Next year, the model at $33.5 billion, so WFE is a little better in that model.

  • Second, we think our share will be up in WFE this year and next somewhat.

  • And then we think AGS is showing good growth momentum, so -- and display should be pretty good in revenues next year.

  • So we think the revenues could be an uptick and approach the model next year.

  • In terms of the biggest discrepancy, my opinion, frankly, is little bit of gross margins, right?

  • 44.5% was small.

  • If you look at the document, it said 45%, but the math is 44.5%.

  • We're up to 44.1 in FY14.

  • The quarter just ended, we were 43.2% We go up a little bit maybe the second half.

  • But then the first half, if etch is heavy and there's little bit of display mix problems, we're not up.

  • So I'd say the biggest delta is probably the gross margin line.

  • If you look at expenses, we're at $575 million.

  • If we hold at that line, which is what we're saying, then we'll be at [2-3].

  • The model is [2-2-2-8], so we are $72 million over.

  • But a lot of that is related to all the new products coming out.

  • I think the biggest discrepancy is probably the gross margin line, personally.

  • - VP of IR

  • Think, Tim.

  • Operator

  • Farhan Ahmad, Credit Suisse.

  • - Analyst

  • Thanks for taking my question.

  • I first question is regarding the backlog.

  • I saw that there were some it de-bookings in the quarter.

  • Can you talk about what those were?

  • And was some of the impact from the recent cuts that we are seeing from TSMC and Intel?

  • - CFO

  • In the backlog, there was some de-bookings of stuff that either slipped out of the quarter, turned around, they were -- there's cats and dogs in there, too, frankly.

  • There's a little bit of (inaudible), some on the miscellaneous.

  • There was foreign exchange was $10 million of that, so that was just FX.

  • So I wouldn't draw too many conclusions on it.

  • - Analyst

  • Got it.

  • And then another long-term question, just talking about the balance sheet structure.

  • Have you given any thought to what level of debt you need?

  • Or you can support on the balance sheet and try to recapitalize your balance sheet and return some cash to shareholders?

  • - CFO

  • Yes.

  • We've given a lot of thought to everything, especially in the last few weeks and looking at the $3 billion.

  • We think - I'm actually pretty optimistic we can get the $3 billion done in less than two years.

  • I'm actually reasonably optimistic that we can continue a significant buyback through 2000 -- I think past 2000 -- for a number of years without going into heavy debt.

  • I think will go into moderate debt, but I'm actually getting optimistic on the tax and the cash flow.

  • And then if we need to take on some debt to continue significant share returns to investors, we are willing to look at that, too.

  • And we plan to do some of that, too.

  • But I'm actually getting more optimistic on the foreign cash lately.

  • - Analyst

  • Thank you.

  • That's all I have.

  • Operator

  • Krish Sankar, Bank of America Merrill Lynch.

  • - Analyst

  • Hi.

  • Thanks for taking my question.

  • Two of them.

  • One, first one for either Bob or Gary.

  • As you look ahead and focus on both trying to gain shares and renewed focus on gross margin, I'm curious, is there going to be a difference in the pricing philosophy for the Company?

  • Are you going to look at pricing differently, be more rational, or is it going to be status quo?

  • Just curious on that, and I also had a followup after that.

  • - President & CEO

  • Yes.

  • So let me talk a little bit about the model.

  • Bob, Tim had asked this question earlier.

  • In semi, we're very optimistic.

  • We talked about the growth in our business as these new memory technologies are ramping into production, and certainly in the FinFET first-generation, 10 nanometer, that's a great opportunity for us.

  • With the products we have enabling those transitions, we gained 1.5 points over the last two years.

  • We indicated we believe we'll gain share again this year.

  • And as these transitions ramp, we're still in the early innings in terms of some of these transitions in the semiconductor area.

  • So we're optimistic in that area.

  • Display, I talked earlier today about three years of double-digit gains in revenue in the display market.

  • We have -- again, there are major technology transitions there.

  • We talked about a new area where that generated $200 million in revenue, will generate $200 million in revenue this year.

  • So again, we have some good growth opportunities in display.

  • And service, our service and spares was up 17% in our service and spares from last year, record revenues.

  • So we have really good growth opportunities.

  • So when you look at the model, the top-line revenue growth, if you look at where we were when we published that model to where we think we'll be, we're going to be in the range of that number for top line revenue growth, which was an incredible accomplishment versus what we said we would do.

  • We still believe these opportunities are great opportunities for us.

