應用材料 (AMAT) 2015 Q4 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, Kyle. Today we will discuss the results for our fourth quarter and FY15 which ended on October 25. Joining me are Gary Dickerson, our President and CEO, and Bob Halliday, our Chief Financial Officer.

Before we begin, let 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 November 12, 2015, and Applied assumes 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 Investors page of our website at AppliedMaterials.com. Now I would like to turn the call over to Gary Dickerson.

Thanks, Mike, and good afternoon, everyone. As this is our fiscal year end call, I'd like to start by outlining the progress we are making towards our longer-term strategic and performance goals. I will then provide our market outlook, and describe how this translates to opportunities and priorities for our business groups. Later in the call, Bob will give you additional color on our financial results, and talk about how we are optimizing the Company's performance and shareholder returns.

Applied Materials' strategy is built upon our leadership in materials engineering. Our foundational capabilities are the broadest and deepest in the industry. We have more tools in our toolbox to help our customers address their most critical technical challenges. Across the Company, we are driving profitable growth by targeting major technology inflections, and introducing new differentiated enabling products and services for our customers. As a result, we are winning market share, growing our service business, and expanding our available opportunities.

In FY15, we grew revenues 6% year on year, and delivered our highest operating profit in four years. And while it still too early to talk about specifics for the calendar year, we are confident that we have made sustainable share gains in both wafer fab equipment and display. Investments we have been making in R&D and field technical capabilities are yielding results.

This year, we released breakthrough new product platforms to address rapidly growing opportunities in etch, atomic layer deposition, and selective materials removal. At the same time, we have made the Company more agile and efficient, by optimizing the organization, business processes and product portfolio. These changes allow us to fuel our growth programs while maintaining our operating expenses at approximately the same run rate we had in 2012.

At the start of the year, industry forecasts expected 2015 wafer fab equipment to be up 5% to 10% year-on-year. Our latest estimate is that wafer fab equipment spending will be more or less flat relative to 2014. As the year progressed, the biggest change was foundry spending. We anticipate that calendar 2015 will represent the lowest spending levels by these customers in the past four years.

While Applied has our most favorable share positions at the foundries, we have (technical difficulty) products to strengthen our position in memory, and continue to get stronger in this market. In the past two years, we [believe we've] increased our share of total DRAM wafer fab equipment spending by about 5 points. We also expect to increase our total share of total NAND spending by approximately 5 points in the transition from planar to second-generation 3D NAND. Overall, 2015 is a year of very strong memory investment, with the highest level of spending by these customers in seven years.

As we look ahead, we expect DRAM bit demand to be in the 25% to 30% range, and investment levels in 2016 to be down significantly. In NAND, we believe next year's [demand] bit growth will be around 35% to 40%, and 2016 investment will be up year on year. We expect around 80% of spending to be focused on 3D NAND, as all the major memory customers ramp this technology into volume production.

In foundry, we anticipate investment levels will be slightly higher in 2016, with the bulk of spending in the second half of the year. We believe more than 50% of this spending will be focused on ramping 10 nanometer technology. In logic, we expect investment levels to be reasonably stable year on year. Overall, we currently see 2016 wafer fab equipment spending being approximately flat, with some potential upside.

Having provided this backdrop, I will now outline the progress and priorities for each of our major businesses. In semiconductor equipment, we delivered our highest annual revenue in eight years, as major changes in device technology continue to expand our opportunities, and provide a catalyst for market share gains. We have very strong momentum in our largest growth businesses, etch, and CVD, and still have significant room to grow. In FY15, our etch revenues exceeded $1.1 billion, an eight year record, and we generated our highest CVD revenues in four years. Combined, our etch and CVD revenues are up significantly year-on-year, and we continue to see very strong customer pull for our new products.

At the start of 2015, we targeted 25 new applications as part of our growth plan. By the end of our fourth quarter, we have won 49 new applications. In our transistor and interconnect businesses, where we maintain strong leadership positions, we secured new application wins at 10 nanometer that will enable us to increase our share of the available market, as customers build out this node. At 10 nanometer, customers are making significant changes to interconnect technology to improve device performance and power consumption. We will be officially releasing new products to address advanced interconnect applications early in the new year.

In addition, we are benefiting from new epi, thermal, and implant steps in memory that expand our market. We also have a significant opportunity to grow in CMP, as the number of CMP steps doubles in the planar to 3D NAND inflection. This quarter, we shipped the 100th unit of our latest generation CMP tool, the LK Prime. The success of this product helped our CMP group post its highest annual revenues since 2011.

In process, diagnostics and control, we recently released UVision 7, a new version of our brightfield inspection tool. This is another area where we see strong pull from customers, and believe we are on track for share gains in brightfield this year. We have also been investing in a new E-Beam inspection platform, and this quarter, we posted our first revenue from both foundry and memory customers.

