應用材料 (AMAT) 2016 Q4 法說會逐字稿

Welcome to the Applied Materials earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. In a moment, I will turn the conference over to Michael Sullivan, Vice President of Investor Relations.

Thank you. In a moment, we will discuss the results for our fourth-quarter and FY16, which ended on October 30. 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 [preview] of its industries, performance, products, share positions, profitability, and business outlook. The statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, and are not guarantees of future performance. Information concerning these risks and uncertainties is contained in Applied's most recent Form 10-Q and 8-K filings with the SEC. All forward-looking statements are based on management's estimates, projections, and assumptions as of November 17, 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. And now, I would like to turn the call over to Gary Dickerson.

Thanks, Mike. I am delighted to report that Applied Materials delivered record revenue and earnings in our fourth quarter, capping off an outstanding year. In FY16, we grew orders, revenue, and earnings to the highest levels in the Company's history, and made significant progress towards our longer-term strategic and financial goals.

Some of our major accomplishments this year include: our highest Semiconductor orders and revenues since the year 2000; and record performance in Display and Service, where both groups exceeded all-time highs for orders and revenue. I want to thank all of our employees for their passion to create value for our customers and for making 2016 a great year for Applied. Looking ahead, I see tremendous capabilities, momentum, and opportunities across the Company. This gives me increased confidence that we will again drive sustainable growth in 2017 and beyond.

In today's call, I will start by explaining some of the key factors contributing to our record performance and describe our strategy for long-term sustainable growth. I'll then provide our market view and describe why Applied has an increasingly positive outlook. I'll conclude with brief updates on our major businesses. After that, Bob will provide additional details about our results as well as his perspective on our future outlook.

At Applied, our strategy of inflection-focused innovation leadership is delivering profitable growth. In both Semiconductor and Display, large multi-year inflections are enabled by materials innovation. Applied has, by far, the broadest and deepest capabilities in materials engineering. It's our ability to combine these competencies, technologies, and products that really sets us apart and allows us to sustainably grow faster than the markets we serve.

To fuel growth, we focused our organization investments to deliver highly differentiated solutions that enable customers to build new devices and structures that were never possible before. At the same time, we have implemented a new operating system for the Company that's driving repeatable success and increasing our product hit rate. A key element of this is our product development engine. We've already trained more than 5,000 engineers how to use these methods, and as a result, we now see inflections sooner, develop solutions faster, and generate higher residual value from our large install base of tools.

Over the past few quarters, I talked about five major market drivers that are contributing to our record performance today and will fuel growth for years to come. These drivers are: leading-edge foundry and logic; 3D NAND; patterning; advanced display; and China. At our analyst event in September, we gave comprehensive updates on these five drivers. So, today, I will only cover two, where we have new information to share.

Let me start with patterning. At the analyst meeting, we said we expect our patterning opportunity to expand to around $3 billion by 2019, growing 2.3 times since 2012. In recent weeks, new details about EUV adoption have been made public, and this gives us increased confidence in these projections. Our model is consistent with others, and assumes that EUV will primarily be used for cuts and vias in foundry and logic applications. That is about 20% of the total patterning market. For the other 80%, we see customers expanding multi-patterning solution, and this significantly grows our addressable market.

Pulling all this together, we believe that in the most aggressive case for EUV adoption, our 2019 patterning opportunity will still grow to around $3 billion as previously forecasted. And scenarios where EUV adoption rates are slower than the most optimistic case, our patterning growth could be significantly higher.

Looking beyond 2019, we see cuts and vias remaining the primary application for EUV, and our patterning opportunity continuing to expand. Patterning is an area where Applied is making significant investments, and has room to grow. We've already gained around 15 points of market share since 2012. We see strong customer pull for new materials-enabled patterning processes, where we have innovative new technologies and believe we can gain another 15 points of share by 2019.

My second update relates to Display. We announced that our equipment has been selected for the world's first Gen 10.5 LCD TV fab. The push to Gen 10.5 is driven by rapid growth in the market for large format TVs, 60 inches and above. A Gen 10.5 substrate is about 80% bigger than the current Gen .85 (sic -- see October 16, 2016, press release "8.5") standard, allowing customers to optimize output for larger screens.

In addition, demand for our OLED manufacturing equipment is broadening. With this strength in both TV and mobile, we are increasing our estimate for 2017 Display capital spending. We now believe customers will invest around $2 billion more than 2016.

In the past few weeks we've also increased our forecast for wafer fab equipment. We now expect 2016 wafer fab equipment spending will be at least 5% higher than in 2015, driven by additional foundry capacity and incremental investments in 3D NAND. At the same time, our view of 2017 is strengthening. We believe spending will be higher this year, with logic and foundry investment remaining at robust levels, and growth in memory spending.

Looking further ahead, I am very excited about emerging trends in virtual and augmented reality, big data and artificial intelligence, and smart vehicles. These new drivers for Semiconductor and Display span consumer, enterprise, and industrial applications and layer on top of existing demand for mobility, PCs, and other consumer electronics. Our discussions with leading companies in these areas make it clear that these new applications create huge demand for memory and require major advances in silicon technology. These trends add to my view that demand for capital equipment is becoming less cyclical, and normalized annual spending is increasing over time.