  • One of the things I also talked about was in etch, we went with a -- we're introducing a new chamber that customers are telling us technically has advantages in uniformity and defect performance.

  • But as you are ramping these many new areas simultaneously, we have great, great new products that are targeted at these inflection.

  • There is going to be some margin pressure with startup in some of these areas, and frankly, they're going even faster than we'd expected due to the pull from the customers.

  • The key thing in any business is to have value, technical value and differentiation your delivering to our customers.

  • So our focus is to enable these inflections for our customers in semiconductor, in display, and in that process, we will drive market share higher, and hopefully, the value for the customer with these differentiated products will also go up over time.

  • As Bob had said earlier, into 2016, due to mix, we believe that the margins are going to be behind, but we are still driving to achieve those margin goals.

  • The timing may be a little bit later than what we had talked about, but the momentum for the Company relative to revenue growth is in the range of what we discussed when we published the model.

  • And again, the margins are going to be off, as Bob talked about, but we are driving -- there are a number of opportunities for us to drive to close and exceed that gap from a gross margin standpoint.

  • - Analyst

  • Got it.

  • And then just as a followup a long the same path, I look at the [SSG] product, the one that has the biggest potential for share gain is conductor etch, but that also looks like has probably another lower gross margin.

  • Would the conductor etch product, do you think, get to the same level as some of your other dominant products like PVD, or do think there is only a structurally lower gross margin product division?

  • - President & CEO

  • Well, over time, we see a lot of opportunity for us to drive higher margins in that business.

  • Certainly, the share gains over the last couple years have been pretty significant.

  • Our business went from I think 2012 from $350 million to about $1 billion last year, so just dramatic gains in the etch business.

  • We think over time, there's still a lot of upside potential, and it really, as I said, comes back to how are you technically positioned in the markets.

  • And there are some significant advantages that customers are seeing.

  • It's in the early innings of that being validated with customers.

  • But you really look for architectural advantages in your products where you can solve high-value problems for customers in these inflections.

  • We believe there are those areas that we can drive over time, and certainly, a lot of opportunity for us to improve our margins in that area.

  • - Analyst

  • Got it.

  • Thanks, Gary.

  • Operator

  • Atif Malik, Citigroup.

  • - Analyst

  • Hi.

  • Thanks for taking my question, and good job on the results.

  • Gary, if I look at the foundry spending at one of your customer that cut the CapEx, if I look at the CapEx divided by the capacity, the CapEx-per-unit capacity is flat over last year, and that's partly because the 20 nanometer demand wasn't strong and they're using more equipment.

  • So my question is, if I look at 10 nanometer, how should we think about that ratio of CapEx to capacity as you move it to 10 nanometer for the (inaudible) makers?

  • - President & CEO

  • So 10 nanometer is -- and we'll talk more about this at SEMICON.

  • I've heard some customers say that this is the most important node in the history of their company.

  • So you look, really, at where the pull is from an end-user perspective in terms of mobile devices, certainly, there is a lot of value.

  • People are trying to pack more performance, more features, and drive lower power for those devices.

  • So 10 nanometer is a big battle for all of the different companies, and there's tremendous focus there and the engagement with the current customers are very deep and very broad.

  • When we look at the opportunity for the CapEx if you take equivalent number of wafer starts, it goes up a significant amount versus what you're looking at for the 16- and 14-nanometer node.

  • I don't -- we'll talk more about this at SEMICON, but it is a great opportunity, and there is a significant change in that device as the customers are ramping 10 nanometer, and we look at that being a great opportunity for us.

  • In the transistor area, we have more epi steps, real strength in PVD, implant, a number of different areas.

  • And then also the interconnect structures there will also change.

  • So this, as we've said many times, is in the street spot relative to materials engineering, and we look at 10 being a really, really great opportunity to drive our business over the next few years.

  • I don't know, Bob, if you want to add anything else on that one.

  • - CFO

  • Yes, maybe I could if you don't mind.

  • If you want to look at this capital intensity and reused and nodal transitions, you have to look at three things really.

  • One is, what's the relative capital intensity of the node?

  • Two, where are they in the transition to a node?

  • And three, how big is the node?

  • So what is worrisome to some people right now is, gee, is it getting a lot of reuse, and is that not as good for you in capital intensity?

  • I'm not actually too worried.

  • If you look at the data, we think this years probably a $33-billion year, and if you adjust for foreign exchange with the weaker yen and weaker euro, it's probably north of $33.5 billion.

  • So the year is pretty good.

  • Now, look at what they're spending on.