In service, 2015 revenues represent an all-time record for the Company. Our team in AGS has done a remarkable job to place this business on a trajectory of profitable growth. Over the past two years, we have aligned our service strategy to enable our customers' success, while making significant enhancements to the organization, processes, and operations that together are enabling us to deliver and capture more value with our service products. We believe that our growth momentum in service is sustainable, and our fourth-quarter orders represented another all-time record.

In display, 2015 was a third consecutive year of growth. As the display industry introduces new technologies for both TV and mobile applications, customers' manufacturing processes are becoming more complex, and our market opportunity is expanding. As we look ahead to 2016 and beyond, one of the key battlegrounds will be for OLED leadership. As this inflection plays out, Applied is in a great position to benefit with new enabling products, including our thin-film encapsulation system.

To summarize, in FY15 Applied Materials delivered solid growth, and moved the ball forward towards our long-term strategic and financial goals. I'd like to take this opportunity to thank our employees around the world, for their tremendous contributions over the past 12 months. As we look ahead, we feel very good about our strategy, our customer positions, and our product pipeline. Across the Company, we remain laser-focused on delivery, delivering the enabling products our customers need to be successful, and delivering attractive returns for our shareholders. To achieve our goals, we are aggressively driving our growth programs, making the Company more efficient and effective, and carefully managing expenses. Now let me hand the call over to Bob, who will provide more details about our results, performance and priorities. Bob?

Thanks, Gary, and thank you all for joining us today. I will start by outlining the progress we made in 2015. We remain focused on investing in growth opportunities, increasing profitability, and delivering attractive cash returns to shareholders.

First, growth. For the year, our total orders grew by 5% to the highest level in 15 years when excluding solar. We grew our revenues by 6%. As compared to 2013, our revenues were up 29%. Our silicon system orders and revenues were the highest since 2007. Revenues grew by 3% in 2015, building on a 25% gain in 2014. 2015 has been a very strong year for memory spending, and Applied made significant progress. Our strong position in 3D NAND gave us further growth in etch and CVD. Combined, these businesses are up 23% for the year, and have doubled since 2013.

Gary mentioned that our etch revenues exceeded $1.1 billion for the year, and they were up 140% versus 2013. Our transistor and interconnect product lines maintained their leadership positions in 2015, and we expect the strength of these businesses to become more evident, when foundry spending resumes later in our fiscal year. Applied global services revenues grew 15% in the year, with continued momentum in comprehensive service contracts, as well as 200 millimeter equipment demand. And display revenues grew 27%, reflecting the success of new products such as thin-film encapsulation, and PVD for mobile displays that are expanding our addressable market.

Next, profitability. On a non-GAAP basis gross margin declined 1.2 points in 2015, or about 0.7 points, when excluding the non-run rate items that we reported in 2014. Operating margin remained at 19.6% for the year, as revenue growth and spending discipline offset the gross margin decline. We made further progress in our tax structure, and achieved a full-year tax rate of 19.3%, which was down by 13 points over the last five years. Earnings per share of $1.19 were our highest in four years, and the highest in eight years, when excluding solar.

Now cash returns. Total shareholder returns from buybacks and dividends for the year grew to $1.8 billion, which was nearly 200% of free cash flow. In Q3 and Q4, we deployed 44% of our three year $3 billion buyback authorization. We use $1.3 billion to repurchase 76 million shares, reducing our ending share count by 6% during the period.

We also completed a $1.8 billion debt offering in September, in an attractive interest rate environment. The offering was very well-received, and provides low cost capital to support increased financial flexibility for investments and capital returns. We also added $800 million of short-term debt to facilitate the efficient return of capital from one of our offshore entities. This debt is expected to be repaid within the current quarter.

Next I will make a few comments about the fourth quarter. Our overall results were at the midpoint of guidance. Revenues declined 5% sequentially, but grew 5% year-over-year. Non-GAAP gross margin of 42.2% was modestly above our expectations, and operating expenses were $11 million below the midpoint of guidance. We used $700 million to repurchase 44 million shares of our stock at an average price of $15.78.

Turning to the segments. Silicon systems orders were up 8% [over year]. Orders declined sequentially following an all-time group record in Q3, and backlog remains strong at $1.7 billion. AGS orders of $761 million were up 2% year-over-year, and set another all-time quarterly record. Revenues were below the midpoint of our expectation, as 200 millimeter equipment sales were slightly lower than expected.

Display orders were up 50% year-over-year. As expected, display operating margins declined to 10%, reflecting a high mix of mobile products, along with investments in new products that should significantly increase our addressable market and revenues. EES orders and revenues remain weak, and we continue to reduce our exposure to solar.