I will now talk about the progress we're making in each of our major businesses. In Semiconductor, we are seeing robust demand across the board, and as we said in September, we expect 2016 to be a strong share-gain year for Applied. Growth in our leadership businesses is being driven by foundry and logic inflections, and also by memory as epitaxy, implant, and rapid thermal processing are adopted in 3D NAND. In particular, we see strong growth in CMP where we've increased revenues around 60% since 2012, and metal CVD where we expect double-digit share gains this year.

Our leadership businesses are in a really great position to grow. In 2016, we converted well over 90% of our development positions to volume production wins. We are also making significant market share gains in etch and CVD. FY16 was our third consecutive year of growth in CVD, and fourth consecutive year of growth in etch, where revenues reached a nine-year high. Overall, our combined etch and CVD revenues exceeded $2.7 billion for the year.

I'm very excited by our product pipeline in etch and ALD. We are seeing rapid adoption of our innovative new solutions, including selective etch and Olympia ALD, that together generated more than $230 million of revenue this year. I'm also pleased with the progress we're making in Advanced Packaging. We have some great new products, and based on the positions we are winning, we expect to double our packaging revenues over the next 12 months.

In Inspection and Process Control, we also delivered our highest-ever orders and revenue this year. In 2016, we believe that we will gain about 20 points of E-Beam Inspection share, around 7 points of share in E-Beam overall, and secure the number one position in this market. E-Beam is the fastest-growing segment in Inspection, and we are winning new applications that support sustainable share gains for years to come.

In Service, our strategy is to deliver more value to customers with our Advanced Service Products. Our service teams are more tightly aligned with our product groups than ever before. Together, they are reducing ramp times, improving device performance and yield, and optimizing output and operating costs for customers. In the fourth quarter, we set new records for both orders and revenue, and, when we look at year-on-year comparisons, we've now grown our Service business every single quarter for the past three years.

Display is also setting records, with two large inflections driving growth. The first is large-format TVs driving investment in new, Gen 10 capacity. Large-format TV units are expected to grow at 15% to 20% annually, over the next three years, compared to single-digit growth rates for TVs overall.

The second is OLED, where investment is increasing as multiple customers start to ramp this technology and battle for leadership in next-generation mobile screens. At our analyst meeting, we said that our market opportunity in Display is expanding significantly, up to 10 times in the case of OLED.

We are focused on building out our product portfolio to deliver the solutions our customers need to transition to new display products over the next few years. We have great traction with our new thin-film encapsulation and E-Beam review products, and have more significant new products that will be announced in 2017.

In summary, I strongly believe this is Applied's time. We set new performance records in 2016, and we are seeing the impact of the investments we've made in our organization and product pipeline over the past several years. As we look ahead to 2017 and beyond, we see strength in our markets as large multi-year inflections continue to evolve, and new emerging demand drivers layer on top of mobility and computing.

Across the Company we are focused on extending our innovation leadership. Applied solutions are enabling customers to build new devices and structures that were never possible before. This puts us in a unique position to drive sustainable growth and raise the ceiling on our financial performance. Now, let me hand the call over to Bob, who will provide more details about our results and outlook. Bob?

Thanks, Gary. In September, we raised the ceiling on our expectations for our markets and our Company. Since then, we've increased our 2016 WFE forecast to a range of $33.5 billion to $34 billion. Our internal projection for 2017 WFE is $1 billion higher than that, and it assumes only modest DRAM investment, China spending, and NAND penetration of hard drives. So our early view on 2018, and the longer-term horizon, is positive as well.

So, while our analyst day was just eight weeks ago, I already feel more confident in our ability to hit our 2019 financial model. After the analyst day, the slide that sparked the most interest was the one comparing average WFE spending, and the standard deviation around the average for two periods: 2000 through 2009; and 2010 through 2016. What really caught everyone's attention was that one standard deviation fell, from $8 billion in the earlier period to $2.7 billion since. The WFE industry has evolved since 2010, and that deserves some discussion. I'll give you the major factors that lead me to believe it is a fundamentally more stable and attractive business.

First, the semiconductor industry we serve has become larger, more diversified, and less volatile. Specifically, semi content was led by PCs, which had multi-year demand cycles, timed to enterprise upgrades. Now we've added mobility, which has annual consumer replacement cycles, and generates more semi revenue than PCs. And today, we are layering on additional semi demand drivers including big data, IoT, cloud infrastructure, artificial intelligence, virtual reality, and self-driving cars.

Second, the cycles of the past were mainly driven by PC DRAM, which was the largest, most competitive, and most generic technology. Today, DRAM is near the bottom in spending, there are fewer producers, and their designs have been tailored to servers and mobile devices, including multi-chip stacks. It's no longer one size fits all.

Third, NAND spending has surpassed DRAM, and NAND continues to unlock growth potential as the gigabyte cost approaches hard drives. Fourth, foundry capacity additions tend to be contract based and demand driven, rather than supply driven, and foundry has gone from being the smallest category to the biggest today. And fifth, our customers now add capacity on a more flexible basis, building out lines and line extensions instead of entire mega fabs.

