應用材料 (AMAT) 2016 Q2 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 second quarter which ended on May 1. 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-Q and 8-K filings with the SEC.

All forward-looking statements are based on management's estimates, projections and assumptions as of May 19, 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.

Next I'd like to share a calendar announcement.

Applied Materials plans to hold its 2016 Analyst Meeting in New York City on Wednesday, September 21.

Those of you joining us in New York will have the option to attend technology sessions with our general managers.

The main event will be webcast live.

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

Thanks, Mike, and good afternoon, everyone.

I'm very pleased to report that we are making great progress with all the major elements of our strategy, and expect to deliver record earnings in fiscal 2016.

We are focusing our investments on key customer inflections that are growing Applied Materials today, and creating exciting opportunities for future growth.

Our record performance is made possible by the outstanding team we have at Applied.

I want to thank our employees around the world for their tremendous passion to create value for our customers and shareholders.

I'll begin today's call by summarizing our strong results and outlook in the context of our longer-term strategy for sustainable, profitable growth.

Then I'll outline our updated view on the market environment and what this means for us.

I'll conclude with a short summary of progress in each of our major businesses.

After that, Bob will provide additional details about our results, and the improvements we're making to the Company's operating performance.

At Applied Materials, our strategy is to develop highly differentiated materials engineering, products and services that make technology inflections possible.

In semiconductor and display, the substantial changes in device technology that are taking place require significant materials innovation.

I believe this puts Applied in a unique position.

We have the broadest and deepest capabilities in materials engineering, and our technology is unmatched.

These advantages are helping us deliver the innovations that enable our customers' success and move the industry forward.

In recent years, we shifted $400 million of annual spending to improve our organizational capabilities, and accelerate product development.

Today these investments are creating significant value for our customers and for Applied.

When I look at our results and outlook, there are five key drivers of our performance I'd like to highlight.

First, in semiconductor, our leadership businesses are delivering key enabling technology for logic and foundry customers.

These businesses have high market share and highly differentiated products, and are benefiting from robust levels of foundry investment in the second half of the year.

Second, our growth businesses are making significant market share gains, as the 3D NAND ramp accelerates.

Our combined etch and CVD revenues for Q2 are at a nine-year high.

Third, we are very well-positioned in China.

Domestic Chinese manufacturers are ramping up their investments, and multi-national customers are expanding their footprint in the region.

As a result, we are setting new records for quarterly semiconductor orders in China.

The fourth driver is our sustained growth in service, where we are building upon 10 consecutive quarters of year-on-year growth.

And fifth, we are successfully applying our advanced materials engineering capabilities beyond semiconductor, specifically in display.

New display technologies such as OLED are enabled by materials innovation.

This is creating significant new market opportunities for Applied.

I'll now give you our latest views on the market environment.

While we are paying close attention to the global economy, at Applied we continue to see strong demand for our products and services.

This is because our semiconductor and display customers are focused on developing and ramping new technologies, rather than simply building capacity.

The inflection-driven investments our customers are making are highly strategic.

They are battling for leadership, and investing to ensure that they're ready as market demand shifts to these new technologies.

In foundry, we expect investment levels for the year to be similar to 2015.

We anticipate more than half of 2016 spending will be focused on the 10 nanometer node, as well as 7 nanometer pilot production.

In addition, as new projects ramp in China, we see the foundry customer mix broadening, and increasing investment in trailing geometries.

This is positive for Applied, because we have a 30 year history of leadership in China, and we've built very strong customer relationships, and a great regional team there.

This quarter, our revenues in China are at an all-time high.

In memory, we expect overall spending to be more or less flat year-on-year, however, there are important changes in the mix that play well for Applied.

Investment is shifting from DRAM to NAND, and we see DRAM down at least 25%, following very high investment levels in 2015.

In contrast, we see NAND strengthening as the year progresses.

Our latest (technical difficulty) will be 35% higher than 2015, as multiple customers accelerate their 3D NAND ramps.

3D NAND is a great example of materials enabled scaling that plays directly to Applied's strengths.

As I've said before, 3D NAND is all about depositing, removing and modifying materials with incredible precision.

Because of this, our available market at a 3D NAND factory can be up to 3 times greater than for planar NAND.

In the quarter, we booked nearly $1 billion of NAND orders, which is a record for us.

In logic, we believe the spending levels will be very similar to last year.

And when we take all of these factors into consideration, we believe that 2016 wafer fab equipment investments will be similar to 2015, with some upside potential.

I will now talk about the progress we're making in each of our major businesses.

In semiconductor, I'm very pleased with our strategy, and how our product pipeline is shaping up.

We made solid wafer fab equipment share gains in 2015, even though the spending mix was not as favorable for us as it is in 2016.

Based on the positions we're winning, I expect much stronger share gains this year.

Across our semiconductor businesses, I see tremendous customer pull for our latest generation products.

In CMP, our new LK Prime system now has over 130 units at customer sites.

This product is winning market share, resulting in our highest quarterly CMP orders for a decade.

We are also seeing a broader adoption of cobalt in advanced interconnect schemes, and this is driving demand for our cobalt CVD systems.