Now let me talk about our priorities for the year ahead. As Gary discussed, we expect 2016 to be another year of healthy demand across silicon systems, services and display. In silicon systems, our early expectations are that demand should be higher in the second half of our fiscal year, particularly within foundry. Throughout the Company, we are focused on making further progress toward our longer-term financial model. On the revenue line, our outlook for overall demand, market share, and served market expansion is positive.

Gross margin improvement is a top priority for the Company. We expect improvements in our second half, driven by three factors. First, we expect a more favorable mix, including higher foundry demand in silicon systems, and a stronger TV demand in display. Second, we have line of sight to cost reductions for fast ramping new products. Third, we are making progress on our materials cost reduction.

For operating expenses, we are performing better than our model. Our focus is to maintain spending discipline, and to fund growth initiatives, using identified savings and portfolio rationalization. For the tax rate, we expect to make incremental progress towards the model, and we will continue to be opportunistic with the stock buyback program to reduce the share count.

Now I will provide the business outlook for our first-quarter, which includes 14 weeks of operations. As compared to the fourth quarter of 2015, we expect our overall sales to be down 2% to 9% sequentially. Within this outlook, we expect silicon system sales to be down 7% to 13%. AGS sales should be roughly flat. We expect display sales to be up 5% to 15%, and EES sales should be approximately $50 million.

Non-GAAP gross margin should be approximately flat. We expect non-GAAP operating expenses to be in the range of $550 million, plus or minus $10 million. This includes two weeks of scheduled holiday shutdown, partially offset by the extra week in the quarter. Given we recently raised debt, we expect our quarterly interest expense to increase to approximately $38 million. We expect non-GAAP earnings per share to be in the range of $0.23 to $0.27.

In summary, Applied delivered another year of growth in orders, revenues, and profitability. The investments we've made are resulting in share gains, and a strong pipeline of new products aimed at key market inflections, with strong customer pull. We are increasing our profitability, and providing attractive cash returns to our shareholders. Now let me turn the call over to Mike for questions.

Thanks, Bob. To help us reach as many of you as we can, please ask us one question, and no more than one brief follow-up. Kyle, let's please begin.

(Operator Instructions)

C.J. Muse, Evercore.

Yes, good afternoon. Thank you for taking my question. I guess, first question on the gross margin, it came in a little bit better I think, and guided flattish. Would love to hear your thoughts on what the magnitude would look like, in terms of the uplift as we head into a more favorable mix, et cetera, in the back half of FY16 and calendar 2016?

Sure, I'd be happy to do it. Let me give you a little more color on the mix issue, because we've talked about it a lot. If you go look at the WFE mix for the last several years, for the three-year average from 2012 to 2014, foundry spending was about -- almost 44% of the WFE mix. If you go look at DRAM, it was about 14.5%, and NAND was about 17.7%. If you go look at this year, foundry was about 34.5%. DRAM was up to 25.1%, and NAND is about 23.5%.

We think foundry goes up, as a percentage of the mix next year, and NAND goes up. Now foundry is our highest percentage of WFE, and NAND which used to trail, is approaching at the 3D inflection, our share for foundry. So these two stronger relative spending areas we see next year are foundry, and especially NAND around V-NAND, where we say it's over 80% of the NAND spending next year. So if you trail it down, we see gross margin revenue opportunities for us, share opportunities and gross margin improvement opportunities.

Now we see those more in the second half, because we think foundry is heavier in the second half, particularly around the 10-nanometer inflection. We think NAND is strong, but a little stronger in the second half. DRAM could go 50/50 split, and logic could be pretty even. So that if you look at the quarters and year -- and I'm going to get to your specific question, C.J., but to give you context I thought that this would be helpful -- we are assuming that our Q2 revenues and gross margins will be similar to Q1, with a pick up in the second half.

And in the second half, we see a booster for our revenues and our gross margins. And the gross margins, the opportunity for the Company to improve are -- we could go up quarter on quarter, half on half, we could up -- there's a lot of mix issues, but the opportunity is a couple of points, half on half.

Very helpful. And I guess, as a quick follow-up, you talked about NAND spending being up, led 80% by 3D. Can you walk through what your expectations are for greenfield versus upgrades in calendar 2016? Thank you.

Sure. So we see total V-NAND this year to be [$150 million] ending this year. We see total ending next year to be about [$350 million to $400 million]. That's a combination of adds and converts. Over 80% of the spend is on NAND. And then, in terms of total brand-new adds -- it depends on the customer converts. The number -- the total is going to get to [$350 million, $400 million], we think by the end of the year.

Okay, thank you.

You're welcome.

Jim Covello, Goldman Sachs.

Good afternoon, guys. Thanks so much for taking the question. I guess, the first question is really a longer-term question about China, as a new entrant into the memory industry. I mean, it's something we've seen over the years be so important to the semi cap industry, whether it was Japan Inc., Korea Inc. or Taiwan Inc.

