應用材料 (AMAT) 2016 Q1 法說會逐字稿

Welcome to the Applied Materials earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead, sir.

Thank you.

In a moment, we'll discuss the results for our first quarter, which ended on January 31.

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

Before we begin, let me remind you that today's call contains forward-looking statements, including 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-K and 8-K filings with the SEC.

All forward-looking statements are based on management's estimates, projections and assumptions as of February 18, 2016, 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.

I'll start by commenting on Applied Materials' results, and talk about our outlook and longer-term strategic goals.

Then I'll share our views on the market, and what this means for us in 2016.

I'll conclude with my thoughts on each of our major businesses.

After that, Bob will provide additional details about our results, and describe how we're optimizing the Company's performance, and delivering strong shareholder returns.

In both semiconductor and display, we see dramatic technology changes taking place.

When we look at the advances our customers are making, materials innovation is at the heart of these changes.

I believe this creates great opportunities for us.

We have the broadest and deepest talent and technology, to enable the materials innovation that will drive the semiconductor and display industries forward.

Our strategy is to develop highly-differentiated materials engineering products and services, that make major technology inflections possible.

Our strategy is working, and I'm pleased with our progress.

We are turning the investments we've made in new products into profitable growth.

When I look at our Q1 results and our outlook for 2016, there are four main drivers of our performance.

First, our leadership businesses, including epi, PVD, implant, CMP, and RTP have high market share and unique capabilities.

I see these businesses delivering critical enabling technology that our customers need to drive significant innovations in transistor and interconnect for 10-nanometer devices.

Second, our high growth businesses, etch and CVD, are winning substantial market share as the 3D NAND inflection and materials-enabled scaling accelerates.

Third, we are delivering sustainable growth and service.

2015 was a record year for service revenue, and in Q1, we booked our highest orders ever.

And finally, we are growing beyond semiconductor, specifically in display.

When I meet with leading display companies, it is clear that the industry is becoming highly dependent on materials innovation, especially as they introduce new technologies like OLED.

This plays to our strengths, and significantly expands our market.

Now, let's turn to our market outlook.

Like everyone, I'm mindful of the current global economic risks.

Even in this environment, we believe 2016 wafer fab equipment spending levels will be similar to 2015.

We are seeing industry investment focused on technology inflections, including 10-nanometer and 3D NAND, as well as increased spending in China.

For our customers, the inflection-driven investments in foundry, logic and memory are highly strategic.

We have been witnessing a fierce battle for leadership in these new device technologies.

When I talk to customers about their major competitive challenges, they talk about how critical it is to hit the right timing for major technology transitions.

In foundry, we believe 2016 investment levels will be more or less the same as last year.

We anticipate that the majority of spending will be for the 10-nanometer node, which will be heavily weighted towards the second half of the calendar year.

In addition, we see a broadening of foundry spending, and some shifts in customer mix, shifts that I believe are very favorable to us.

In memory, we see NAND investment up about 25% year-on-year, as more customers ramp 3D NAND technology.

Our available market at a 3D NAND factory is up to three times greater compared to traditional planar technology.

2015 was a year of heavy DRAM investment, with the highest level of spending in five years.

This year, we expect DRAM investment to be down around 20%, coming off this high.

And in logic, we expect investment to be relatively flat year on year.

Within the global environment, I look at China as a very significant opportunity.

In China, we are seeing growth in revenue and orders both from Chinese manufacturers, as well as multinational customers who are expanding their footprint.

I believe that Applied is very well positioned.

We were the first company in our industry to establish a presence in China, more than 30 years ago.

Today, we have strong customer relationships and great talent to support the new projects that are ramping there.

Now that I've given you this background on the market environment, I would like to talk about the progress and priorities for each of our major businesses.

In semiconductor equipment, I'm pleased with our momentum.

Technology changes are moving the market to our sweet spot in materials engineering, and this means that our served market is now 60% of total wafer fab equipment.

We are investing more than ever in innovation and unique products, to accelerate materials-enabled scaling for our customers.

I like how our future pipeline is shaping up, and we have very strong pull for our latest technology.

We are projecting that 40% of our 2016 revenue will come from products that we launched in the last three years.

In 2015, we believe that we made solid share gains in wafer fab equipment, with almost all of our major businesses growing or maintaining their market position.

I expect that 2016 will be an even stronger year for us.

In service, we aligned our strategy to enable customer success.