This is one of the factors that is contributing to strong share gains in CVD this year.

We continue to see rapid adoption of our Sym3 etch platform launched at last year's SEMICON West.

We project that we will ship around 700 chambers by the end of our fiscal year, fueling strong conductor etch share gains in 2016.

I'm also very excited that customers are beginning to transition a number of our highly disruptive new technologies from pilot to high-volume manufacturing.

These include our selective removal products and Olympia ALD system.

In service, we are making significant investments in our organization and capabilities, so that we can deliver more value to our customers.

These investments are generating a strong pipeline of new service products that help customers improve their device performance, yield and costs.

We're on track to grow this business for the third year in a row, which I believe is strong evidence that our service strategy is working.

In display, I am increasingly excited about our opportunities, and the unique position we have in this market.

The major technology inflections that are taking place require materials innovation, so our available market is expanding significantly.

One great example of this is thin-film encapsulation that protects an OLED device from air and moisture.

The precision deposition of this film stack is incredibly challenging, and relies on Applied's advanced materials engineering capabilities.

Overall, we estimate that our opportunity in OLED is more than 3 times larger than for traditional LCD.

I believe we're still in the very early innings of OLED, but we're already seeing a significant impact on our business.

This quarter, our orders in display were an all-time record.

To summarize, as I look ahead, I am increasingly confident that we are in a great position to drive sustainable, profitable growth at Applied Materials.

Across the Company, I believe we have greater opportunities, and a stronger pipeline of enabling technologies than at any point in our history.

We are investing more than ever to accelerate materials enabled innovations for our customers.

We're maintaining a very positive outlook for 2016, because our customers are making inflection-driven investments, as they race to introduce new technologies.

These investments are both highly strategic, and play directly to Applied's strengths.

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

Bob?

Thanks, Gary.

Applied Materials is extremely well-positioned to deliver profitable growth, this year and for the foreseeable future.

In Q2, we generated orders of $3.5 billion, the highest in 15 years.

Our strength was led by silicon systems, which had $2 billion in orders, with nearly half from NAND, and by display which had record orders of $700 million.

Our backlog now down stands at $4.2 billion.

And it's broad-based, with nearly half in silicon systems, and roughly a quarter each in services and display.

Our silicon systems backlog is the highest in at least nine years.

Looking ahead, I'm confident that the investments we're making in differentiated products and services combined with our cost efficiency programs will drive record earnings.

And I expect sustained performance, as we help our customers drive their technology road maps forward, particularly in foundry, NAND and advanced displays.

We have momentum in services, and we are improving our execution and operational performance across the board.

Today I am (technical difficulty) confident that we are on track to achieve the earnings targets in our 2018 financial model.

I'll provide a detailed update at our Analyst Day in September.

But with the disruptive nature of our order strength, I'd like to give you some insights during this call.

We're making very good progress growing our revenues.

If recent demand patterns continue, which seems likely, then by 2018 I believe we can meet or exceed our targets in silicon systems and services.

Through 2018 and beyond, we believe display, NAND, and China will grow by more than we anticipated last year, and our positions in these growth areas are becoming stronger.

I am also confident that we will meet or exceed our goals for tax rate, weighted average share count, and earnings per share.

Relative to gross margins, (technical difficulty) progress on our overall cost structure, and on optimizing the gross margins within our product lines.

Even as our etch and display businesses strengthen their share, I believe we can hold our overall gross margins flat with last year.

Over the model horizon, we now see faster than expected growth in etch and display.

The net profitability gains from this revenue growth should be very positive for us, and we're committed to achieving our operating margin targets, even with the impact of this mix change on our overall gross margin percentage.

Regarding operating expenses, Gary outlined how we are gaining share in our existing markets, and expanding our served addressable markets with strong customer pull.

Today several of our customers are asking us to develop new technologies to support their product road maps, and we are choosing to increase our R&D investments in certain areas this year, notably in display.

As we ramp up to support these new projects, we expect OpEx to increase by about $10 million sequentially in Q3, and stay at this level in Q4.

At the same time, we'll continue to be very aggressive in controlling and optimizing our spending, to invest in sustainable revenue growth, while increasing our profitability.

Let me give you some insights into how we've optimized our operating expenses.

Between 2012 and 2015, we cut spending in G&A organizations by 27%.

In the same period, we boosted the funding of new and disruptive products by $400 million.

We did this by using G&A savings to fund R&D, and by shifting spending from underperforming areas like solar, to areas where we can grow and gain share by enabling major technology inflections.

Today our R&D to OpEx ratio is 67%, which is up by over 10 points relative to 2012.

Now I will comment on our second quarter results.

Revenue of $2.5 billion was at the high end of the guidance range, led by silicon systems.

Non-GAAP gross margin of 42.7% was slightly higher than expected.

Non-GAAP operating expenses of $575 million were within the range.

Our non-GAAP tax rate declined to 14.4%, as more profits were generated in lower tax jurisdictions.

We believe 15% is an achievable rate for the balance of the year.

Non-GAAP EPS of $0.34 was the highest in four years, and the highest in eight years when excluding solar.