And now it seems like China Inc. is determined to become a player in the memory industry, in particular the DRAM industry, I guess to start. So I guess, how big of an opportunity, do you think it could be, how soon do you think it could impact your P&L? Obviously, I would think that any -- the commentary you made about 2016 would include any early opportunities you see from China, but more really over the next couple of years?

Yes, I think -- thanks for the question. Clearly a lot of activity in China as you've said, we have a very strong position in China. Applied just celebrated 30 years in China. We've got a great team, and great capability there, very strong customer relationships, and very strong share positions with Chinese companies and the multi-national companies that are in China. There are a number of projects that people are talking about, and there are certainly going to be some incremental wafer fab equipment spending in 2016.

I don't know that we want to give a specific number right now, but I would say there are a lot of projects that are in the pipeline. And that could be from a strategic investment standpoint, additive for wafer fab equipment. And our share there, Bob talked about our share in foundry, our share in China is very, very strong. And again, 30 years, we've built a very strong team there.

That's very helpful. Thanks. And I guess, as a quick follow-up, if I could just ask, obviously there's some consolidation that's been announced in the industry. I would love your quick thoughts on, whatever opportunities or threats you perceive as it relates to that consolidation? Thank you.

Yes, again, thanks for the question. We like our strategy. As I've talked about on the call, and also Bob's talked about, we have a very strong position in transistor and interconnect when foundry ramps. And Bob talked about that being in the second half of calendar 2016.

We have strong customer pull for etch, deposition and inspection, very, very strong customer pull. We're growing the service business, significant opportunities to grow our display cam, 2, 3 times above where we're at right now, great alignment and pull from customers for our R&D pipeline. So we're very focused on our opportunities. Bottom line, we're winning in inflections. We have a good position to grow as our customers move to next-generation technologies in semi and display.

Regarding Applied M&A, really nothing has changed relative to our strategy. We're very selective in the opportunities that we look for. There are really three criteria that are the same, that we talked about before, financial return, strategic alignment, leadership in whatever segments the Company is participating in. So those are the things that we look for.

The hurdle for us is very high. Obviously, we can't talk about anything that we are specifically looking at, from a M&A standpoint. But again, bottom line, we are winning inflections, and our strategy is positioning us really well to create value for customers, and grow the business.

Thank you very much. Good luck.

Thanks.

Romit Shah, Nomura.

Yes, thank you. Intel has publicly said that this year's CapEx is an anomaly, and that they will spend more next year. So I'm trying to reconcile that with your outlook for logic being flat in 2016.

Yes, we think, overall logic is up somewhat. It's on the up -- a little bit up frankly. And that we don't have classified in logic, Intel's initiative in memory, right? So that's in the memory bucket. And the third issue is, there's some other cats and dogs or smaller opportunities down below the Intel level. So it's not all Intel. Some of those aren't growing as much as Intel.

Okay. And then another clarification I had, Bob, was just on the 14-week quarter, just so we can model April properly. Is there much of an impact to revenues in either January, or what you would perceive in the April period?

No, it's really more of an OpEx management issue, and we're kind of mitigating that with two weeks of shutdown to offset the full extra week of OpEx expense.

Okay. And, if I could just -- one for Gary. Gary, as you mentioned, FY15 was a good year. You grew your revenues, you had record profits, and you guys made a lot of progress lowering the share count, OpEx, and the tax rate. The share price though, is down about 30% over the last 12 months. And I realize that the merger accounts for a lot of the weakness, but just wondering from this standpoint, what the management thinks they can do to improve shareholder value from here?

Yes, as I said before, if you look at our business, break it down into different pieces, foundry is down a significant amount relative to the mix. And if you look at our position in transistor and interconnect, when foundry ramps, that is a real strength, and really a unique strength for Applied Materials. Epi, PVD, implant, CMP, RTP, all of those areas are very strong leadership positions for Applied. The incremental profitability as that CapEx increases, there's a lot of drop-through to the bottom line.

The mix this year, of memory versus foundry, is different than what we've seen over the last few years. So when foundry comes back, we are in a better position than any company really, relative to the incremental profitability. The other thing, on the foundry is that -- at 10 nanometer, different than 16 nanometer, there are big changes in terms of the device architecture. Interconnect is growing a significant amount, and our share and number of steps will grow, as those devices ramp. So that's one, that's a big driver for us when the mix comes back.

We've talked about the products that we've introduced, the really tremendous momentum we have in etch. The CVD, ALD, these areas are growing for us at a very high rate. And I still think we're in the early innings, relative to the pull that we have from customers, you're going to continue to see growth in those areas as we go forward. As Bob talked about, our memory position has increased significantly.