Not only has the industry changed, but Applied has changed in ways that give us larger and more diverse revenues and profits. Over the past few years, we have achieved relatively balanced market share across all of the semiconductor device types.

Most of our businesses are now benefiting from 3D NAND, and our success in NAND has been a springboard to our new patterning wins in DRAM. At the same time, we've greatly expanded our Service business, whose revenues are up by over 30% in just the past three years. By 2019, this relatively stable business should deliver almost a quarter of our revenue, and an even greater percentage of our operating profits.

And Applied is uniquely positioned as the equipment leader in Display. We are on track to triple our overall opportunity with new Display products, and we are accelerating our Display pipeline by leveraging our Semiconductor IP, including E-Beam, identifying new technology through Applied ventures, and securing R&D co-funding.

In both Semi and Display, we can point to specific inflections and winning products that will drive our growth through the model period and beyond. And, in all of our markets, I believe we are demonstrating systemic improvements in our ability to outperform. The better allocation spending, more efficient execution, and product development engine are now culturally ingrained.

Now, what's the significance of this greater stability? I'll mention just three things. First, our order variations now reflect seasonality more than cyclicality. We are focused on driving year-over-year revenue and earnings growth, and we plan to stop reporting quarterly orders as of 2016. To help you feel comfortable with this change, I'm telling you now that I expect our Q1 of FY17 orders to be meaningfully higher in both Semi and Display. I also plan to detail our Q1 orders on the February call, so you can have a complete set of data for your calendar 2016 models.

Second, this stability gives us a unique opportunity to get closer to our customers, and here is why. The technology roadmaps are getting harder, so customers increasingly want to work with the most capable suppliers, and we are the broadest and most capable. Today, our customers are asking us to engage earlier and ramp new enabling technologies much sooner and more aggressively. This costs money. But the more stable business environment gives us confidence that we can invest more in our customers' roadmaps and generate more attractive risk-adjusted returns.

Three, the stability helps us deliver higher, more predictable profits, and increase cash flow. It's great for our financial stability. Eight weeks ago, we showed you our 2019 financial model. Some of you realized that we plan to generate substantial free cash flow, well beyond what is needed to achieve our share count objective. We regularly evaluate the best means of returning excess cash to shareholders, and we know some shareholders value dividend growth as much as buybacks. We are evaluating our options for this additional liquidity, and we're monitoring the tax policy environment for any changes that could influence our thinking about the mix.

Now, I'll shift gears and comment on our performance during Q4. I'll focus on our revenues and profits, as compared to the same period last year. We grew Company revenue by 39% year over year, and more than doubled our non-GAAP earnings per share. We increased non-GAAP gross margin by 1.5 points year over year, and our spending discipline helped us to increase non-GAAP operating profit by 82% year over year. The non-GAAP tax rate was a little lower than expected, due to a favorable geographic mix.

At the segment level, we grew Semiconductor Systems revenue by 42% year over year, and segment non-GAAP operating margin by 9.1 points. We increased Service revenues by 13% year over year, and non-GAAP operating profit by 1.9 points. And we grew Display revenue by 92% year over year, and non-GAAP operating profit by 10.9 points.

Moving to the balance sheet, we delivered strong operating cash flow of $797 million in Q4, or 24% of revenue. We grew total cash and investments to $4.68 billion, after returning $279 million to shareholders through buybacks and dividends. For the year, we distributed 106% of free cash flow to shareholders. At year end, about 14% of cash and investments were onshore. The on-shore balance has since increased to roughly 45%, reflecting the effects of intra-Company transactions.

Now, I'll provide our guidance for the first quarter of 2017. We expect our overall revenue to be close to the record levels set in Q4. Our expectation represents year-over-year growth of approximately 45%, plus or minus 3 points. Within this outlook, Semiconductor Systems revenue should be near the 15-year high achieved in Q4. This forecast represents year-over-year growth of about 55%, plus or minus 3 points.

Services revenue is seasonally lower in Q1, but we expect it to be up by about 10% year over year, plus or minus 2 points. And Display revenue should be up by about 65% year over year, plus or minus 10 points. Our non-GAAP earnings per share should be in the range of $0.62 to $0.70, the midpoint of which would be up by 154% year over year. As a reminder, Q1 of 2016 was a 14-week quarter.

Since it is the first quarter of a new year, I'll help you with your modeling questions. In Q1, non-GAAP gross margin is likely to be up by about 1 point, from 43.7% in Q4, reflecting very positive mix. For the full year, we expect gross margin to reach approximately 44%, which would bring us to within 60 basis points of the midpoint of our 2019 model. Non-GAAP OpEx is likely to be $625 million in Q1, plus or minus $10 million. Our quarterly run rate in the balance of the year may be approximately $635 million, which remains below the model. Our non-GAAP tax rate is likely to be around 11%, which is at the model. And we will continue to buy back shares to achieve the share count target in the model.

In summary, we delivered new levels of revenue and profitability in 2016, and demonstrated the benefits of the strategy we've been working to implement over the past several years. But this is just the beginning. The industry is bigger and more attractive. Our opportunity set is larger, our customer relationships are stronger, and our new product pipeline is better than ever. We've raised the ceiling with our 2019 target financial model and we're making excellent progress already. Our stronger performance is sustainable and we're confident in our ability to deliver increasingly predictable cash returns to our shareholders. Now, Mike. Let's start the Q&A.