Next I'll update you on our cash returns during the period.

In Q2, we returned more than $1 billion to our shareholders.

We used $900 million to repurchase over 45 million shares of our stock, and paid $113 million in cash dividends.

We ended the quarter with 1.1 billion shares outstanding, which is the level we targeted in our 2018 model.

We've now completed 95% of the $3 billion authorization we announced last April, and we expect to complete the program in the current quarter.

We remain committed to returning excess cash to shareholders using dividends and buybacks, and we plan to discuss the buyback program with the Board of Directors at our upcoming meeting.

Before I turn the guidance, let me share some observations and expectations surrounding our display business.

Disruptive technology changes are happening in the display market that will increase customer spending this year and beyond.

In the TV market, while there is sufficient overall capacity at this time, we expect additional investments in certain regions.

And longer-term, I believe the technologies now being piloted in mobile will be attractive in TVs as well.

Such adoption would be very positive for us.

Today customer demand for our display products is increasing, particularly in mobile.

As a reference point, over the past three years our display orders were $750 million per year on average.

Our display orders were $883 million in the first half of this year alone.

The growth we're announcing in display, comes largely from new products we've funded and developed over the past few years.

Based on conversations with our customers, we expect display order strength over the rest of 2016.

Most display systems are very large, and often take two to three quarters to build, deliver, install and revenue.

And customers are pulling for Applied to develop new display technologies that I believe will significantly expand our market opportunities over the next several years.

We'll invest in additional new and disruptive products to capture these opportunities.

And while our display orders and revenues will continue to be lumpy from quarter to quarter, I believe we'll deliver sustainable growth over time.

We'll have more to say about our display opportunities at our Analyst Meeting in September.

Now I'll provide the business outlook for our third quarter.

We expect our overall net sales to be up by 14% to 18% sequentially.

Within the revenue outlook, we expect silicon systems net sales to be up by 10% to 15%.

AGS net sales should be up by 5% to 8%.

We expect display net sales to be up by 70% to 90% to approximately $300 million, and EES net sales should be flat to up slightly.

We are modeling the non-GAAP gross margin percentage to be up by 50 to 100 basis points sequentially.

Non-GAAP operating expenses should be $585 million, plus or minus $10 million.

The midpoint is up just 1.6% from the same period last year, and we expect non-GAAP EPS to be in the range of $0.46 to $0.50.

The midpoint is up 45% from this period last year.

This EPS guidance represents a new record that is significantly above any previous performance for Applied Materials.

To summarize, while overall economic and semiconductor industry conditions are relatively flat this year, Applied Materials is uniquely well-positioned.

We plan to set new records in a number of areas, including EPS for the full year.

We have significantly biased our spending towards disruptive new products and customer support.

And I believe we now have a great pipeline of new and emerging products, focused on the key technology inflections.

We also have strong customer pull in markets and regions that give us sustainable opportunities to deliver profitable growth in the years ahead.

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

Let's please begin.

(Operator Instructions) Toshiya Hari, Goldman Sachs.

Hi.

Thank you for taking my question, and congrats on a very strong guide.

My first question is on the display side of the business.

In the past, you guys have talked about increasing your SAM by, I think 3X over the next couple of years.

I guess, my question is, how much of that have you realized already, and how much of that is still coming, going forward?

Sure.

Let me see if I can start, and Gary can jump in.

What we're seeing is two or three things helping us here.

One, the overall market is growing for spending, two, our position in it is growing.

I don't think we've reached the culmination of our ability to grow our SAM.

I think that's going to go on for the next several years.

Okay, that's helpful.

My follow-up is on the core SSG side of things.

In the quarter that you just reported, obviously NAND orders were up a lot sequentially.

And I was surprised to see foundry down a little bit.

On the NAND side, where are you picking up share?

And on the foundry side, is it fair to assume that orders pick up in the current July quarter?

Thank you.

Yes, thanks, Toshiya On the NAND business, very, very, very strong pull from customers, as NAND moves from litho-enabled scaling to materials-enabled scaling, so we see very strong pull for etch.

We're gaining new steps in NAND, very, very strong performance.

Overall, we believe this will be a strong year for our etch business.

We'll gain share.

And certainly, in 3D NAND, the growth there is significant.

Deposition is another area, CVD is an area that's very, very strong in NAND.

We have additional epi steps in NAND.

There are many additional CMP steps.

So there are a number of areas where there's really significant growth for us in 3D NAND.

And we look at this as a wave that will continue over the next few years.

So it's really a great opportunity for Applied, where our TAM is going up, as you are moving from litho to materials, and we are also significantly increasing our share in 3D NAND.

Thank you very much.

C.J. Muse, Evercore.

Yes.

Good afternoon.

Thank you for taking my question.

I guess, first question is on the silicon front, so a couple parts with it.

First one is, you talked about upside potential to your flat WFE outlook, would love to hear your thoughts there.

And then, as you think about growing share in etch, a very favorable mix in terms of foundry as well as China, and what you're doing around 3D NAND, how should we think about your growth in calendar 2016 relative to that flat to slightly up WFE outlook?