So as the customers are ramping those 3D NAND technologies, that's what puts us in a good position. We are growing the service business, and we believe it's sustainable growth in service. And as our customers move to new technologies in displays, that's another area where they are adding steps, deposition, materials, engineering steps, that give us a great opportunity. So you put all those things together -- again, we are winning in inflections, and we really have a great opportunity to grow, in all of our different business segments as customers transition to these new technologies.

Thanks, Gary.

Timothy Arcuri, Cowen and Company.

Thanks a lot. I guess, first question really is for Gary. So Gary, given the merger that we saw announced, there's a lot a bold moves to shake things up in the industry. I guess, most of what you have done so far is to consolidate markets that you already are in. But if you look sort of to those markets, there is not a whole lot that you can do, that would really move the needle. So I guess, I wanted to ask you about your willingness, to sort look outside of your traditional [front-end] wafer fab equipment markets, maybe into the back-end, maybe into some non-semi stuff? Sort of how you think about the strategic way, where you can grow the earnings to $2 or more? It seems like you might have to look outside of your traditional front-end WFE markets. Thanks.

Yes, Tim. Hey, thanks for the question. So if you look at -- again, if you look at our businesses, if you get to a mix of foundry and memory, that's more similar to what we have seen the past. As I said before, our transistor and interconnect business is very, very, very strong. So, and we see growth, in terms of the number of steps, as our customers are transitioning to these next-generation devices. If you look at etch and deposition, we have grown maybe $1 billion over the last two or three years. We still think there's a lot of opportunity to continue to grow there, going forward, a significant opportunity.

One of the things I talked about this last year, is that we had a goal of 25 applications wins. We actually won 49 new applications, and that gives us a great tailwind going forward in terms of those areas. So that's $10 billion market opportunity, where our share momentum is strong. We have great products, we're winning applications, critical applications with customers in those areas, so big opportunity for us to grow. Services has grown about $500 million over the last two years.

And in display, what we've talked about is the opportunity to triple our TAM. And we could be somewhere around $1 billion in display this year, and there are changes in technology that will happen in display, that are also great opportunities for us. So you put all those things together, and you have a more normalized mix, in terms of memory, foundry, mobile, TV. And you have a market around $33.5 billion in wafer fab equipment. We have a lot of momentum to hit the model that we had talked about before.

Now relative to the areas that you talked about, Tim, all I can say here, is that we have the same criteria that we had before, the financial returns, strategic alignment, leadership in whatever businesses that we are looking at. But we really can't comment in a public forum like this on anything that we are looking at.

The other thing I would say though, is we have a very high bar for M&A, but I also believe you miss 100% of the shots you don't take. We have a great team at Applied Materials. And I think if we find the right opportunity, I have tremendous confidence that we can execute on that opportunity. Bob, I don't know if you want to add anything?

Yes, see if I can be responsive to your question, Tim, and the investors. There is kind of three ways we move the needle here. There's inorganic stuff, there's organic stuff, and then there's capital returns to investors and how we do that.

So if you look at inorganic stuff, Gary's right, we look at everything, and we are aggressively looking at everything, and we are very open-minded to it. So we've closed no doors. On the organic stuff, I frankly think the results are even better than they appear. If you look in display and AGS, we are growing them more rapidly than they had in years.

If you look at the semi business, if you looked by vertical, our highest share is foundry where we've maintained that. We've gain 5 points of share in the last couple of years in DRAM, 5 points of share in the transition from 2D to 3D NAND. And we've gained 3 to 5 points, we think in logic. Okay? So in all the verticals we're doing well. You say, well, I don't see it enough in P&L. Well, foundry is down 9 points this year, and DRAM is up 9 points. I don't think anyone projects that's going to be a sustainable future.

So as we gain share in virtually every vertical, and the mix normalizes, that revenue growth opportunity looks pretty good in the semi business. And then, in the etch business where we gained, we're up over $1.1 billion, we start to in later years, get a lot more service business out of that too, because that's a very attractive business. So within the organic markets, when you look at performance within vertical, performance by product, performance in terms of revenue growth, and also in AGS and display, pretty darn good.

No one predicted nine months ago or a year ago, that foundry was going to be down this year, and be 9 points down as a percentage of CapEx. And nobody predicts it's going to stay that way. We managed to grow revenues, orders, and profit in that environment. And I don't think you go to a cocktail party, and anybody who says, historically Applied's a DRAM company versus a foundry company. But we're -- growing our DRAM share 5 points. Okay?

Got it, Bob. Thank you for that. I guess as a quick follow-up, Gary, you just talked about $1 billion in revenue. I -- do you mean you could do $1 billion in display revenue next fiscal year, for FY16, is that what you mean?