We've done this by bringing together capabilities from across the Company, to deliver more value with our service products.

The changes we've made to our strategy drove record performance in 2015, and we are now focusing on sustaining growth in this business.

Because demand for service is seasonal in nature, we believe year-on-year comparisons are helpful.

Our Q1 revenues are up 7%, compared with the same period last year.

I also look at service contracts as another leading indicator of our future growth.

If we look back to 2012 and 2013, the net number of tools under contract was not growing.

In 2015, we added around 1,250 tools under contract, and I expect us to continue this momentum.

As I mentioned in display, customers are also making strategic investments in new technology.

We are seeing these investments accelerate, particularly for OLED displays.

The display technology inflections significantly expand our available markets.

For example, we project that our opportunity at an OLED factory is more than 3 times larger than at a traditional amorphous silicon LCD factory.

We have great opportunities and momentum in display, and I am excited about how we are positioned.

Our display business has grown consistently for the past three years, and we expect to deliver additional growth in 2016 and beyond.

To summarize, as I look ahead, I am confident about our future growth and performance.

We are maintaining a positive outlook for Applied in 2016, because our customers are making strategic inflection-driven investments that play to our strengths.

Our leadership businesses where we have unique capabilities are performing well, as the market comes to the sweet spot of our technology.

Our high-growth businesses, etch and CVD, are making significant market share gains as the 3D NAND inflection accelerates.

And we are delivering sustainable growth in service and display.

Across the organization, we are focused on delivering enabling products and services, and generating attractive returns for our shareholders.

Now, let me hand the call over to Bob, who will provide more details about our quarterly results, performance and priorities.

Bob?

Thanks, Gary.

Like Gary, I believe we're in a strong position to deliver profitable growth in 2016, as our customers invest in the technology roadmaps across semi and display.

Based on the demand outlooks of our customers, I believe we'll make significant progress this year towards our 2018 financial model, and we'll deliver very attractive cash returns to our shareholders.

On the revenue line, I'm encouraged by the progress we're making in semiconductor systems market share.

While we expect the WFE market to be about the same size this calendar year, we believe our share of WFE will be higher.

We expect our SAM share of WFE to expand this year as well.

In fact, we believe it will be up 7 points compared to 2012.

Our global services business is on track for a third consecutive year of growth, and we believe our display business will grow for a fourth consecutive year.

I'm also encouraged by the progress our teams are making on our gross margin initiatives, and I am still confident that we'll make additional progress in our second half.

On the operating expense line, we are tightly controlling our discretionary spending, holding OpEx relatively flat, while strengthening R&D.

We are making substantial R&D investments to deliver a strong pipeline of new products for emerging inflections.

These products are already delivering revenue growth today.

At the same time, we are reducing non-GAAP G&A to the lowest level in years.

We made further progress with our tax structure, and I believe we're on track to lower the rate once again this year.

We continue to be aggressive with the buyback program.

We've repurchased 112 million shares over the past three quarters, which is equal to 9% of the shares outstanding at the beginning of the program.

So while 2016 is shaping up to be a flattish year for WFE, we believe Applied will outperform our markets, making significant progress towards our financial 2018 model, and deliver very attractive cash returns for our shareholders.

Next, I'll make a few comments about the first quarter, when we delivered financial results that were slightly better than our expectations.

Revenue of $2.3 billion declined 5% sequentially, and we slightly increased our non-GAAP gross margin to 42.4%.

We held non-GAAP operating expenses within the range, and we delivered non-GAAP EPS of $0.26, slightly above the midpoint of the range.

Turning to the balance sheet, we used $625 million to repurchase 35 million shares of our stock.

We have completed 65% of the $3 billion authorization, and we'll continue to be opportunistic with the program.

We also repaid $800 million in short-term debt, and redeemed a $400 million bond, scheduled to mature in June.

Turning to the segments, silicon systems orders were 12% lower sequentially.

Within the mix, only DRAM orders were higher.

Our silicon backlog remained healthy at $1.6 billion, and while revenue declined in Q1, we believe our demand will increase in Q2 and the second half.

Our AGS orders reached $773 million, and set another all-time quarterly record.

AGS sequential revenue was slightly lower, consistent with seasonal patterns.

Our display orders were down 6% sequentially, but remained up year-over-year.

Our display revenue increased 12% sequentially.

Bear in mind, the display orders and revenue will continue to be lumpy.

EES turned a modest profit, even as revenue remained at low levels.