Yes, we -- so I'll try and Gary can jump in.

We agree, it's flat to up a little bit this year.

The year's unfolded as we hoped last November, and it's gotten better and better for us, frankly.

If you all look at it, the NAND has picked up.

We now think it's up about 35% year-on-year, whereas DRAM is probably about down 25%.

Foundry is not up a lot this year, up somewhat.

But if you look at our position within foundry, it's really, really strong, and in DRAM we're also gaining.

So if you go look at our position with each, we're gaining share.

I'll give you a factoid, you may not have picked up on.

Pre-2012, in 2012, we were only over 15% share by the -- in one of the four major groups, whether you look at NAND, DRAM, foundry and logic.

This year, we project to be over 20% in all four.

So if you look at the NAND spending of $9.2 billion, our share is going go probably from under 15% to north of 20% this year, and the spending is up to about $9.2 billion, whereas in the base year of 2012 it was about $4.2 billion.

So the market is up, and our share is up significantly, and the NAND strength goes on for a number of years.

As you know, by the end of this year, we're only going to have about 375,000 wafer starts converted.

There's about another 1 million wafer starts out there planar.

If you go look at foundry, we anticipate it being a reasonable year in foundry, but our position has done really well whether it's in Taiwan, or a lot of the activity going on in China.

So we're gaining, we're doing very strongly there too.

And then also logic, we're doing well in leading edge logic.

So the way the year is laid out, our positioning of our products in the markets that are fastest-growing, whether it is NAND, strength in leading edge foundry, strength in China, and also strength in display is playing very well for Applied.

So we expect within semi, we will gain share this year.

Thanks, C.J. I will take the etch question.

So as I said earlier, we think that 2016 is going to be a really strong year for us in growing our etch share.

We have a very strong position, very, very strong position in 3D NAND conductor etch.

So as that business continues to grow, as that wave moves forward over the next few years, we're in a really great position.

And we have some of the most exciting products in this group that I've seen in my whole career.

The Sym3, tremendous pull from customers, in 3D NAND, and also in other segments.

We're winning new steps, and strong pull really across the board for Sym3, so very, very, very strong position there.

And also in selective material removal, we have very strong pull from customers, and that business is growing also for us at a strong rate.

So overall, we think 2016 is going to be a great year for us in etch.

And again, it's some of the strongest products I've seen in my career.

Very helpful, thank you.

If I could sneak a quick one on OLED in.

I thought your commentary on the TV side was interesting.

When do you think you will start to see your first Gen8-plus orders for OLED?

Right now, what's driving the market in 2016, as we said earlier in the year over -- we said earlier in the year, over 60% of our orders and revenues this year were going to be mobile versus TV.

In fact, that's turning out -- it's probably over 70% now, in terms of order rate.

If you look at the big inflection that's taking place in mobile, it's around OLED.

That inflection may come some time in TVs, but it's not in our foreseeable immediate future.

Very helpful.

Thanks.

Steven Chin, UBS.

Thanks.

Hi, Gary and Bob, congrats on the execution.

Just a question, Bob, on the comment that there may be display order strength for the rest of 2016.

Is the display visibility from a follow-on order to a big Korean customer, or do you have visibility from other display customers, perhaps in China who are constructing a lot of new display fabs?

It just sounds like the message is aimed at total orders could be strong in the second half of the year; just trying to get some color on that.

Thanks.

Well, I think as Gary, referred to sort of the waves -- the things that are happening for us now are not one quarter events.

There are several inflections going on, In display, it's around OLED; in NAND, it's around VNAND.

And even in the China thing that's going to go on for years.

And the foundry strength we're seeing at 10 and 7 is going to go on the next couple years.

So these big inflections are going to go on for a number of years.

So for instance in display, we think it's going to go on for a while, it's not a one quarter event.

And we see the concentration in mobile.

In terms of your specific question on TVs, I guess, in China, was that the specific question?

More like the second half of the year.

Oh, second-half mobile.

Yes, we think the display order rate will stay strong for the rest of the year.

Okay.

Thanks, Bob.

Just a follow-up question on the foundry orders.

So I just want to clarify, do you think we'll see second-half foundry orders up?

Because foundry orders are up in the second half, it's possible AMAT's total orders could remain quite strong for the second half of the year too.

We think in our fiscal year we think our orders in foundry remain quite strong.

We think in the calendar year, split for the business, we think foundry is second-half weighted also.

So we think second half is pretty good on foundry.

Okay.

Thanks, Bob.

Congrats.

Tim Arcuri, Cowen and Company.

Thanks a lot.

I had two.

I guess, Bob, I'm just looking at the upside to the orders, and it really seems like it was driven from clearly OLED and it looks like China memory stuff.

So it seems like you are finally beginning to see some of these China memory projects move within your 12 month shipment window.

So I guess, my question really is, how much can China add to WFE say, next year?

Because if you book an incremental $400 million to $500 million this quarter from those projects, that would argue that you could add maybe a couple billion to WFE next year.

So I'm wondering if that math works with you?