  • For three years in a row, 2012 to 2013, 2013 to 2014, 2014 to 2015, the percentage of the spending that's going to companies like Applied, actually Applied has gone up as a percentage of 100%, so this PME thing is really taking traction.

  • Third if you'll look at where they are in the nodal transition, 16 to 14, they're pretty early.

  • 20 wasn't a big node, and they are doing some reuse.

  • But if you look at it, as they get later into the node, the percentage reuse probably goes down somewhat.

  • And too, as Gary said, 10 is a big node.

  • And if you look at the capital intensity, which we'll talk to you more about at analyst day, it looks like 10 mix again plays for companies like us.

  • So I'm actually not too upset about the nodal transition or the mix for us.

  • - Analyst

  • Thanks.

  • Very helpful.

  • And as a followup from Bob or Gary, your services growth is outstanding if I compared to the wafer start growth, which is about a 3% to 4% year over year.

  • Can you provide us a percentage of your installed base that's currently under contract so we can see how much headroom you have?

  • - President & CEO

  • What I would say on the service contracts, that we are making really significant progress relative to service contracts, and all of those tools under contract really provide a great forward momentum for us in the service business.

  • We've made a lot of changes relative to our strategy, our structure, bringing new talent into the organization.

  • And also, the connection between the service business and the semiconductor business units -- we've relocated people -- is really stronger than ever in terms of those value road maps for customers.

  • So that's translating into significant growth in our service and spares business, which I talked about earlier was 17% growth in service and spares year over year.

  • And we believe there is a huge opportunity.

  • If you look at the share, it's still a very, very, very low.

  • We have a lot of momentum there, and we think the growth opportunity there for us is significant.

  • - CFO

  • Yes.

  • Let me add something, connected the dots with a question that was asked earlier.

  • The point question that was asked earlier is, can etch gross margins get to be where some of your higher product gross margins are?

  • I think the answer is they can certainly improve from where they are, but even if you look at other etch companies in our industry, the overall etch gross margin is not as high as some of our other high gross margin, higher share businesses.

  • But what is very attractive about etch is a few things.

  • One, if you look at our growth in operating profits since 2012 in etch, it's outstanding.

  • In terms of what's dropped through to the bottom line, it's very good.

  • Second thing is if you look at etch in the aftermarket, and we are focused more and more at total product lifecycle profitability of a business, etch is probably the biggest opportunity because these, tools as Gary has said many times, eat themselves.

  • So in terms of driving long-term profitability and predictable profitability, etch is a very attractive business.

  • Operator

  • Harlan Sur, JPMorgan.

  • - Analyst

  • Good afternoon.

  • And nice job on the quarterly execution, guys.

  • As a followup to the previous question on 10 nanometer, sounds like another solid move up in intensity for the Applied Team.

  • We've heard pilot production later this year to first half of next year.

  • Question is, are you guys seeing the 10 nanometer spending in order pipeline for this quarter, the July quarter?

  • Or is it more targeted to come into your order pipeline more in the second half of this year?

  • - President & CEO

  • We -- it's really not amounting to a large number right now.

  • And certainly, the engagements that we have with customers is really better than ever across all of our different products.

  • Certainly, in the transistor area with epi PVD, more epi steps, that's a great opportunity for us.

  • And in the patterning space, one of the things that we did in the organization is pull all of the patterning groups together, so we have etch, the selected material removals, CVD, ALD.

  • And the synergies there for us as we have the -- we are delivering these new materials, our ability to deliver those materials and etch them and remove them, that's a great synergy that we are driving as part of the organization change that we made.

  • So the opportunity for us there, the engagements we have, are great leading indicators of where we're going to be when that ramps, and they're broader and deeper than we've ever had.

  • But from a revenue standpoint right now, it's not a significant number for us.

  • It's a very small number for us.

  • - Analyst

  • Got it.

  • Okay.

  • I was talking more about orders there, but I understand where you're going with that.

  • And then on the NAND segment, obviously, very strong orders up, I think, 40% sequentially.

  • How much of this order mix in the April quarter was 3D, or is it still being focused on planar?

  • And I'm assuming that the 3D spending mix is moving higher here in the July quarter.

  • Are you seeing this order trajectory spread across multiple customers?

  • - CFO

  • On NAND in total, we had a good bookings quarter, as you said, and we think it's pretty strong for the rest of the year, as we told you earlier.

  • We think the trans -- the second thing we told you earlier was by the end of the year, we see 120,000 wafer (inaudible) installed, which is about 10% of overall capacity, up from about 60,000 at the end of last year.

  • So we see a heavier weighting of the 3D in the second half spending.