Now I'll provide our business outlook for Q2.

We believe our overall net sales would be up by 5% to 10% sequentially.

Within this outlook, we expect silicon systems net sales will be up by 11% to 17%.

AGS net sales should be flat to up 5%.

We expect our display net sales to be down by 20% to 30% and EES net sales should be approximately $55 million.

Our non-GAAP gross margin should be approximately flat, and we plan to hold non-GAAP operating expenses in a range of $565 million plus or minus $10 million.

We are forecasting a Q2 non-GAAP tax rate of 17%, and we believe non-GAAP EPS will be in the range of $0.30 to $0.34.

So in summary, we see 2016 as a year when a broad range of our customers invest in leading-edge technology across semi and display.

Our investments have put us in a position to grow our served market, revenue, share, and earnings.

While we're mindful of the macroeconomic concerns, we believe 2016 will be a strong year for Applied Materials.

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 no more than one question and no more than one brief follow-up.

Operator, please let's begin.

(Operator Instructions)

Your first question comes from the line of C.J. Muse from Evercore ISI.

Your line is open.

Good afternoon.

Thank you for taking my question.

I guess first question, on the silicon side, so given your outlook for you to outgrow WFE, and where you are in terms of backlog and the orders in the quarter, the math seems to work that orders should be up at least 20%, 25% into the April quarter, and then rising through the back half of the year.

Is that the framework you're looking for?

And I guess within that, how should we be thinking about mix between foundry, logic and memory through the year?

Sure.

C.J. I'll take a shot at that.

We're not giving specific orders guidance, but we have said -- we do believe that the second half is stronger than the first half.

We do believe that the first half is a little bit more weighted to NAND, whereas the second half is more weighted to stronger performance in foundry, logic and DRAM.

So we do see a stronger second half.

And incrementally, we see strong performance for Applied in the second half, because of our position on VNAND throughout the year and also foundry in the 10-nanometer conversion.

We think the second half does feel more positive than the first half, and our position is pretty good in the second half.

Excellent.

And I guess as follow-up, how should we think about the trajectory here off of a flat gross margin guide into the back half of the year?

Sure.

We said on the last call that Q -- first half of FY16 would be flattish with the fourth quarter of FY15, when we did 42.2%.

We did 42.4% in first quarter this year.

We're guiding to about the same in Q2, so we're a little above what we thought we were a quarter ago, and we still believe that the second half is up from the first half.

We said last call there would be a 200-basis point, roughly increase from first half to second half.

We think the full year is still positive, as we've said.

We think we exit the year, we think we're up in the second half.

But given that we're a little ahead of plan in the first half, I don't know that there is a 200-basis point improvement from first half to second half.

Got you.

Makes sense.

Thanks so much.

Your next question comes from the line of Toshiya Hari from Goldman Sachs.

Your line is open.

Thank you for taking my question, and congratulations on a solid quarter and a strong guide.

I have two questions, as well.

The first one is regarding memory CapEx.

Just given the pricing dynamics in memory, are you worried at all about DRAM and NAND CapEx in the back half of the year?

Or do you think the pending projects are strategic enough for your customers to spend according to plan?

So generally we think this year is flattish with last year, with last year.

It was like $31.5 million to $32 million.

But the year is a good year for Applied Materials.

If you look at the spending this year, we think foundry and logic are flattish, but the mix within foundry and logic spending, in terms of what they are buying and customer profile is very good for Applied.

The second thing is within memory, we think memory, DRAM's down about 20%.

We think flash is up about 25%.

And the predominant spending in flash is VNAND, so the transition on VNAND is particularly good for Applied on three levels.

One, the absolute level of greenfield spending for first and second generation VNAND is higher than the absolute spending for planar NAND.

The second thing is that the re-use, where they were doing a lot of re-use and the shrink from planar is significantly less than first and second generation VNAND, and particularly around tools that we sell.

And thirdly, we're gaining on the transition.

So I think that the mix within this for Applied, in terms of our concern, we think the $31.5 million type number, maybe a little more on the year is a fair estimate.

We think we've taken the risk you've referenced into account.

Okay.

Helpful.

Thank you.

The second one is regarding your display business.

I know Gary and Bob, you both touched on this.

But can you maybe talk a little bit about what you're seeing in terms of order trends primarily in China today, and how big the OLED opportunity could be for you in 2017 and beyond, I'm guessing primarily in Korea?