Yes, let me give you -- you sort of have two questions, but let me see if I can do them both.

First, in terms of the second quarter just ended, we were pretty strong across the board in orders.

We had a very strong quarter, almost $1 billion as Gary mentioned in NAND.

And then, in terms of the other devices, foundry, DRAM and logic, we were reasonably strong actually across the board, and display was very strong, and services did well too.

So our strength was pretty broad.

In terms of the China impact, the Chinese talk about spending $20 billion to $30 billion over sort of four to five years.

We're seeing record revenues for ourselves in China this period, and it's gone up.

Our expectations for the year have gone up every quarter basically.

So in terms of -- so if they spend $20 billion to $30 billion over four or five years, how much is incremental?

That's about $4 billion a year roughly, $5 billion a year.

I would say, for the next three years, you could see some -- maybe half of it incremental?

And I think it provides an underpinning for overall demand, so that you feel pretty comfortable that next year is probably a good 32 year if you guess, because you get this underpinning of good NAND, good China.

I think the second wave of 10, 7 is okay.

DRAM, I'm not sure about.

Yes, one other thing I would say is China is probably our strongest region, relative to our position, with both the domestic companies and multi-national companies.

And as Bob said, the momentum just keeps building.

We doubled revenue in China over the last two years, and I'm spending a fair amount of time there myself.

And certainly, you look at what's happening there now, and discussions for future projects, as Bob said, multi-year wave opportunity in terms of China.

Hard to say exactly what the number would be, but it's definitely going to be up a fair amount.

Got it.

Thanks for that.

And then, I guess, follow-up is, I know previously, you guys talked about 3D NAND installed target of like 350,000 to 400,000 industry-wide exiting this year.

So it seemed like maybe the industry was going to add roughly 200,000 this year.

So my question is, how much of that is conversion, versus how much of that's greenfield?

Thanks.

Sure.

This year, we came into the year with 150,000 installed.

We think the year goes out to 350,000 to 400,000.

In terms of the mix, we think capacity adds are probably 100,000 to 150,000; converts are 100,000 to 150,000 in the year.

That's in the year, right?

Yes.

Great.

Thanks so much.

Farhan Ahmad, Credit Suisse.

Hi, guys.

Congrats on the great quarter.

One question on your spending pattern on NAND, like do you still think it's a first half weighted this year, or do you think it will grow in second half?

And the incremental strength you are seeing in the NAND, is it stronger in -- is it more in the second half, that you are seeing the uptick, or was it already captured in your bookings in the first half?

Yes, in terms of the NAND split, we think the second half -- first half is stronger for NAND, but the second half is pretty good.

So we think it's more first half-weighted, but it doesn't fall off a cliff in the second.

It's pretty good.

And what was your second question?

I'm sorry, I was looking at the base.

Just like the uptick that you are seeing in NAND.

Like you mentioned NAND spending is now -- you expect it to be stronger than your last quarter call.

And I just wanted to understand, is the uptick more in the first half or second half?

Yes, we're up to about $9.2 billion on NAND right now, and I think last quarter, we were about a $0.5 billion less maybe.

We're seeing broad-based spending.

Some stuff was pulled into the first half, and second half is staying strong.

Got it.

And then, regarding China, obviously, like it's the strongest for you in this quarter, but even going back, it seems like it's been tracking to the second strongest region for you guys for a while.

I just wanted to understand, in terms of your exposure to China, how much of that this quarter was display versus semiconductors?

If you can provide some color on that, that would be really helpful.

Yes, we were particularly strong in semiconductor this quarter in China.

We see display has been very strong, but right now the TVs in China, the order rate is not quite as high as it was.

Got it.

That's all I had.

Thank you.

Patrick Ho, Stifel Nicolas.

Thank you very much.

First, Gary and Bob, in terms of the foundry orders and outlook that you have, have you started seeing any pickup in 10 nanometers, or are you still seeing like the first quarter, some of your orders coming in from the 28 nanometer node?

Yes, we're going to have a strong 10 year, then you're going to have some 7 also.

In terms of the split, we think -- it came into the year with a 10 and 7 of about 10,000.

We think you go out of the year, maybe 60, so maybe add 50 concentrated in Taiwan.

And then, if you look at it, what's unusual about this or interesting, Patrick, some of the trailing edge stuff is pretty strong.

So you see a fair amount of over 40 and above, and you see pretty good 28 year also.

And a lot of that is the China impact.

Great.

And in terms of your shareholder return, you mentioned that you're completing your shareholder -- your stock buyback this current quarter.

Can you maybe perhaps give a little bit of update of what you think you're going to do on a going forward basis?

Yes, we're going to talk about this at the Board of Directors meeting.

We are, as obvious, we are very committed to shareholder returns, cash returns to shareholders.

In fact, in the last year, we've returned 250% of our free cash flow, so we can't stay at that level.

We are committed.

And as we also said in the call, we will beat our targets for weighted average share in the model in 2018.

So you know we're almost there now, so we'll continue to get better on that.

In terms of the magnitude of that, we have to talk to the Board.

But we are committed to shareholder returns.