If you -- we're consolidating in display, the display upgrades that's been in the service business. So that had been segmented out of display, and we're going to consolidate also the web business into display. So you put all those things together, and you get closer to $1 billion.

Again, we had segmented out the upgrade business there, which is different than what we've done with some of our other segments. So put all of those things together, and that's how you get closer to the $1 billion. And what I would say, if you look at -- we can't talk about specifically about what customers are doing. But there's some big changes in the display market, that could be really great opportunities for us over the next two to three years, to grow that business even further.

Yes, if you look at the revenue growth in display, it's pretty impressive. They were [$473 million] in 2012, [$538 million], [$615 million], [$739 million], [$780 million], and we think next year is a strong year also. And then, also, we bundled the display upgrades into AGS. So when you gross up the display business, it is probably, next year pretty close to $1 billion all-in, including some services too, I guess. So it's growing pretty well.

Got it. Okay. Thank you so much.

Krish Sankar, Bank of America Merrill Lynch.

Yes, hi, thanks for taking my question. I had two of them. One is for Gary or Bob. You guys highlighted how the last four years was great for foundry spending, and now it's moderated this year. But if you look at the last four years, like smart phone growth is very strong. I'm just kind of curious, what makes you think that this year is not the new norm for foundry spending? And along this path, do you think there's going to be any reuse for 10-nanometer foundries? And then I have a follow-up.

I am going to start, and you can finish. So if you go look at 2015, a couple of things happened. The biggest thing was, if you go look at this -- you got to look at the node, and the previous node, and the next node when you consider spending and reuse. So if you go look at it, I don't think anyone thought the 20 nanometer was a super device.

A lot of customers, and you guys know this, looked forward to the introduction of finFETs, and the finFET device at 16/14 was a more powerful device for them, in terms of processor and power. Right? So not too many customers, customers did 20-nanometer [tape-outs]. You know that, right? What we are seeing is that 16/14, by the time they're done, is going to be a big node for tape-outs. So what you had is a fair amount of the equipment at 20 can move to 16/14.

So it is the height of the opportunity for reuse, because there weren't a lot of tape-outs at 20. Now when you go to 10 -- now the one thing that helped you at 20, for the one particular customer that went [big at 20]. They buy a fair amount of equipment at the first part of this two-node buyout, 20/16, so the [10 versus 7], because a lot of the equipment isn't necessarily for interconnect, and they buy at the front of those two-node buying patterns. Now that's very good for Applied, frankly. So as you look at the transition from 20 to 16, verses 16 to 10, the plus -- you kind of had them both, is the big spend on interconnect, and a little bit of the front end, we benefit from that.

What you had as a minus, two minuses kind of at the 20/16 node, a lot of people moved their demand from 20 to 16, and there wasn't a lot backfill. So 16 projects to be a big long node, so a lot of that capacity is going to stay there and not move to 10. So you're going to get a fair amount of buying at the 10-nanometer node. So we think 10 is a pretty big spending node for us, and I think the customers say that too.

And many new steps also.

And many new steps. If you look at the interconnect stuff, it's up high percentage. And that's a very good sweet spot for us. 10 nanometer will be big, because you've got a node before you at 16/14, that's a powerful node, so not going to move everything to 10. They're going to keep a lot at 16/14, they're still growing. And then 10 will be good, because you got the finFET, and you got the new interconnect. You didn't have the new finFET at 20.

Got it. Got it. And then just as a follow-up. I'm quite curious -- and I understand the thought process on the M&A side. I'm just curious more on the organic development side. If I look at your -- some of the products where you're investing or trying to gain traction, for example, the offset or dielectric etch where there has not been a whole lot of traction. And also, the E-Beam product, where it looks like Hermes has already won the battle and it might be a niche market. I'm kind of curious, what are the thought processes on the organic product development, are you guys looking to hit singles on this? Or do you expect this to be a big home run, driving like a $500 million or a $1 billion revenue stream?

Well, I would say in etch with Sym3, we went from something like 10 chambers, to close to 500 chambers, 450 chambers in five quarters. We've never seen a ramp like that at Applied Materials, and you very rarely see that kind of adoption anywhere in the industry. And I was traveling actually most of the last six weeks with pretty much all of our major customers, the pull is really phenomenal.

And I talked about the 49 application wins in etch and CVD, we have tremendous, tremendous pull from customers. And we're winning critical applications also. This is not just non-critical applications. Some of the most critical applications, the design of our technology is outperforming the competition. So we look at that, the etch business, $6 billion market it's, is a great opportunity for us.

Relative to your question on dielectric etch. Again, you have a $6 billion market. We certainly have gained share. But our position going forward on new applications is also very, very strong, and the pull from customers is tremendous. So our focus has been really on conductor etch. We wanted to go where we had the best opportunities, where we could create the most value for the customers.