Sure.

OLED is a great opportunity for Applied.

We've talked about the increase in the total available market.

Their added CVD, PVD, thin-film encapsulation steps, so if you do a comparison to amorphous silicon LCD, the total available market is up by about a factor of 3 for us.

In display, we've talked about 2016.

We're anticipating being a fourth consecutive year of growth.

And based on everything we're seeing, we're on track to either hit or exceed the 2018 model that we published for display previously.

So display, and we have tremendous momentum.

And certainly OLED, especially in mobile, is a huge opportunity for us.

The other thing I would say is that this is really a great proof of our ability to expand materials engineering into adjacent markets.

Thank you so much.

Your next question comes from the line of Joe Moore from Morgan Stanley.

Your line is open.

Great.

Thank you.

I wonder if you could talk a little bit about the lumpiness in some of the order patterns, particularly NAND?

I mean, for NAND to be as strong as you've talked about, it seems like it's going to come back a lot in the second quarter.

Is that the right trajectory?

Then longer term, how long do you think this 3D investment sustains, and when do you think that might peak?

Sure.

I'll take a shot at that.

So if you look at the disconnect is, we think that NAND is stronger in the second half than the first half, and we think there's an increasing traction around VNAND.

I'm sorry.

NAND is stronger first half than second half.

And you would say well, why did you have bigger DRAM orders, and not NAND?

We had already booked some.

If you go look back at Q3, Q4 of 2015, we had very large bookings, and some of those were VNAND bookings.

Secondly, we see increasing traction.

So if you see why we're beating in Q2, it's around two things in particular.

It's around China and a wider proliferation of VNAND.

So we do see the momentum in VNAND and we're pretty comfortable it's going to happen.

And then in terms of the length, the duration of this investment.

Oh, the duration.

Does it grow again, you think, in 2017?

Do you have the visibility to say that?

Right now, there's about 1.4 million wafer starts in the world of NAND.

Through the end of calendar 2015, 150,000 had been converted.

We think cumulatively through the end of 2016, it's going to be 350,000 to 400,000.

Through the end of 2016, 400,000 of the 1.4 million available have been converted.

We think most of those get converted over time.

This year, we think NAND spending is about $8.7 million.

We think it's sustained at pretty good levels for the next few years for this conversion.

Does it stay that high?

I'm not sure, but it's a pretty healthy number.

Very helpful.

Thank you very much.

Your next question comes from the line of Timothy Arcuri from Cowen and Company.

Your line is open.

Thanks a lot.

Actually, I had two.

First, Bob, if I look at the service, orders have been pretty meaningfully above revenue for about a year now, and I thought that service usually had a one-year contract.

So I guess I would have thought we would see some catch-up on revenue relative to bookings.

Are these contracts now lengthening out beyond the year?

Can you bridge that gap for us?

Thanks.

Yes, the service contracts are a good leading indicator of revenue, and they're also a good leading indicator of sustainability of revenue, because you build in that relationship over time, and customers get greater value from us, frankly.

It's a win-win both ways.

In terms of how you recognize it through the revenue plan, it is happening.

A couple of things are happening in the quarter.

One, you did have the Chinese New Year, and a little bit of slowdown started up earlier in Q1.

So we book a lot of contracts typically in Q1.

But the revenue, it's not a high revenue quarter.

And fab utilization was okay in the quarter, so in terms of tactical sales of spares and services, not super high.

And then 200-millimeter tools are in that number, too, and those go up and down a little bit.

Okay, great.

Thanks, Bob.

And Gary, just a question for you on M&A.

Can you just talk at a very, very high level about that?

There's just not a lot of stuff in your current SAM that really can move the needle for you.

I guess the question is your willingness to think a bit outside the box, and maybe expand your SAM into some new verticals?

Thanks a lot.

Thanks for the question.

Regarding our current strategy, we like our current strategy.

The outlook for 2016, we think, is very strong and beyond 2016, we also believe that there is great opportunities for growth.

We have a strong position in transistor and interconnect, as foundry and logic moves to the new technology nodes.

Very strong pull for etch deposition tools also, especially in the memory space, but certainly in patterning, in future technology nodes.

We're growing service, growing the display business, and we believe that's sustainable growth in those markets.

So overall, we're making tremendous progress toward the 2018 model, and we're optimistic about growth opportunities for Applied, especially when you look at what's driving, what's driving this year and what's going to drive the future.