We are committed to beating the weighted average shares in the model, and the details of that, we'll have to go through with the Board in June.

Great.

Thank you.

Romit Shah, Nomura.

Yes.

Thank you, and congratulations on the success here.

Bob, you've given it to us in bits and pieces, but I was just hoping you could overall, give us a sense of how you're thinking about second-half calendar revenues, over the first half?

On one hand, with the strong July guide, you've got arguably a tough comp.

On the other hand, I did notice that your revenue growth guidance for July is well below your growth in your backlog, which implies that sales should be strong for the balance of the year.

So just how are you thinking about second-half calendar year versus first half overall?

Well, I will piece together the data you already have, just to give you some more pieces to the puzzle.

Our backlog at the end of the quarter was $4.2 billion.

And we said in the 10 -- we're going to say it in the 10-Q, I'll say it right now: 73% of the backlog is shippable in the next six months.

And then, if you look at it on the semi side, the lead times on that stuff typically are not too long.

On display, we've said that the lead times historically have been six to nine months.

Now we're able to increase our outlook for display revenues next quarter, because we've primed the pump a little bit in the supply chain.

So we're optimistic that display can continue strong in revenues, for the rest of the calendar year.

So we are feeling pretty good that our second half will be up from first half, and that we'll do well in the year.

And the underpinnings that we talked about are strength in display where we have the orders in backlog, and continue that strong.

In semi, we've said to you, we think that our share gain goes up this year, as in semi equipment.

And services will get strong, for the rest of the year will be continue to be strong.

And so, we feel pretty good about the second half.

Great.

And then just on display, as the revenues improve, how do we think about incremental margins on this business?

It's -- I think it's averaged about 20%, but we know that it does bounce around.

We think the operating margins prospectively for display are pretty positive.

Right now, we're ramping a lot of things.

We're ramping new products, we're ramping production.

So we think over time, as we basically have said or implied in the financial model of the Company, the display operating margins for the Company will be similar to the overall average for the Company.

Now both display and AGS have a slightly different business model than SSG, in that the gross margins tend to be a little higher in SSG but the operating expense metrics are less in AGS and display.

So you net-net come down to about the same operating margins.

Okay.

Thank you.

Krish Sankar, Bank of America.

Hi, thanks for taking my question.

I have two of them.

First one, either Bob or Gary.

Of the $700 million in display orders, how much of them was for OLED specifically, and would most of these be revenued in fiscal 2017?

Can you give us some color on that?

And then I had a follow-up.

Sure.

What we said earlier in the year, that of our display business this year, over 60% was going to be mobile.

And in fact, it's probably over 70% now.

And the vast -- a significant majority of that, a great majority of that is focused on the OLED market this year, in terms of the order rate.

In terms of when it revenues, we anticipate as we guided, that our revenues will be up next quarter.

We are positive about our revenue opportunity for Q4, and we think we'll do very well in display next year too.

They won't all obviously revenue in the next six months, three to six months, but we feel good about our opportunity on a long-term basis in display.

Got it.

Got it.

And then, a follow-up question for Gary.

You guys are getting some traction in etch, especially on the 3D NAND side.

Can your current etch tools actually do 96 or 128 layer 3D NAND, or do you need to develop new tools?

We're just trying to figure out the R&D profile on etch or SSG like two years down the road.

Sure.

So let me first, also add to Bob's comments on display, and then I'll get to etch.

So I really think it's important for people to understand, we're in the early innings of this opportunity, in terms of the OLED wave.

And relative to the questions on sustainability, if you look at the waves that are really driving our business in display, NAND, China, we're in the early innings of all of those different waves.

We are continuing to invest, and we've expanded our TAM by factor of 3. We have an opportunity to expand our TAM more in the future.

So that one, really very optimistic that we are going to continue to drive significant growth in display going forward.

And then, in etch, we're in a very strong position in etch, to gain share in 2016 and beyond.

As I've said before, the products that we have, Sym3, selective material removal products, it's almost on a weekly basis I hear new opportunities, very strong pull, across the board, all customers for these new technologies.

And so, relative to 96 pairs or over 100 pairs, we have pull from customers in some of the most critical applications.

We're PTOR, DTOR, in some of the most critical applications.

So I'm extremely optimistic that we're going continue to gain share in etch in 2016 and beyond.

Thank you.

Joe Moore, Morgan Stanley.

Great.

Thank you.

I wonder if you could give us an idea of the puts and takes on gross margin in the back half?

I would think that the ramp of display, and CVD and etch, and the mix shift towards memory and all, would be sort of headwinds in gross margin.

Just any way we should think about that?

Sure.

That's a good question.

We are working a lot on gross margins.

Let me give you -- we ran an analysis the other day, you might find interesting.

So the Company gross margins as you know were 40.9% in 2012, 42.1% in 2013, and 44.1% in 2014.

And then we went down a little bit around 43% last year I think, and we'll probably be about the same the next year.

I guess, we were 42.9% last year.

And so, I say, well, are we making any traction or not?

So I had the guys run all of our BUs, in all of our segments, with current gross margins by BU and segment with 2014 mix.