We continue to focus on areas that are the best fit for our differentiated technology and customer high-value problems. And I can tell you, there's still a lot of room there for us to grow in the etch business. So tremendous growth over the last few years, but still phenomenal pull and momentum and opportunity for us going forward.

In E-Beam inspection, I wouldn't say the game is anywhere close to over. Our PDC business, the majority of our revenue in PDC comes from E-Beam products. We have a very strong position in E-Beam review. We've gained some share in CD-SEM, CD metrology also. And really the focus there is around the most critical imaging applications. We have world-class electron optics, and the team is bringing that technology leadership now into E-Beam inspection. And we have a great opportunity, a great opportunity going forward.

So I wouldn't say -- again, I've been in this kind of a business for a long, long time. I don't think that this game is anywhere close to over. We have a great opportunity there.

Got it. Thanks, Gary.

Farhan Ahmad, Credit Suisse.

Thanks for taking my question. Gary, you mentioned that the foundry is stronger in the second half. I was wondering if you could provide us some comments on the linearity of next year, for your overall silicon business? Is it stronger in the first half or second half, and how does it compare to the second-half calendar this year?

So, if you go look, Farhan, this is Bob. So in 2015, WFE for the industry, we think for the total WFE was probably like 48[%], 52[%], something like that. I personally think, next year WFE is all of that and maybe a little more back-end loaded. Because in 2015, you had foundry back-end loaded more, and you get that again next year. But I think, the memory is not as -- it's a pretty good memory year next year, but not as strong in the front end as it was this year, okay?

So I think 48[%], 52[%] it's that or more than that next year, in terms of back-end load -- that's for the industry. Now for Applied Materials, we always tend to be back-end loaded, just because of the way we run quarters, and the December calendar year end. So this year I think we were like 57% in the second calendar half, 43%, 57%. I don't want to give an exact number, but I don't know why we would be any different than that. Because I think the industry is similar. Where we're strong foundry, and being end is more second half. So I think you're talking those types of numbers. I don't want to give hard numbers, but it's similar to this year.

So, overall it should be very similar for the overall business in terms of the linearity?

Yes, it might even be a little bit more second half next year, but pretty similar.

Got it. And then, in terms of your capital returns. You obviously raised some debt recently. How are you thinking about the $3 billion buyback now, do you still think it will take up to two years, or do you think it will be much faster than that? Just at the rate at which you're going, it seems like you would be almost done within like a year. And second, in terms of your dividend, how are you thinking about it?

Yes, we did $625 million in the first quarter, which wasn't a full quarter. We did $700 million on the buyback in the second quarter. That's $1.325 billion. And then, we have a matrix that tracks the volume by the price. So my guess is that Q3 is a good-sized buyback. Maybe not quite as big as -- as the recent -- next quarter, I think might be a good-sized number, somewhere between the first two quarters we did, is my guess. But it depends on the stock price, right? In terms of -- we originally said, we get done three years, then two years. It may be shorter than two years, but I don't want to predict it right now, because it's based on stock prices at any given point.

Oh, and the dividend, is the other question. We addressed -- the dividend is a Board decision, and we have that meeting in like February/March with the Board every year. The Board's always been very supportive on all forms of cash returns to investors. In fact, if you look at Applied over last 1, 3, 5, I think even 10 years, we've returned about 100% of free cash flow to investors. So the Board will talk to us about a dividend versus buyback for some other things in February, March. And I think they'll be open-minded on everything, but no decision has been made.

Thank you. That's all I have.

Harlan Sur, JPMorgan.

Thanks for taking my question. On the Lam-KLA deal, one of the revenue synergy opportunities that they talked about as a rationale for the deal -- and they put the synergies at about $600 million within five years, is on the integration rights. And the integration in situ or standalone, or the process tools, and the process control tools. Obviously, the Applied team has got somewhat similar capabilities on both sides. How do you see the opportunity for more process control integration with your process tools? And if they're right, then should you be looking at a similar opportunity? Be great to get your thoughts here.

All right. Yes, thanks for the question. So on -- I just want to clarify, you're talking about integrated process control, is that the question?

Yes, integrated process controls, whether it's in situ or standalone?

Okay. Great, yes, thanks. So if you look at integrated process control, the adoption has been very limited over time. There are a few examples, CMP is one. Another one that has some adoption is ASML's YieldStar product. It's not a new concept. We have a very good understanding of these opportunities, but we really can't comment on our strategy, and either company's long-term roadmap. But I would say that we have a very, very good understanding of this particular area.

Okay. And then, on the AGS revenues, up 15% FY15, solid performance. The team has been focusing on its services and monetizing its manufacturing IP and know-how. Within the framework for a flat WFE spending year next year, do you expect your AGS business to outgrow the industry and outgrow your overall SSG business in FY16 as well?