You have 10-nanometer, that is really based on materials, new materials, 10-nanometer, 7-nanometer, new memory technologies, organic LED displays.

All of those areas are enabled by materials innovation, where Applied has clear leadership.

And we think this is a -- we're in the early innings of these changes, in driving materials-enabled scaling.

So I am personally very optimistic about growth for Applied Materials.

Relative to M&A, our strategy continues to be pretty much the same.

We continue to look for good opportunities, but we're very selective in what we look at.

There's three criteria: financial return; strategic alignment, especially with our engineering materials technologies; and does the Company have an opportunity for leadership in whatever segments that they are in.

So those are the three things we look at.

Certainly we keep looking for opportunities, but I am very confident about our growth opportunities, and we are definitely not needy, relative to M&A.

Thanks a lot for that, Gary.

Thanks.

Your next question comes from the line of Romit Shah from Nomura Securities.

Your line is open.

Yes, thank you.

You talked about strength in China and I'm seeing orders in this region up 20% sequentially, and up over 50% year-over-year, and in terms of regions, your second-largest region for total orders.

Can you talk a little bit about what's driving that strength, and the sustainability of it?

I can start, and then, Bob, if you want to add anything.

So clearly, there's a lot of activity in China.

We see investments by both multinational companies and domestic companies.

Applied has a very strong position in China.

We were the first company to build capability there about 30 years ago, very strong team, very strong capability, very good relationships and positions with both the Chinese companies and the multinational companies that are moving to China.

So we look at this as certainly an incrementally very good opportunity in 2016, but I would -- my feeling is this is certainly not just a 2016 story, that there is a great opportunity going forward, and for Applied, we're very, very well positioned.

Okay.

Thanks.

Thanks, Gary.

And then I also had a question on OLED.

Your display business was about $700 million to $800 million last year.

Can you break down for us, within that, how much was OLED revenue, and when do you think this business actually starts to move the needle for total revenues?

Sure.

We segment it a couple of ways.

One, we talk about historically between TVs and smaller screens.

And the smaller screens historically have been split between OLED and non-OLED.

Last year, mostly what we sold was OLED, was in encapsulation tools.

Those were OLED-like.

We talked about bookings last year of $150 million.

Many people in the mainstream media speculate that there will be a more rapid transition, particularly in small screens to OLED.

We are pretty well positioned for that.

In terms of split of revenues, we said earlier in the year that our split of revenues that we were projecting for this year between small screens and larger screens, TVs and small screens, I think we were 60% for the small mobile devices and about 40% for the others, mostly TVs.

If anything, we think we're better positioned if there's an inflection that goes more strongly in OLED.

Over time, we think there's probably more and more of that.

Now, put in perspective, we are much better positioned than we were several years ago there in terms of products and breadth of products.

There's about twice as many layers on an OLED devices as an LED screen.

I think we're very well positioned.

The inflection seems to be happening, but we haven't talked specific numbers.

And it won't hit our revenue line right away, because these tools take about nine months to build.

Okay.

Thank you.

Your next question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

Your line is open.

I have two of them.

First one for Gary or Bob, it looks like everyone is bullish on 3D NAND, which makes sense, given the technology transition going on.

I'm curious, when you look at the risks to it, where do you think we could be wrong in terms of 3D NAND growth?

And along the path, have any of your customers actually looking at 2D NAND, at 12-nanometer or below, or do you think there's really no more 2D NAND development being done?

And then I had a follow-up.

I think relative to 2D NAND, certainly when I'm spending time with customers, there's a tremendous competitive pressure to move to 3D NAND technology.

So all the discussions -- I've met with many customers over the last few weeks.

All of the discussions are focused on that transition.

Not everybody is in the same place relative to the maturity or the yield for that technology, but I certainly see that as an overwhelming focus for all of the memory companies.

Got it.

And then a follow-up on the display side.

Looks like when you compare to your semi business, your served available market on display is pretty low.

I understand that you're riding the OLED wave.

Is there any plan to actually make the display like a $2 billion revenue business by organically and inorganically developing products so you can get a better percentage of the display CapEx?

We've got, as we've talked about, really good momentum in OLED with a 3X larger TAM than we've had in the past.

Bob talked about the number of steps increasing with CVD, PVD.

We've entered thin-film encapsulation also, so that gives us another growth driver.

We're very optimistic in terms of the growth opportunities in display.

We are working on some other areas that would expand our TAM, but we're not ready to talk about those.