And if you take the 2014 mix, when we earned 44.1%, the gross margins this year would be 44.7% which is up 0.6 from then, and north of our committed model of 44.6%.

So what you see is, within virtually all of the product groups, and within exercises like cost reduction and negotiation, we're doing pretty well actually.

And it is in fact mix that's the challenge for us.

So I do think that, as I said earlier, for instance, display has a similar operating margin to the Company, but lower gross margins.

In etch, we're doing great in terms of growing profitability and market share, but with a little lower gross margin also at this stage.

So those are headwinds in our face this year.

But we think we'll offset them, and still hit the roughly 43% on the year, that we said earlier in the year.

Okay.

And can you give us some idea of how much different the display gross margins might be just qualitatively?

And does that change, when you are at 3 times the run rate that you've been?

Yes, we haven't gone into that level of detail.

We think over time, the gross and operating margins in display will trend up, but we haven't been specific on the numbers.

Great.

Thank you very much.

Great quarter.

Thank you.

Harlan Sur, JPMorgan.

Hey, guys.

Great job on the quarter, the execution and the strong guide.

Given the pricing environment in DRAM, there seems to be more pressure on your DRAM customers to move to the 1X nanometer node.

So I guess, the question here is, are you starting to see some of the early spending for 1X in your second half pipeline, and how do you see DRAM spend second half versus first half?

I will start, Gary can jump in if he wants.

We think DRAM was front end loaded, first half loaded on the calendar year, softer in the second half.

In terms of our outlook for DRAM specifically, we think it's stronger in the first half than the second half.

We hear speculation about some of that early spend on DRAM, but it's not in our line of sight yet.

Got it.

Thanks for those insights.

And then, on OLED, the team obviously has been talking about the 3 to 4 times increase in dollar opportunity, versus some of the silicon.

You've also on this call have been talking about some new tools that can even drive further increase in your OLED SAM opportunity, thin-film encapsulation was a good example of that.

So I guess, the question here is, are you guys already sampling some of these new tools?

And when should we hear about formal introduction of these tools, and when could they start to add to your revenue streams?

Thanks for the question.

So you mentioned thin-film encapsulation.

And certainly, that's a great example of materials engineering enabling new capabilities for our customers and also growth for Applied.

So as you said, we talked about that being a great opportunity.

And that's part of what we're seeing in terms of a very, very strong opportunity in display.

We do have other areas that we're working on, but we're not really ready to forecast or signal when those technologies will be ready.

But I would say that, that team in display is an incredible team of people.

They've demonstrated that they can grow in these major inflections.

And I'm very optimistic that this wave that we are seeing in display, OLED, is a multi-year wave.

And then, I really believe that we have a great opportunity, to not only ride that wave, but expand our TAM and share in display.

So very, very optimistic about that business.

And I'll just pile on.

The team has done a great job, number one.

Number two, the market is going to grow for a while, and our ability to capture with products we're still pushing down the pipe, and look very optimistic on, is going to grow.

So served addressable market looks good too.

Thanks, Gary.

Thanks, Bob.

Atif Malik, Citigroup.

Hi, thanks for taking my question, and good job on the quarter.

If I look at your foundry orders for -- the last six quarters have declined on a year-over-year basis.

And I'm just trying to reconcile that with your expectations of second half being better for foundry.

And given that TSMC said on their call that 10 nanometer could be a shorter demand node, as their customers taping out more products for the 7 nanometer, so I'm just trying to understand the risk in the second half foundry expectations.

Is it more China-weighted or Tier 1 foundry weighted?

And then, I have a follow-up.

You've got three questions buried in there: annual trend, going back a few years, the half this year, and a little bit projection into next year.

So if you look at the trend data, you are correct, that total foundry spending from 2014 was down to 2015, down sort of flat up a little bit in 2016.

I don't have 2013 in front of me.

I think it was similar to -- well, here is 2013.

That's not totals though.

Oh, there it is.

2013 was -- it was about the same.

So 2013, 2014 about the same, down a little bit 2015, down a little bit 2016, so that's the annual trend.

If you look at the year, we're pretty confident that foundry is strong in the second half, based on the timing and the specifics of it.

Now what you have going on, which is a little different then, a lot of people concerned about the dynamic of, what happened in 2014 going to 2015, and what could happen in 2016 going into 2017.

So if you go look at 2014, when we turn down to 2015, you had a latent excess capacity, right?

You had 28 nanometer business had been purchased a year or two before capacity for a big phone manufacturer.

And then a lot of the capacity was added very aggressively in 2014 for 20 [nan rated] for the same phone customer.

So you had latent potential capacity there that hit us in 2015.

And that also hit us a little bit with another foundry customer who thought they could get some of the business.

You don't have the same type of dynamic this year, because you're in the very early stages of the build of 10, 7, to the overbuild you had from the previous nodes, say 28 in this case.

You really don't have that as much from 2014 to 2016.

And thirdly, they haven't ramped that much on 10 at this point.

In 2014, at the end of 2014, they had about 100,000 wafer starts, total installed, of 20.

At the end of this year, on 10 alone, they might have 50,000, right?