Thanks, Bob.

(Caller Instructions)

(Operator Instructions)

CJ Muse, Evercore.

Good afternoon, thank you for taking the question. I guess if you look back, or at least the implied guide for calendar 2016, or for Q4 you're growing roughly 24plus%. If you think about mix next year, I'm assuming growing Display, growing NAND -- how should we think about your relative out-performance to the rest of the industry?

Sure. In our fiscal year and our calendar year next year, we think in Semi, it's going to be healthier in general for the environment. We feel good about the environment, but we are going to gain share.

We don't want to give the exact numbers right now, but we are going to gain WFE share next year in a number of places. And in Display, we see Display revenues up a significant amount next year. And then we see the Service business continue to grow.

So we will outperform the markets we're in, but additionally, we think the markets are pretty good next year. Our outlook is WFE is up. Our outlook is that spending on Display equipment is up, and Services will be good.

Thank you. Toshiya Hari, Goldman Sachs.

Great. Thanks for taking my question. Bob, you talked about 2017 WFE being up about $1 billion based on modest expectations for DRAM, China, and NAND. Can you dig a little a bit deeper into those three items, and give a little color as to what you are assuming in the model?

Sure. Part of what we were answering there was, that we think there is wind at our back into 2018, too. So, if you look at 2017 we think NAND is up next year, we think foundry is strong, and we think logic is pretty good. DRAM up some next year, but what we don't see is high levels of absolute DRAM spending, because this year is not too big.

What we are modeling, and we might be a little conservative, is not a big change in China spending. We think that hits more in 2018, if you just look at buildings and shells and stuff like that. We are big believers China is going to happen, but we think we have wind at our back into 2018 based on a few things. We think China ramps a fair amount more in 2018, we think DRAM probably has upside in 2018, not to mention some of these alter-form memories we're starting to see early, now.

And thirdly, NAND, by the end of next year is probably going to get to about 700,000 wafer starts, so it's about 1.4 million. And we think all of that eventually -- virtually all of that, gets converted, so we think there's still strong NAND spending in 2018.

Thanks, Toshiya.

Harlan Sur, JPMorgan.

Good afternoon, and good job on the quarterly execution. One of the key takeaways from the analyst meeting, was the order trajectory. So specifically book-to-bill as a leading indicator of the revenue and the earnings power momentum. The past four years you guys have had book-to-bill greater than one, and obviously clearly an indicator of the growth of the business. As you look at your customer and program pipeline for FY17, combined with your view on growth in soft panel and WFE, initiatory spending growth, is 2017 likely to be the fifth consecutive year of book-to-bill greater than one for the team?

What we said earlier in the call was that we see our bookings continuing strong, but the voluntary bookings quarter-to-quarter, in particular, we are going to stop reporting bookings after Q1. We're going to give it to you in Q1.

Q1 we see up meaningfully. What we mean by meaningfully is, up more than strong double-digits from Q4.

People have been worried that we peaked in Q3, bookings down some in Q4. We see a strong Q1s, and we see a strong year overall. We think the momentum is still with us, and our revenues are going to be up, and our shares are going to be up next year.

In terms of quarterly variability in orders, I'm the sure. In terms of book-to-bill next year, we don't have clarity on the second half yet. It's too early for us to tell, but we see a strong WFE year, share up, strong spending on Display. Frankly, it's more strong in both those, than we saw eight weeks ago. For instance the large TVs are doing well, the Gen 10 stuff, of the profitability of the Display guys, is good. So we see Display as pretty darn strong next year.

We see breadthening of demand for mobile display, up to nine or ten people trying to make OLED displays, now, for mobile. And then within WFE, we get a lot of pull from customers to increase production and shipments. We think overall next year, we think we're going to have very healthy bookings whether it's where it is relative to one, I don't know right now.

Thanks, Harlan.

Timothy Arcuri, Cowen and Company.

Thank you very much. Bob, I'm sort of curious on China, how much you're putting in? I know that you think China is sort of generally more of a 2018 thing than a 2017 thing, but I'm wondering if you can give us some numbers in terms of what is embedded in your WFE forecast next year for China, versus what it was this year? Thanks.

Well I will tell you -- I will give you a sense of what is in the numbers, and then I'll give you my qualitative assessment of the numbers a little bit. We think it's down a little bit next year, but -- the numbers say it is down a little bit next year, but we think it's flat. So, I think I'm probably conservative on that. So what is buried in my numbers, is down a little bit, but we think there's probably upside to that to be honest with you.

Gary's shaking his head, that he definitely doesn't think it is down next year. (laughter)

Yes, I would say that -- Applied, we are strong in all regions including China. As we've talked about before it's one of the strongest regions in Semi and Display. Right now, it looks like 2017 is going to be roughly the same as 201,6 but it's up a pretty significant amount from where we were a couple of years ago. 2018, we think, could be meaningfully up above the 2017 forecast. Those are my thoughts.

Thanks, gentlemen.

Atif Malik, Citigroup.