Got it.

Thank you.

Your next question comes from the line of Farhan Ahmad from Credit Suisse.

Your line is open.

Thanks for taking my question.

Congratulations on solid results and guide.

My first question is on 3D NAND.

In your guidance of up 25%, can you tell us if you are including cross-point or any of the new memories in there?

And secondly, if you could tell us what portion of the non-CapEx was 3D last year, and how much of it is on 3D this year?

I can take on the cross point.

Cross point still is really in the early phases, so really almost no CapEx for cross point in our forecast.

What was the other question?

The other question was what portion of the CapEx within NAND is 3D in 2016, and what portion of it was 3D in 2015?

We think in 2015, it was a little under 50% and we think in 2015 it's probably mid-80%s.

Got it.

And then one question on China.

I wanted to probe a little bit more on China.

There are two things we have seen from China.

One is like we have seen new announced, fab announcements from new entrants.

So I wanted to understand if you have seen any of the orders or any activity from new companies that are coming up in China, like XMC or some of the other memory companies that have been announced.

Secondly, there have also been some large equity investments in some of the tech companies in US, from Chinese private equity companies.

I want to hear if you have received any interest from any private equity firm in China?

So the first question, have we seen memory orders from new Chinese manufacturers in China?

Memory or interest like even activity, like joint development projects or R&D lines or any activity.

Let me try to help.

Most of the activity we're seeing tactically is from existing customers.

Existing customers in China already, and existing customers outside of China, who are increasing their footprint in China.

We hear about people interested in technology and acquisitions, but we're not really involved in that.

I would say we are engaged with some of these companies, but relative to business coming from those companies right now, it's very minimal.

We are engaged with some companies that have future opportunities, but by far and away, the majority of the business today is from existing companies.

Thank you.

That's all I have.

Your next question comes from the line of Harlan Sur from JPMorgan.

Your line is open.

Nice job on the quarter's execution, and the strong guide.

On the foundry investment for this year, I think you were previously looking for slight growth for foundry this year and now you're guiding for flattish.

I'm curious what's changed.

Do you see a slower 10-nanometer conversion cycle, or maybe slightly lower 14 and 16-nanometer capacity adds?

Any color here would be appreciated.

I don't think we've changed much, frankly.

I think we are flattish, slightly up last time.

We're flattish now.

I don't think there's been much change, frankly.

I wouldn't read too much into it.

There has been some change in mix.

Yes, I think mix has changed a little bit.

In other words, we think some of our foundry customers are more committed to spending, advance orders, some of the others seem to be hesitating.

So we think the mix has changed a little bit from last quarter.

And those changes are also positive for us in 2016.

Got it, okay.

And then on DRAM, you expect it to be more second-half weighted.

Are you starting to see the 1X nanometer DRAM conversion in your pipeline for the second half of this year, and is this part of what's driving the second-half bias?

We see some of that happening this year, but we're not getting a lot of orders yet.

But it is a big focus.

There's no question, 1X is also another one of these competitive battlegrounds where there's a lot of focus.

All right.

Thanks a lot.

Your next question comes from the line of Steven Chin from UBS.

Your line is open.

Gary and Bob, nice execution also in silicon.

Just a follow-up question on China.

Can you share your thoughts on the competitive landscape in semi cap equipment from local Chinese semi cap suppliers?

Applied has been there for many years.

Do you see any meaningful local Chinese semi cap competitors, different from other regions in the world?

As you said, we have been there for a long time.

We have extremely strong relationships.

I mean, certainly you have the -- some investment from multinationals moving to China, and the transitions that are happening there are areas where we have strong share, strong momentum.

And the domestic companies that are there, we also have a very strong share position.

Historically, those positions have been some of the best that we have within the Company, and that's really -- we expect to continue that outlook in 2016.

Okay.

Thanks, Gary.

Then just a follow-up question for Bob, on how to think about modeling gross margin in the second half of this year.

It sounds like foundry customer mix is helping Applied's revenue in the second half of the year.

But should we also think about that helping drive gross margin higher in the second half too, because of the favorable foundry customer mix?

Thanks.

Yes, it should help some.

If you go look at why it would be up from the first half to the second half, it would be because some foundry mix, some cost reduction is helping us, and some is maturing of new tools.

The thing that helped us a little bit ahead of schedule in the first half is we had some pull-in a little bit of some of the foundry customers, where we have -- this is some of the lagging node stuff, as much as anything, where we have strong share and positions.