  • - Analyst

  • Great.

  • Thanks, guys.

  • Operator

  • Steven Chin, UBS.

  • - Analyst

  • Thanks.

  • Hi, Gary and Bob.

  • Just a follow-up question on the gross margin next year.

  • So is the gross margin issue mostly because of the display margin headwinds and less from these new etchers?

  • And what is the display margin issue?

  • Is it mostly from this new OLED display win that you are just ramping for the first time?

  • - CFO

  • Yes.

  • If you go look at it - I'm looking at the data, actually, a second, to be more accurate.

  • So if you look at it, we're little below where we want to be.

  • We'll be up next year, we believe, in SSG in absolute gross margin percentages, but not as far up as we want.

  • Now, the reason we're not getting as far as we want is mostly mix.

  • The reason were improving in absolute dollars is within each product we're doing better.

  • Okay?

  • But the mix is still a little bit off, particularly in the first half.

  • Within display, again, it's a mix thing that's next year -- our business are predominantly for many years has been driven by TV equipment, so we sell equipment to make TV panels or TV screens.

  • Next year is a disproportionate number of sales of very high -- I think the highest ever, and probably the highest we will have for the foreseeable future -- sales of smaller screen sizes, which is somewhat different mix of tools.

  • Some are different mix of customers.

  • So this is for cell phones mostly.

  • And so that's the mix that's hurting us in display next year, and it's unprecedented in the volume.

  • - Analyst

  • Okay.

  • Thanks for sharing that.

  • And my follow-up question is just a general question on multiple patterning.

  • There seems to be a perception that once UV tools are put into production, there will be a big decline in some of these etch and deposition sales for multiple patterning.

  • I was hoping you could share your thoughts on this given the big EUV order that we saw recently.

  • Thanks.

  • - President & CEO

  • Yes.

  • Thanks, Steven.

  • So I think our position is on EUVs is consistent with what we've said in the past.

  • We think it's post 10 nanometer when you would start seeing any real volume on EUV.

  • And so as we said, over the last -- over the next few years, the real big driver for us will be the 10-nanometer node and maybe the second generation of the 10-nanometer node.

  • That we anticipate to be a big node, a real important competitive battle for our customers, and we'll talk more about this at SEMICON, but really a great driver for us from a TAM standpoint.

  • EUV is out beyond that timeframe, so it's out beyond the next few years.

  • And then the other aspect is when EUV comes in, we believe that it will also come in potentially with multiple patterning.

  • So the timeframe for EUV to really have any impact on our business is out there several years, so we don't see anything really near term.

  • And certainly, again, the big, big, big driver for us over the next, I would say, two, three years is going to be the 10-nanometer node and maybe the shrink of that node.

  • - Analyst

  • Okay.

  • Thanks, Gary.

  • Operator

  • Romit Shah, Nomura.

  • - Analyst

  • Thank you.

  • Gary, you've mentioned that revenue growth in this industry is hard to come by, and given it that and the developments over the last couple of weeks, why can't you guys do better than the OpEx run rate of $2.3 billion?

  • - President & CEO

  • Well, I'm not sure I completely understand the question.

  • The revenue growth, as I talked about earlier, we have a lot of momentum around these inflections in semiconductor and display and in semi we gained 1.5 points over the last couple of years.

  • We expect that we will gain share again this year.

  • And as these new technologies ramp, we're still in the early innings in terms of the change in memory technology, and the whole FinFET battle that is happening with our customers, so we're very optimistic based on the investments we've made and our Teams, that we will continue our momentum in growing our share of WFE in the semiconductor business through those transitions.

  • As I said earlier, the display, three years of double-digit revenue gains in the display business, so we have very good opportunities there.

  • And also in display, that market is undergoing significant changes a from a technology standpoint, including this new area in OLED that we're ramping.

  • So again, we have a lot of confidence in the growth longer term in our display business, a great Team, they're gaining share.

  • And also, we're expanding our TAM with these new applications.

  • So that part we're very, very, very happy with the progress that we are making in all of the major parts of our business.

  • The OpEx question, relative to the $575 million number that -- where we're at right now, our number-one focus is that we want to capture these inflections with our products in semiconductor, in display, and continue to grow the service business.

  • And as I said earlier, we're pretty much on track for significant top-line growth.

  • If you look at where we were at when we talked about the model versus the momentum that we have, we're in the range of what we talked about earlier for top-line revenue growth.

  • So as you said, it's really hard, but I am very proud of this Team that we have at Applied and what we've been able to accomplish and the momentum that we have in these different businesses.