We think AGS have a very good opportunity to grow their revenue line next year. And I think they're very good shape to hit the model we put up for 2018. In terms of whether they outgrow the semi business or not, there are a lot of variables in terms of WFE spending. But I think they are going to have a strong year. They had a really great year this year.

Yes, okay. Thank you.

Steven Chin, UBS.

Okay, thanks, hi, Gary, Bob. Just a follow-up question about DRAM WFE in 2016 being down significantly. Do you think DRAM as a percentage of WFE goes back to 14% of total WFE, compared to 25%? Is that kind of the way to think about your definition of being down significantly?

I don't want to give a hard number. We think it's down, but not down that far.

Okay. Thanks for sharing that. And then, just a follow-up question on market share. It sounds like your etch and deposition market share did quite well this year. Now that Lam and KLA are combining, is this typically a time that Applied can take even more market share in etch, deposition, and maybe even inspection, as those companies look to integrate?

Yes. What I would say, in etch, deposition and inspection, we have, as I said earlier, incredible pull from customers in etch and deposition. Especially as they are moving to new device technologies, there is a lot of new materials that are going to be implemented, where we have a very strong position. I talked about the number of applications wins earlier. So we already have very strong pull from customers, with the enabling technologies, the new platforms that we have implemented in those areas.

Also, very, very strong pull from customers on inspection. Deeper technology engagements than we've ever had before as our customers are moving to these new device structures. And really a great opportunity, strong pull from customers.

Okay. Thanks, Gary.

Atif Malik, Citigroup.

Hi, thanks for taking my question. Two quick ones. Bob, assuming flat WFE next year, AGS sales up, how should we think about OpEx dollars, in terms of absolute dollars for into next year?

For the whole Company?

Yes.

Yes, we will be -- year, fiscal year, fiscal out year, we would like to be down a little bit -- or flat to down a little bit.

Okay. Then as a follow-up, I believe there was a $13 million small negative adjustment in the backlog. Can you talk about what -- where that was? Was it in silicon and which end market?

Well, we had a backlog adjustment earlier in the year in foundries, remember? And then, I think we had some FX. Hold on, I am looking it up.

$13 million was -- yes, there is a cancellation -- there's a bunch of small ones really, there is no big pattern. Currency adjust was $27 million, that's buried in there too. So $27 million was foreign exchange, $24 million in SSG, $3 million in solar. So a lot of it was foreign exchange movement too.

Okay. And one last one. On the services side, is it possible to provide some kind of percentage for [200]-millimeter refurbished equipment? Is it more like 10% or 20% of your service sales or higher?

I'm sorry -- I missed -- I didn't hear the whole question.

The 200-millimeter refurbished equipment sales as a percentage of overall services sales?

Yes, we don't break that out. What we've said is, that it was a strong year for 200-millimeter tool sales, up a fair amount from last year, and we think it will be pretty strong next year, too. There's a couple big demand drivers there.

One is, you don't quite realize it, but your average cell phone has got a lot of sensors in there, so a lot of those sensors are made of 200-millimeter devices. The second is, the whole automobile and sensors business is growing quite a bit. So both of those look like they'll be pretty good next year, too.

Okay, thanks.

Thanks, and I think, Kyle, we have time for about one more question, please.

Weston Twigg, Pacific Crest.

Hi, thanks for taking my question. Wanted to ask about your comments on inspection, where you said you're seeing very strong customer pull. Was that more related to just the new UVision platform, or were you referring to E-Beam inspection? And if it was E-Beam related, I'm wondering if you can give us an idea of how much a revenue contribution that could be in 2016?

Yes. So in UVision, we have a good position in foundry and logic. Also, we had a recent multiple tool order in memory for the UVision 7, so making progress there, in that part of the business. On the E-Beam area, again as I said before, we have really very strong electron optics. We've got a strong position in E-Beam review, and putting all that together, we think it's a great opportunity for us. We are not ready to quantify the exact number, in terms of the potential there. But it is a fast growing part of the market. And with the technology and the team we have, we think that it's a good opportunity going forward.

Okay, that helps. And then, as a follow-up, I was wondering, on the last call you said, you were ramping down some businesses, and you planned to cut anything really sustainably below 20% Op margin. And I was just wondering if there were any significant cuts this quarter that you could talk about?

Well, it's hard to talk about those in advance. We consistently screen all of the businesses. The one that consistently, we are ramping down is the solar business, frankly, because the market is bad, right? But other than that, we don't have much we would talk about right now.

Okay, thanks a lot.

All right. Thank you, Wes, and we like to thank everyone for joining us this afternoon. A replay of this call will be available on our website, beginning at 5 PM Pacific Time today. Thank you for your continued interest in Applied Materials.

This concludes today's conference call. You may now disconnect.