Well, 10 and 7 would be 55,000 maybe or 60,000.

So you're in the early stages.

So one, it's been trending down over the years, yes, partly because of this capacity issue there.

And two, as you know phone growth is little bit down.

Second though, is the second half good this year?

Yes, it is, because we can see it.

Third, do we have this big capacity issue next year?

Not so much, because it's different.

And related to that, an unusually high amount of spending in foundry this year is at 40 and above, and 28 is pretty strong because of the China phenomenon.

So I think, catching it all on the foundry floor is the China phenomenon is adding to foundry floor.

Thanks.

Very helpful.

As a follow up, is your ability to ship or revenue display, it could then be constrained by other display makers' ability to capacity ramp?

For example, we have heard of some of [operations] tools might not be able to ramp capacity as quickly as the market is demanding.

I think right now, it's independent of that.

Thanks.

Weston Twigg, Pacific Crest.

Yes, hi.

Thanks for taking my question.

Just wonder if you could help us understand, as the 3D NAND customers migrate from adding some greenfield capacity this year to more planar NAND conversions.

Can you give us an idea of what your revenue opportunity is, maybe per 10,000 wafer starts of greenfield 3D NAND, versus planar conversion 3D NAND capacity?

Sure.

So this is confusing as hell, so I am going to try and make it half confusing as hell.

So I'm going to give you a really simple numbers first.

So in 2012, total NAND spending was $4.2 billion.

We think total NAND spending this year is $9.2 billion.

Applied Materials' share of that spending in 2012 was little under 15%.

Applied Materials' share of that spending is over 20% this year.

So our revenues are going to go from about $600 million in NAND in 2012, to close to $2 billion this year, okay?

So the market has more than doubled, but our revenues have more than tripled, okay, because our share is up 50%, okay?

The next observation I'll give you is, if you compare greenfield to greenfield -- I'm happy to do that for you: a 100,000 wafer start, last plane or greenfield, is $3.5 billion.

A 3D greenfield 48 pair is $5 billion.

But what you have to model is, well, what were they actually buying?

So in 2012, there was a mix of adds and converts, right?

And so, if you go look at the data, it was actually fair amount of adds oddly enough in 2012.

But for us, as a Company, we mostly were getting the shrink money.

Most of that spending was more weighted on converts for litho.

So if you go look at it, and you go to a 50/50 model now roughly, between converts from planar and 3D, our revenue opportunity for where we were in the planar world is up more than 3X.

And the simple math of what's going on, it was 3X.

And you'll say, well, Bob, it should be even more, because the total spending is up.

It will be -- it would be more, but there was unusually high spending on planar adds in 2012.

So our revenue opportunity, apples-to-apples is kind of over 3X.

All right.

I think I got all that.

So that was the half confusing story I've rehearsed five times.

(laughter).

All right.

Good.

And the other piece of the question is, or the follow-up question is, how much 3D NAND capacity do you think the industry can realistically absorb each year, without flooding the market with 3D NAND bits, since you get more bits on a wafer?

Well what's going to happen is that I believe, and I think many people believe that, as 3D NAND matures, and becomes even more reliable, and reduces its cost point, particularly as you go to 48 and 64 layers, it's going to significantly expand its addressable market, so you're going to get growth in solid state disk drives.

So right now, you have -- I think last, you had 1,394,000 wafer starts in the world of NAND, and through the end of last year it was 150,000 converted; the end of this year is about 375,000.

I think the vast majority of it's going to get converted over time, because they're not to be able to sell that 2D NAND device very well, because it's not going to be competitive.

One other thing I would add, on 3D NAND overall, our position in 3D NAND is really better than any other company.

If you look at our strength in etch, the share gains will become evident this year, very, very strong.

We're number one in deposition.

We have additional CMP steps, epi steps.

So again, you look at our opportunity in 3D NAND, really we're in a unique position.

So as those greenfield factories ramp or the conversions happen, if you look at the spending profile, the spending profile is completely different than it was at 2D NAND, and very, very favorable for Applied.

The funny thing, you wouldn't intuitively say, is that in 2D, our market share of conversions was less than our market share of adds, because it was mostly litho-enabled.

They just bought litho tools.

If you go to VNAND, our market share is high in adds, but even higher in converts, because they don't have to buy new litho, okay?

So if they go to a convert model, the total TAM goes down, but our share is pretty good actually.

All right.

Makes sense.

Thank you.

Thank you, West.

And we've got time for just one more question, please.

Jerome Ramel, Exane BNP Paribas.

Thank you for taking my question.

Could you just give us a little bit of color on your traction in ALD?

Yes, we have very strong momentum with ALD, and we're pretty much on track with what we've previously communicated, very strong position in leading logic and foundry customers.

They're seeing device advantages, as they're going to the most advanced technology nodes.

So we look at this as a really good opportunity, one of the areas that will fuel our share gains in 2016.

Thank you.

Okay, great.

So Jerome, thank you 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 PM Pacific Time today.

And thank you for your continued interest in Applied Materials.

This concludes today's conference call.

You may now disconnect.