  • We will continue to look for opportunities to optimize the business.

  • We moved hundreds of millions of dollars over the last couple of years into areas that will drive longer-term shareholder value.

  • Bob talked about the action that we are taking in the solar business right now.

  • And there are probably more opportunities for us to continue to optimize the portfolio.

  • Longer term, we will continue to look at structural changes that will lower our overall spending in the Company and improve productivity.

  • But in the next year, we are very, very focused on top-line revenue growth, and as you said, that's very, very difficult to come by.

  • - Analyst

  • Thank you for that.

  • And one of the things you highlighted in your monologue was just the strength of the services business.

  • And if I look at that as a percentage of SSG, it's around 41% attach rate.

  • Is that a number -- is that right way to the about it, services as a percentage of SSG?

  • And is that 41% a number that you think you can improve on?

  • - President & CEO

  • Yes.

  • So again, the 17% growth in service and spares in the last year.

  • So think about the service business around $2.5 billion.

  • This year, we'll be north of $2.5 billion.

  • And I think in the model, we had something like $2.6 billion, $2.7 billion for --

  • - CFO

  • Oh, no.

  • The original model is only $2.561 billion.

  • - President & CEO

  • Oh, $2.561 billion.

  • - CFO

  • We beat it.

  • - President & CEO

  • So we'll beat that.

  • But if you can achieve double-digit revenue growth in service, as we are this year, that's $250 million, $300 million.

  • That's almost 1% of WFE.

  • So through a lot of changes in our strategy, our structure, we are increasing our service and spares business, we are adding value to the product, so that can be a great revenue driver as we are adding more value for our customers.

  • So certainly, that's an area that the whole Company is focused on is really creating more value for customers and then driving growth in that area.

  • - Analyst

  • Thank you.

  • Operator

  • Patrick Ho, Stifel Nicholas.

  • - Analyst

  • Thank you very much.

  • Gary, first, in terms of the share gains you've garnered on the memory space, can you give a little more color on the gains that you've achieved on the foundry space where you've traditionally have had strong exposure in many of your process segments?

  • Can you give a little bit of color on where you see some of the gains?

  • - President & CEO

  • You're talking about in foundry, Patrick?

  • - Analyst

  • Yes.

  • - President & CEO

  • Yes.

  • So in the last year, certainly PVD and epi, we talked about both of those areas being up 3%, and those are great growth drivers for us.

  • All of the different areas around the transistor, if you look at a RAM plant business, for instance, that business is very, very, very strong.

  • The switching cost in the memory is much higher than in any other market.

  • So that area, our high current share --

  • - CFO

  • Foundry.

  • - President & CEO

  • In foundry, our high current share in foundry is in the 90% range.

  • So that area is extremely strong.

  • Last quarter, we said that our etch business had the highest revenue in foundry since 2007, so we are making some progress there.

  • Not -- we are making more significant progress, certainly, in V-NAND and the memory space, but that's an area that we think longer term is a really, really great opportunity for us.

  • So I would -- there's a number of areas.

  • I don't know, Bob, if you want to add anything on this, but there's a number of different areas.

  • And I think as you go to these future nodes in FinFET, our TAM opportunity will increase a significant amount around transistor, interconnect, and a number of different areas.

  • - CFO

  • Yes.

  • I think the three thing you look at here are how big is your product footprint in foundry, and how strong is it, and three, are you getting D2R wins, right?

  • So if you go look at our foundry footprints, very strong, and they're highly differentiated products.

  • That's why it stays strong as a share position.

  • In terms of gaining share, because they run so many different devices and so many different customers, and it is so complex, they're getting, turning D2Rs into P2Rs.

  • Takes a little longer.

  • But we've got some pretty damn good D2R positions that we've worked on the last two years, which very well could turn into P2Rs later this year.

  • - President & CEO

  • The other thing I would say, in our PDC area, we are stronger in foundry and logic, and this last quarter we had some good wins in a couple of major foundries.

  • One of the things, also, if you look at our 2015 business in PDC, it's about 60% eBeam at 40% optical.

  • And in eBeam, we have very high share in the eBeam review area with the SEMVision.

  • And you look at the different areas of the segments within eBeam of CD-SEM, eBeam inspection, and defect review, those are all areas that are growing very fast.

  • And our technology there, especially electron optics imaging capability, is really world class.

  • So that's another area we look at as we go forward where we see a potential for growth.

  • - Analyst

  • Great.

  • And maybe, Bob, a specific question for you in terms of the margin impacts on some of these new product ramps.