So foundry does help us generally, because it's -- the mix of tools is more advantageous for us there.

Okay.

Thanks, Bob.

Your next question comes from the line of Patrick Ho from Stifel Nicolaus.

Your line is open.

Thank you very much.

And congrats on a nice year.

Bob, first on the display side, typically it's always had a little bit of a lower gross margins relative to your silicon system.

As the transition to OLED begins, is there any potential, I guess, margin improvements you see with the product portfolio, and things that you have done on the display side of things?

Yes, I think display gross margins will improve over time.

I think that in this year of early adoption, some of these new tools I think are okay and then they get better through the end of the year, into next year.

The second thing which we talked about, I think on earlier calls is that the mix of tools we sell into small screens versus TVs, TVs is the sweet spot for us in terms of mix of tools and gross margins.

It's a little bit different mix now that the smaller screen size, a little lower gross margins, as we mature our positions there, they should get pretty good.

By the time we're done, you'll see gross margins more attractive in display over the next year or two.

Great.

That's helpful.

And Gary, maybe a question on bigger picture related to EUV, and potential capital intensity increases on future technology nodes on the logic end.

Have you had any customer discussions that have highlighted, hey EUV could be further delayed, what are you going to do to help us out, and maybe potentially, especially since your models are based on EUV, getting the 7-nanometer logic node, maybe on a big picture basis, what are some of the additional incremental opportunities for Applied, if EUV misses this next node?

Thanks for the question, Patrick.

We have a number of very deep engagements with customers in patterning.

Certainly patterning cost is one area that's a big focus.

But also from a yield standpoint, edge placement errors are another area that is a big focus for customers.

And this is another area where, again, the materials innovation, materials engineering, there are some really great opportunities for us.

So as we continue to drive new capabilities with the new products that we've introduced over the last three years, the combinations of those products, we also see tremendous opportunity.

So the engagements that we have with customers, I would say are, are further out, broader, deeper than we've ever had.

This particular area is one that is a huge focus for all of our customers.

Great.

Thank you.

Your next question comes from the line of [Sidney Hill] from Deutsche Bank.

Your line is open.

Thanks for taking my questions.

And congrats on the quarter and guide.

My question is on the foundry side.

With improved visibility of your 10-nanometer orders, do you think 10-nanometers will be a smaller node, similar to 20-nanometer, or is closer to full node?

And related to that, how much of 10-nanometer capacity do you expect by the end of this calendar year?

Lastly on this topic, what's the incremental equipment for 2016, 14 versus 10, and maybe between 10 versus 7?

If you could give some color, that would be great.

Sure.

Let me see if I can do this efficiently.

Our customers tend to think of these as sister nodes now, 20, 16, 14, then 10,7 They do the interconnect more on the first leg, and they do the transistor stuff more on the second leg.

They're thinking of them as, they tend to ramp quickly through the first leg, whether it be 20 or 10, to get to 16, 14 or 7, all right?

And so my guess, 10 won't be a long node.

They are obviously going to start doing parallel work on 7, and so it won't be a long node.

The total node of 10, 7, the sister might be an attractive node.

But they are going to get to 7. Okay.

That's step one and two.

In terms of comparing 20 to 16, 14 to 10, 7 there are differences.

You have to look at what the backfill is from the previous node on a lot of this stuff.

So if you look at 20-nanometer, they chose interconnect, but it was the last planar transistor.

It wasn't a finFET, right?

So the attractiveness in terms of processing power and battery, processing speed and battery is a lot better on a finFET, so that you didn't have a lot of people pulled to go to 20, they waited to 16.

You don't have that disadvantage when you're going from 16 to 10, so there will be a lot of tape-outs coming from 16 from people that went from 28 and so forth.

You're not going to have this backfill gap you had at 20.

Point number one -- 10, 7 are probably attractive, they'll get through 10 pretty aggressively.

You won't have as big a gap as you had at 20 because 16 will backfill and tape-outs will increase.

Great.

Switching to a different subject, how should we think about your buybacks in the April quarter, now you're down to roughly $1 billion remaining authorization?

Are you restricted somehow by a domestic cash balance to do more buybacks beyond the existing program?

Sure.

The total authorized buyback was $3 billion through the end of fiscal Q1.

We had done $1.950 billion, so we have $1.050 billion left on the existing authorization.