Thanks for taking my question, and great job on the quarter. A question for Gary. Gary, thanks for the update on the patterning with the vias, and the [votez] on EUV. On the Display side, can you just give us a little bit of an update or preview on what some of the new products that you're working on, on the OLED side, plan to achieve? Are these products meant to remove the supply chain bottlenecks, or are they going to target some of the cost of ownership, or other technology challenges?

Sure, thanks for the question. Our strategy overall, is inflection-focused innovation. What we've talked about in Display, is an opportunity to triple our served market over the next few years.

The team in Display is really, really an outstanding team, driving innovative new products, targeting major customer inflections. You can already see growth in Display with thin-film encapsulation and E-beam, two products that we've introduced in the last couple of years that are already generating meaningful revenue for the Display business.

And so we're really continuing this same play-book. We're focused on inflections that are meaningful for our customers. We have very strong pull and investment from customers in these new products, and high confidence that these new businesses will add meaningful revenue for our Display business, and increased confidence that we are going to hit or exceed the model that we showed for 2019. We will disclose more about the specific products in 2017, next year.

And then I think Atif asked two questions, even though I asked for one and I wonder if you can comment on the EUV?

Oh, sure. We talked about patterning at our investor meeting in New York, and we see patterning as a great opportunity. We forecasted about a $3 billion TAM by 2019, and when we look at EUV adoption, we agree with others that the view of EUV is going to be mostly focused on vias, and cuts and logic.

When you look at the leading customer roadmass, vias, and cuts and logics is about 20% of the total patterning TAM. 80% of the TAM will continue to add multi-patterning. And that gives us increased confidence in this $3 billion estimate, that we had at our investor meeting.

Basically, if you take the most aggressive EUV assumption for adoption, something like ten layers adopted at 5-nanometer logic, for vias and cuts you come up to the $3 billion estimate. Of course if it is not in this most aggressive assumption, then the TAM could be higher.

And Applied is really in a great position to gain share. We talked about a $1 billion number in our model for 2019 for Applied, and we have great confidence in that number. We already gained 15 points of share in patterning since 2012.

We're forecasting at least 15% more between now and 2019. Really great products in etch, in selective removal, CVD, ALD, CMP, really, really, really great new products. And we have line of sight to the 2019 model, with many application wins and increasing customer pull for these innovative new products.

Thanks.

Steven Chin, UBS.

Thanks. Hi, Gary and Bob. So, I have a follow-up question on your 2017 view on foundry logic, WFE. Does your 2017 view assume there will be much foundry logic customer reuse of10-nanometer equipment or the 7-nanometer node, or does it assume limited equipment reuse by foundry logic? Thanks.

Sure. We've had a couple of questions on peak questions, and reuse. Let me give you some context on how we look at the business, then I'll answer your specific question, Stephen.

We actually really believe three things. One that the industry is growing more and more attractive in which we compete. Total spending is trending up and volatility is trending down in both WFE and in capital spending for Displays.

Secondly, Applied, I think, is trending up in terms of the breath of our product offerings and reduced volatilities. We have a similar share across NAND, foundry, DRAM and logic. We are gaining share. We have a deep product pipeline.

So I think the second thing is, the trend is the industry is looking good. The trend is Applied is becoming more and more attractive and less volatile. And third, those things combine to produce very predictable cash flow, which we can talk about later on the call gives us opportunity return cash to investors.

In terms of risk, that this, there some replacement/reuse in 10 and 7 next year. I think it's pretty moderate, frankly. I think 10 is not going to be a big node, I think people are going to rush to go to 7. But 10 nano devices are shipping next year, 7, the year after. So the ability to migrate equipment is somewhat limited.

The second thing is, the comparison everybody always gives is the 20 to 16/14 migration. That was distinct in a couple ways. One, you had the biggest consumer of computer chips in the world switch from one vendor to another in a node. And secondly, you had gone from the last planar FinFET device to the -- last planar to the first FinFET, which really made the last device unattractive. So is it going to be reuse some kind of equipment from 10 to 7? Yes. I don't think it's next year, and, I think is going to be much smoother than it was in 2015.

Thanks, Stephen.

Krish Sankar, Bank of America.

Hi, thanks for taking my question. I have like a two-part question, Bob. One, as you mentioned, the business is getting more seasonal versus cyclical, when you look at the order trend, you had a dip in orders for Semis in your October quarter. Is that the seasonality you are talking about on a go-forward basis?

And along the same path, when you look into calendar 2017, can you help us understand -- dig a little bit more deeper on how the WFE profile looks like, first-half versus second-half for NAND, DRAM, foundry, and logic?

I do believe that as we said on the call -- the previous part of the cal, I do think it is more seasonal than cyclical. We have a lot of data that shows it.

For instance, even if you look, as we said, the script we got asked the most questions about at the Analyst Day, was this average WFE spending since 2010 is up to like $31.7 billion, I think it is, with the volatility of about $2.8 billion versus 2000 to 2009, it was like $25.5 billion with a volatility of $8 billion. I will give you more details on that.

If you look at memory as a sum, because virtually every customer makes DRAM and NAND, the average before 2010, one standard deviation, one signal, was $6 billion on average spend of $10.7 billion. Since 2010 it's $3 billion standard deviation, on average spend of $12 billion when you put DRAM and NAND together.