  • Obviously, you mentioned that the faster-than-expected traction has obviously put some pressure on the near term.

  • When do you expect to see some of those supply-chain efficiencies kick in terms of supply agreements and volume buys that will help margins improve over time?

  • - CFO

  • Yes.

  • What we're doing, Patrick, is -- what's driving us down is mix makes, where we're gaining some share a little faster probably than we expected, and the new products are starting to track in.

  • And now what we're doing to mitigate that is get the new products up to gross margin curve faster and also to get gross margins up everywhere else across the Company, and that's through material cost absorption.

  • So the cost reduction efforts across of the whole Company in terms of PPV are picking up reasonably, not heroically, yet.

  • We're getting better.

  • In terms of the new products, it's picking up faster.

  • So my guess is you'll start to see -- you are seeing progress now.

  • It'll pick up more next year.

  • What's killing us in the first half of next year is mix again.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • Sidney Ho, Deutsche Bank.

  • - Analyst

  • Thanks for taking my question.

  • First, a clarification.

  • Did I hear correctly that earlier, Bob, you said you expect a 2016 WFE market to be $33.5 billion, or are you just referring to your operating model that you saw in the past?

  • - CFO

  • We don't have an official forecast.

  • That's our model.

  • We don't have any detailed analysis of that.

  • If you take me out for a beer, it's a working model that's okay to work with, but we don't have a real number yet.

  • - Analyst

  • Okay.

  • My first question, then, is in the DRAM side, obviously, very strong bookings in first two quarters and record level last quarter.

  • And you've about the second-half DRAM revenue will be lower than the first half.

  • I know you're not giving 2016 guidance yet, but are there any reasons why this strength would not continue in 2016 given the increased complexity at multiple patterning steps used in the advanced node?

  • - CFO

  • In terms of DRAM you said?

  • - Analyst

  • Correct.

  • - CFO

  • Yes.

  • I don't know if you got it here, but I'll tell you my guess.

  • I think the V-NAND thing is going to pick a momentum because I think you're going to see more and more go to 3D.

  • Patterning doesn't play there.

  • So in fact, if you look at the mix of etch, a deposition play is particularly well for us.

  • If you go to DRAM, patterning does play an increasing role there.

  • I agree with that.

  • Now, if you look at the DRAM, prices are down a little bit, so they are very driven by economics in that business.

  • So the cost is getting a little higher to make those devices.

  • So the patterning is positive for them, but the cost is an issue in the pricing.

  • So I think the DRAM capacity ads will be moderate.

  • - Analyst

  • Okay.

  • And my follow-up question is, now that the deal is over and the reason being future product roadmap, can you talk about what areas within etch and deposition that you are not currently strong in but you are expecting to gain share in the future?

  • - CFO

  • Well, the DOJ certainly was confident.

  • I'll tell you that.

  • (laughter)

  • - President & CEO

  • Yes.

  • I think as we've talked about, last year, we had just tremendous momentum in etch and CVD with a 50% revenue growth.

  • And we really are optimistic about the momentum we have in both of those different areas, and so we continue to believe that the opportunity for us for share gains and growing those businesses is very good.

  • Another area that we see as a great opportunity is ALD.

  • We've been investing in new technology there, and we believe that that has potential for significant future growth.

  • We have very strong pull from customers for this new technology that we've developed, but we're not in a position really to give any more color at this time, but that's certainly another area on top of the momentum that we have in etch and CVD where we see a great opportunity.

  • - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Operator

  • Mark Heller, CLSA.

  • - Analyst

  • Thanks for taking my question.

  • Gary, I didn't quite catch it, but the display mix in FY16, did you say if that's LCD or OLED related?

  • - CFO

  • The 2016 mix is a much -- I'll start at the higher level.

  • Most of it is weighted towards smaller feature sizes.

  • That'll be the cell phones versus TVs.

  • And when you look within it, most of those are all OLED, and it's particularly LTPS, a lot of it.

  • - President & CEO

  • Yes.

  • The mix, as Bob talked about, the mobility in the mix versus TV is really up about -- the percentage of the mobility is up about 2X if you look year to year, and that goes back down to a more normalized mix between the two different markets for us.

  • So that particular year is we see the mix of mobility up a significant amount, double what it was the year before, and we think the year after, it will go back down to this more normalized mix that we've seen for a number of years.

  • - Analyst

  • Okay.

  • Got it.

  • And then going back to this WSE question, I remember in 2013, you gave the financial model before the TEL deal was announced, talking about a WFE maybe a size $37 billion.