The way we execute the authorization is we look at multiple valuation metrics for the Company and we set up a table.

If the stock price is attractive, based on frankly longer-term metrics, then we will buy stock.

So we pretty aggressively bought stock the last three quarters.

We started to get a little bit tight on US-sourced cash in September, so what we did was we were able to trigger some $800 million of cash as a repatriation of capital without paying tax, and secondly, we raised some money through debt.

Right now, about 50% of our cash is on shore at the end of the fiscal quarter.

So we think we have enough cash to execute the buyback.

And then if we want to continue, we are committed to long-term cash returns to shareholders, through dividends and buyback.

If we want to continue to buy back after discussion with the Board, we believe we can find other sources of cash.

Okay, great.

Thanks so much.

Your next question comes from the line of Weston Twigg from Pacific Crest.

Your line is open.

I just have a couple of questions.

First, operating expenses looked like they are creeping up a little, based on the guidance.

Just wondering if you think that flattens out moving forward or if that grows a bit more in the second half?

Yes, we said -- we're about $5 million over in Q1, about $5 million over the midpoint in Q2.

So I think we're a $5 million over model for a quarter or two, but I think we're pretty much holding the line.

Did you say 555 or 565 for Q2?

I think we're flat from Q2 forward.

Okay.

The other question is just related to the inspection segment.

You have a new UVision tool, a new optical tool.

KLA had a pretty good quarter and outlook, they had orders up 26% last quarter and they have a new inspection platform launching this year.

You said you'll get more aggressive in that segment.

I'm wondering if you can walk us through what you think happens in the inspection segment.

Do you think you can gain some share or grow your SAM this year, or is it more of a 2017 event?

Yes, we're pretty optimistic on wafer inspection in our view for 2016.

Our UVision Brightfield tool has a good position in foundry and logic.

Last quarter we talked about receiving our first revenue for our new e-beam inspection platform in both memory and foundry.

e-beam technology is the largest part of PDC revenue, our PDC division.

We're number one in e-beam review.

Now taking that technology into an inspection where we have significant pull from customers.

So I think overall in 2016, we're pretty optimistic about that business.

Okay.

Good.

Thank you.

Thanks, Weston.

Operator, I think we have time for two more questions, please.

Your next question comes from the line of Tom Diffely from D.A. Davidson.

Your line is open.

Quick question on the mature side of the business.

What is your view right now for 200-millimeter business this year, and what impact does that have on margins in general?

200-millimeter business ticked up last year, 200-millimeter business is driven mostly for things like sensors, CIF devices.

There is a growing content of those in your mobile devices, and also in things like automobiles.

Last year spiked up, as they added capacity.

We think sales of 200-millimeter tools this year might be down a little bit, but healthy.

Okay.

Over the next few years, do you think that's still an IoT growth market for you?

Generally speaking, we're positive on IoT growth in sensors and things like that.

How it translates into used 200-millimeter tool sales, we're not sure past this year.

I would say those, the other way for processing CIS, CMOS image sensors, power devices, RF sensors, all of those areas are definitely areas of growth, and some we're seeing in China, with some of the business incrementally in 2016, but definitely that will continue to grow.

Whether it's 200-millimeter or 300-millimeter, I think that -- it may not be 200-millimeter far into the future.

But certainly, that is definitely an area of growth and opportunity for Applied.

Okay.

Thank you.

Your last question comes from the line of Mark Heller from CLSA.

Your line is open.

Thanks for squeezing me in.

Two questions on OLED.

I guess first, on the display business you're guiding down I think 20% to 30% on revenues for the April quarter.

I was wondering if you could give any color on expectations for display orders in the April quarter?

Again, these tools take nine months to build, Mark, so I wouldn't read too much into the Q2.

I think that the general direction is positive, and our position is positive on display.

So I think I wouldn't read too much into Q2.

That's more of a result of what we booked six to nine months ago.

Okay.

But any color on direction of orders for the April quarter for display?

We don't usually guide explicit orders, but we're directionally positive.

Okay.

And then it sounds like most of the interest or activity is on small screen displays, but I was wondering if you have any thoughts on OLED TV, pickup in investment there.

Certainly the big inflection right now is in mobile, and we see tremendous opportunity there.

TVs is really a longer-term opportunity.

Okay.

Great.

Thank you.

Thanks, Mark, for your question.

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

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

Thank you for your continued interest in Applied Materials.

This concludes today's conference call.

You may now disconnect.