The second thing is, virtually every year since 2012, I think it is, it's a pretty much $1 billion to $2 billion a year total memory spending. Now, if you get the lost in the weeds between DRAM and NAND, it's a little different. But the companies manage their budgets that way. They say, we're going to spend on DRAM this year and NAND that year. Fab-- ramp this fab this year, the other fab the next year.

And then on foundry, foundry spending before 2010, it was about $2 billion on an average -- the standard deviation was $2 billion. Since then it's $1.5 billion on a spend of $12 billion. In the spend pre-2010 average, $4.5 billion. So the magnitude of these standard deviations, the volatility is going down. It really is. It seasonal, non-cyclical.

In terms of your specific question, about -- I guess it was about next year, we're not exactly sure. I'll give you some data for us.

We think our Q1 bookings are up. We think on the year, WFE is up We think our share is up. I was just looking at the data, we think year-over-year it's a chance that every quarter year-over-year is up. I think it's less.

In terms of the seasonality you specifically asked on foundry. Historically, spending on WFE and foundry, foundry is the one that tends to be a little more seasonal because it's Christmas and China's New Year. They, historically, have taken equipment more March through August -- like end of February through August. And then they might have another spurt if they need more later in the year.

This year was a little different, because one of our big foundry customers is trying to more level-load themselves and get a head start on 10 nanometer, so we have a little bit different cycle in terms of spending. Because, remember 10 nano is not shipping until next year. And then, the other thing that made this year a little different is there is just sustained demand for 3D NAND.

So, we had some at the beginning of the year, we have a pull at the end of year. So the seasonality, which is kind of more than cyclicality, is being mapped to a technology transition, which is very helpful too. And, again, that's not so much cyclical, it's more of a technology trend that's going to go on for years.

Thanks, Krish.

Thank you. Farhan Ahmad, Credit Suisse.

Thanks for taking my question. My first question is regarding the Jan quarter orders outlook. On the prior call, you have kind of indicated that orders would be flattish in the Jan quarter from October. I just want to understand what has improved, and how do you see the order trend by different segments evidence as switching?

I'm trying to get off my orders, bad habit, but I'll try to help a little bit What we said last quarter, to make sure we put a floor, because we spiked up a lot in every metric you can measure, the last few quarters: orders, revenues, EPS.

We wanted to give people a sense, we were going to continue strong, that our share gains, our revenue growth, our operating margin expense was sustainable. So what we said last quarter was, orders are not going to fall off a cliff. The number is going to start with a three in the next two quarters, Q4 and Q1. And in fact, they will start with a three, and in fact the three was a little bit -- we thought it would be a little higher in Q4, and some of those went into Q1. So we think we are up double-digits in Q1.

So it's probably a little bit timing. The magnitude is probably a little stronger because where we are getting pulled is on some flash devices, stuff like that, 3D NAND. So it is strong and it is probably stronger, even, than we thought a few months ago.

Thanks, Farhan.

Romit Shah, Nomura.

Yes, hi. Thank you.

It just seems that AI machine learning, and self driving car adoptions, are coming along a lot faster than we thought at the start of the year. We know these applications are iterative and very compete intensive. I'm wondering if all this could be an incremental driver next year for your memory and logic businesses?

I don't know about next year, but I would say that we are definitely increasingly bullish about the longer-term. We've talked about five drivers in our model between now and 2019, these multi-year waves. So we're very confident in those drivers, and we talked about that in the prepared remarks.

I would say definitely increasingly bullish, relative to the longer-term opportunity. As we are engaged with some of the leading technology companies, around cognitive computing, smart vehicles, you saw a big announcement from Samsung this week with an $8 billion acquisition. There's an incredible amount of money being spent.

When you look at these drivers, VR, AR, smart vehicles, cognitive computing, all these different areas, you need higher-performance computing. And we had the CEO of one company that was here recently, and we were talking about logic devices, what are the size of those logic devices going to be, and basically said, as big as I build them. As big as I can fit it into theoretical field.

And he was also talking about the amount of memory that's going to be needed for some of these future applications. And it's much, much bigger than I think any of us could imagine. So I would think we are much more bullish about the longer-term, relative to the drivers for high-performance computing, and for memory.

I'm also bullish about the innovation pipeline that we have within Applied Materials. I really believe that the $500 million per year that we've moved in terms of innovation, we are already enabling people to design devices that they could not have dreamed of building a few years ago. And I strongly believe that the pipeline we have now, the best is still coming in that pipeline.

So, I'm really bullish about the market. Bob talked about where we compete being better, more stable, upward trajectory, less volatile. Applied is in the best position we've ever been in to enable all of these great, big inflections to happen.

Thanks, Romit.

Joe Moore, Morgan Stanley.

Yes, thank you. I wanted to ask about your multi-year commentary, when you said you're still optimistic, even beyond 2017. Can you talk about NAND in that context? And as you go through a very high capital-intensity period of planar to 3D conversions, and 3D greenfield, you'll get to point where you're doing more layer count increases, which is less capital-intensive. Shouldn't NAND turn into a headwind at some point in the next couple years? And how do you think about that in that multi-year context of overall WFE?