  • Now, I know you're not giving official forecast for next year, but is there something that's tempering your -- how high WSE can go in a given year?

  • Has something changed there?

  • - CFO

  • Well, I'll give you my observations.

  • When we put the model out in July 2013, one of the biggest reasons for that number was that was the data course number, basically, at that time.

  • We didn't know 2017 -- 2016 rather.

  • And then we put up three numbers at that time, $30 billion, $33.5 billion, and $37 billion, and a fair amount of our focus was on the 33.5.

  • In terms of what next year will be, we really haven't spent much time.

  • I think it's a pretty healthy year.

  • Could be north of that.

  • I honestly don't know.

  • I don't even know what Dataquest says.

  • Do you know what Dataquest -- it's up a little more than that.

  • I think Dataquest is maybe 34 or something.

  • - President & CEO

  • Yes.

  • I think what, certainly, what we can see relative to our business, if you look at what's going to happen over the next two or three years, this transition in the 3D NAND, as we said, by the end of this year, you only have 10% of the capacity with 3D NAND.

  • So that transition is really a good one for us.

  • And that 10 nanometer transition we believe is a great opportunity.

  • So those are going to be some of the major drivers for us over the next two or three years.

  • And then we try to size the business relative to a normal run rate on WSE.

  • And certainly, there could be drivers to make it higher than that, but from a planning standpoint, we're sizing it around the $33 billion, $33.5 billion level.

  • - Analyst

  • Thank you.

  • Operator

  • Mahesh Sanganeria, RBC Capital Markets.

  • - Analyst

  • Yes.

  • Thank you.

  • I just want to -- I have a follow-up question on 3D NAND, that right now you have a couple of customers adding capacity for production, and the user probably not at the highest level, and they're working -- different customers are working on different structure.

  • My question is that at the maturity on 3D NAND, 48 layer TOC, what kind of bit density do you get on the wafer compared to planar?

  • Are they closer to getting 3 to 1, or they are far behind that?

  • - CFO

  • Well, I'll do what I've seen -- I'll do from memory.

  • I don't have this in front of me.

  • Our take on it was the initial transition from planar to 3D, they got traditional type of bit growth that they get in the planar shrink.

  • They got the bigger capital efficiency and bit growth going from a first generation to second-generation 3D.

  • Now, what we used to run in models was a lot of 32 to 64.

  • Right?

  • So 32 to 64, you get over 100%.

  • Right?

  • Because you get the scaling and also the size -- I don't even know the shrinks.

  • They're 40-, 50-nanometer stuff.

  • So I think the big opportunity for them is 64.

  • At 48, it's a midway, I'd say.

  • So I'd say it's moderate.

  • It's better than the first generation, not as good as 64.

  • - Analyst

  • Okay.

  • And then, on your WFE number, I suppose you -- the last quarter, you had a little bit higher number than now, and of course, there are a lot of changes has happened since last quarter.

  • Can you articulate what you had seen, changes in the segment wise, from last quarter to this quarter in terms of DRAM flash and logic and foundry?

  • - President & CEO

  • Yes.

  • We haven't actually changed a lot.

  • Pilot -- we were slow to about 32.5 last quarter kind of about a 33 now.

  • Some of that is just FX as you run into the euro, and on WFE, euro doesn't affect us much, but euro and yen.

  • Right?

  • So the second thing is, there's been some announcements like (inaudible) seems a little less.

  • But I'm actually feel like maybe NAND is a little stronger later in the year, so net-net I'm neutral on the year.

  • In terms of how we feel specifically by space, we are a little higher on DRAM now than we were last quarter.

  • A little higher on NAND than we were last quarter.

  • We're a little lower on foundry and logic.

  • We are -- logic, we're probably a little negative, too, from last quarter.

  • - Analyst

  • But that's very helpful.

  • Thank you very much.

  • - President & CEO

  • You're welcome.

  • Operator

  • Tom Diffely, D.A. Davidson.

  • - Analyst

  • Good afternoon.

  • So as it pertains to growth, you talked a lot today about 3D NAND and talked about that 10 nanometer transition.

  • What about DRAM?

  • Is DRAM in your mind a growth market for you in the next couple years?

  • - President & CEO

  • Yes.

  • I think so.

  • I mean, I think so.

  • I think if you look at it, was driving it, wafers number one, wafer starts, number two capital intensity, number three our positioned there, right So if you go look at 2015, we think overall spending is up I don't know 15% or something like that, 15% to 25%, and if you look at our position there, it's been improving.

  • We gained share in DRAM in the last year or two, and we think that will continue this year so we -- go ahead, Gary.

  • I think DRAM, mobile DRAM especially, has been driving incremental investment, and we're happy that our share of that market is increasing, and so that is a positive driver.

  • But you don't have the same --

  • - CFO

  • Inlexion stuff.

  • - President & CEO

  • Inflection in the DRAM business going forward that you have in 3D NAND and certainly in the FinFET technologies.

  • There are -- the 3D NAND, the litho CapEx is declining, and the areas that we are participating in are going up a significant amount.

  • So we have an opportunity there with not only the CapEx increase but more of the CapEx being spent on our area of the market, a significant change from what was there in the planar technology node.

  • And the same thing is true on the FinFET technology.

  • Again, that really leverages our materials engineering, some of our strongest products, as those technology inflections are happening.

  • So the DRAM opportunity is a good one for us, but it's not the same order of magnitude driver for us as the transition to 3D NAND and FinFET.

  • That's my feeling.

  • - CFO

  • I agree with you.

  • Most of what they are doing this year is conversions versus capacity adds.

  • - Analyst

  • Okay.

  • No, that's helpful.

  • And then on the display side, is the move of OLED to TVs, is that the sweet spot for you going forward, or do you think margins might be an issue at that point as well?

  • - President & CEO

  • Yes, we think the OLED is more focused on mobile right now, these a smaller screens for mobility types of applications, not so much on TV.

  • - CFO

  • It's pretty expensive for TV.

  • - Analyst

  • Yes.

  • I was just thinking out the next couple years when it does ultimately move to TVs, if that is more of the sweet spot for you versus next year.

  • - President & CEO

  • Yes, there's no question as -- OLED in general, we've said, if you look at it more for silicon compared to OLED, our TAM grows about 2X, so certainly, as OLED is adopted, both in mobility and in the future in the TV market, that is a really great transition for us.

  • And you really can see it also in the thin-film encapsulation.

  • We talked about the incremental opportunity there.

  • But there are more deposition steps as you go to OLED technology, so the adoption in any of these different markets for us is a really good driver.

  • - Analyst

  • Okay.

  • Thank you.

  • - VP of IR

  • Thanks, Tom.

  • Kyle, we have time for just one more question please.

  • Operator

  • Edwin Mok, Needham.

  • - Analyst

  • Thanks for squeezing me in, guys.

  • So first question, in just in terms of directly, maybe on a second half of their versus first half, how do see you are booking trending between the DRAM/foundry and larger buckets?

  • - CFO

  • Well, we think that foundry is up in the second half.

  • We think that's their bookings.

  • Foundries up, DRAMs down a little bit, NAND is up, logic is flat.

  • - Analyst

  • Okay.

  • Great.

  • That's helpful.

  • And then a question on PDC, so we saw some of the data from Garner they published around market share, and seems like PDC may be down a little bit last year.

  • Can you maybe help us with that a little bit.

  • Is it due to Max?

  • How do you guys see your position?

  • And I think you talked about 10 nanometer being an opportunity, and obviously, that's much higher process control intensity.

  • How do you think you're positioned there, and do think that could drive some incremental growth there eventually starting in 2016?

  • - President & CEO

  • Yes.

  • Again, relative to the intensity of the percent WFE, this area has not been a great driver over the last couple of years, and it's not --relative to some of the other inflections that we are focused on, we don't see this as being as large and inflection in our markets as some of the other areas.

  • But as I talked about earlier, our business is really, if we look at 2015, more heavily weighted toward the EBM segments where we have a lot of strength, really great technology.

  • That segment of the market is growing fast, and we really see a great opportunity for us to leverage that strength in growing that part of the market.

  • In of the optical inspection area, last year, certainly, the mix of customers worked against us but we recently had a really strong quarter relative to orders from a couple of large foundries, and we look at our technology position there as incrementally better than where we were at before, so we're optimistic overall.

  • PDC growth in 2015 will be good for us.

  • And then really being positioned from a technical standpoint going forward in PD-where we think this can be a growth driver.

  • I wouldn't say this is on the same scale as some of the other opportunities we have on inflections and the 3D NAND and 10, nanometer FinFET, but certainly, incrementally, it's a positive for us, and the incremental profit from that business is also very good overall.

  • - Analyst

  • Great.

  • Thanks.

  • - VP of IR

  • Thank you, Edwin for your question.

  • And we'd like to thank everyone for joining us in this afternoon.

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

  • Thank you for your continued interest in Applied Materials.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.