Sure, Joe. Let me -- this is going to be a historic day. I'm going to use phraseology on this, in the next minute, that's never been used by a CFO of an American public company before. All right? So hold on.

So I have a couple slides in front of me, that shows the demand for solid-state disk drive market growth in both enterprise and PCs. So these numbers, you can argue them a little bit but I think there in the ballpark. So 2015, there was about 12 petabytes of demand for solid-state disk drives in enterprise. That goes up to almost 120,000 petabytes, in 2020. So it goes from 12,000 to 120,000.

And on the PC side, in 2015, it's about 20,000 going to 140,000 petabytes in 2020. Let me give you another way to look at those.

Our estimates, that the penetration across all PCs including workstations, notebooks, in 2015 was 21.8%, and it was only 15% in 2014, up to 31.6% of those have solid-state disk drives, going to 77.5% 2020. And, if you go look at the enterprise servers, this year, it is about 20% it was 14% of all of them in 2014. And we see it going to 26% in 2020.

So again, the total petabytes, I'll use that word again, has gone up over 100,000 petabytes from 2016 to 2020 in each, PCs and enterprise. So the demand is there, their expanding the addressable market for NAND. Other data I have seen, is that for servers alone, you might have to add 500,000 wafer starts of capacity, and your average NAND factor of 100,000 costs about $5 billion or $6 billion, say $5 billion, $6 billion. So that's about $25 billion to $30 billion. And upgrades are about another $25 billion to $30 billion. So, you get have $50 billion to $60 billion of spending, and that's cost-callibrated, over the next, sort of, five years, maybe? 2020-type date, of four or five years.

If you take it over four years, that's like you are going to be $50 billion, that says. So it's over $10 billion a year. So we've upped this year's forecast, Next year, we're over, I think, $11 billion and change. I'm not sure it doesn't stay at $10 billion and more for a few years to come. Because we're kind of looking at the end-user demand for solid-state disk drives, penetrating hard disk drives, by market. We're looking at capital intensity, and getting feedback from customers. And in the short-term, they are shipping everything they can build.

So what the point? I think the NAND build out goes on for awhile, and I think people underestimating. Because the other thing is, they're going to convert the 2D to 3D, because they are not going to be able to sell the 2D, and that will drive down to sell even more 3D, and hit cost points that feed into the hard disk drives even faster. So I think there's a bunch of ways you can get a number that could be $10 billion for a while.

Great thanks, Joe.

And I would like to say that I was proud to use the word petabytes today.

Patrick Ho, Stifel Nicolaus.

Thank you very much. Bob, maybe if you could clarify again the growth that you're expecting in total Display spending in 2017? Is that incrementally because of the Gen 10.5 build out that you're seeing? Or are you also anticipating a further increase in OLED spending next year?

I think we are seeing a few things. In actual spending, I think, probably we're up more -- we have a slide on that, somewhere. I think we're up probably more in TVs, versus what we thought two months ago. We think that there is huge demand for OLED for mobile.

The question is how fast can they ramp it? I think it's a question of supply more than demand. I think they on TV, they can ramp the big TVs and they are going to ramp them pretty aggressively, particularly in China. This Gen10.5 is ramping, there's going to be more to come after that.

So we're up to over $16.5 million next year for Display CapEx. I don't have the numbers from two months ago, but the growth is in both. But, I think the thing that's bigger in two months for us, is the TV, because the TV sizes are coming bigger than we thought -- the individual TV sizes, and the profitability is quite strong in the TV panel business, which is a leading indicator of spending, and then these big fabs. I think they're both very healthy, but I think the increase in spending is probably a little bit more on the TV side.

Thanks, Patrick.

Edwin Mok, Needham.

Thanks for taking my question. My question is on DRAM side. Bob, you sound a little more conservative on DRAM, but we've seen pricing improve, and some talk about a customer looking to move into the next node.

Are you just being conservative or have you -- what are you hearing from the customer and are you seeing signs that you can start moving on to the next node?

We think DRAM is up some next year, but we think most customers who make DRAM and NAND are setting a priority on NAND right now, because they are seeing an expansion in their addressable market for NAND, number one. Number two, it's a competitive situation that they don't want to miss that growing market. And DRAM, their pricing is pretty good, so I think the capital dollars will go to NAND.

Thanks.

Jerome Ramel, BNP Paribas.

I'd like to know, what is your assumption in terms of in-store capacity with (inaudible) 10-nanometer node for next year?

Our line was quiet for a moment. It sounded like you're talking about 10 nanometers, and was at the capacity at the end of the year or something? Sorry, we couldn't quite hear. Can you please just repeat? Thank you.

Can you share with us, what is your assumption for the 10-nanometer node capacity that you have at the end of -- let me say Q4 to 2017, for the industry?

Sure. The chart I'm looking at we put -- I will give you what I have easily available, okay? The spending in 2016 in foundry, 59% is, we think, after September, 2016, is for 10/7, and about the same percentage next year because you're still seen strength at some of the trailing edge stuff. 28 -- particularly 28 nano is pretty strong still, and in fact, we think it might even be up next to.

And then, in terms of the split between 10 and 7, the total capacity between 10 and 7, is around 70,000 to 80,000 wafer starts of the end of this year. About 110,000 to 130,000 at the end of next year. I think the vast majority that is 10-nanometer.

Thanks, Jerome.

Mehdi Hosseini, Susquehanna.

Thanks for taking my question. You sound really positive regarding the demand drivers, and you're going to stop providing booking numbers on a quarterly basis. So if you're so confident, why not provide an annual revenue and earning target, so that we can better track this multi-year cycle that you're going through?

We never have in the industry. I'm not going to start now. We don't give guidance out a year.

But you stopped providing bookings, so --

Here's what we gave you. We gave you a 2019 model, that gave you a WFE assumption, revenue assumption by product, share assumptions. We told you on the Analyst Day that our share gains were almost linear from now through 2019, and we told you that our Service business was going to grow almost linearly by year, and we told you that display was going to be growing up to that number, too.

Our growth in revenue from 2015/2016 to 2019, we think is pretty straight line. Now, giving an absolute numbers a year in advance, we don't have that level of precision.

Tom Diffely, DA Davidson.

Good afternoon. When you look at the next two years, and a lot of the growth coming from both the flat-panel OLED, as well as China, what impact does that have on your both, cost structure and your margin structure?

I'm sorry, Tom could you repeat it, please?

Yes. When you look at growth, coming specifically from a couple of large markets like the OLED and China, what impact does ramping revenue in those particular markets do to your cost structure and margin structure overtime?

I'll give it a shot. In terms of -- if you want to look at cost structure at Applied, most of our sales are related to physical products we sell, and they share a common factories, which are predominantly in Singapore and the US.

The material cost, product cost is similar, and then Taiwan is a big source for our displays. So the material cost structures and supply chains are worldwide. So wherever we sell them doesn't matter too much for us.

In terms of differentiation and mix, which sometimes drives gross margin, different device-type customers use different mix of our hardware and products. In terms of OLED, we look at the OLED display market, for our existing products, as being similar margin profiles to our TV markets, and by region similar.

The opportunity for us on margin, is the new products we are going to be introducing in the next couple years in display, which we think are very highly differentiated and very attractive products, which have upside for us. In terms of margins by region, it goes predominantly to mix of products, but historically we provide a high level of service to customers in China, and so we usually do well in terms of share there, in particularly.

The incremental operating profit, if we look at China is pretty good for us. We have a very strong position, and really great relationships, and a really great team supporting customers, both multi-nationals and the domestic companies, and also the incremental profit for us in Display is positive for the company overall.

Great. Operator we have time for just one more question, please.

Jagadish Iyer, Summit Redstone.

Thanks for taking my question, Bob. I'm just trying to reconcile on the flash segment, we had a good spreading this year, but why were the orders essentially flat between FY15 in FY16? I understand it's fiscal year, but what does it mean for FY17, given it the spending that you are seeing for the flash? Thanks.

We had one particular customer in 2015 that gave us orders pretty far in advance, because they wanted to lock-in capacity deliveries from us. So, I think that was the aberration.

I think the trend line is up. If you look at total WFE, it is up for flash, and if you look at our sales are up, and probably they're up next year, too. So, it was a little bit in 2015, one particular customer, in particular, wanted to get into their pipeline in terms of the queue for production.

Thanks, Jagadish, for your question. And, Bob, would you like to summarize before we close the call?

Sure, it seems like a year ago, but we only had Analyst Day about six weeks ago, or maybe a little more, in New York. I have to say, even in the last eight to nine weeks, I increasingly believe that the industry we serve are becoming more and more attractive and growing and more diverse and less volatile.

Gary talked about some of the demand drivers for our customers, whether it is autonomous cars, it's virtual-reality, it's AI, big data, you really feel this when driving in Silicon Valley. You see it everywhere. We had some of the CEOs of these companies come in and talk to us, and it's real. It's happening.

You look at some of the highest performing stocks in the space this year, that's what's driving them. So one, the industries we serve and Display is also that way, where it's kid-of doubled in terms of spending, are becoming more and more attractive, and more demand drivers would make it for less volatile for us.

Second, Applied is performing better. I think we are more and more, becoming more and more innovative and executing better. And there is compounding benefits from that. So I think, that results in us, in a broad range of opportunities. Our biggest problem is just picking and choosing among good opportunities at this point.

So Applied is feeling more broader, more diverse, and less volatile, and more predictably we are going to do better. And then finally, those two things combined, and potential with tax legislation, that there's a really good opportunity to return superior cash returns to investors, including, which we've said -- I think we said earlier today, that we were conservative in the financial money model, we showed eight weeks ago, in terms of the cash, and we kept a little conservatism in the cash in the model, because we wanted to be opportunistic. If there was tax law changes, then we could return even greater returns to investors. So I think the industry is becoming more diverse, and less volatile, and more attractive in terms of growth, more drivers. Applied is becoming that way, and the leverage down to the cash line, especially to get some tax legislation that is attractive, is a pretty powerful combination for Applied.

Great. Thanks, Bob. And we'd 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. So, thank you for your continued interest in Applied Materials.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a great day.