Applied Materials' CEO Discusses F2Q 2013 Results - Earnings Call Transcript

May.16.13 | About: Applied Materials, (AMAT)

Applied Materials, Inc. (NASDAQ:AMAT)

F2Q 2013 Earnings Conference Call

May 16, 2013 4:30 PM ET

Executives

Michael Sullivan – VP, Investor Relations

Michael R. Splinter – Chairman and Chief Executive Officer

Gary E. Dickerson – President

Bob Halliday – Senior Vice President and Chief Financial Officer

Analysts

Terence Whalen – Citigroup Global Markets Inc.

Edwin Mok – Needham & Co. LLC

Tim M. Arcuri – Cowen & Co. LLC

Thomas Yeh – Bank of America Merrill Lynch

Jim Covello – Goldman Sachs & Co.

Mahesh Sanganeria – RBC Capital Markets LLC

Stephen Chin – UBS Securities LLC

Satya Kumar – Credit Suisse Securities (NYSE:USA) LLC

Vishal Shah – Deutsche Bank Securities

Jagadish Iyer – Piper Jaffray, Inc.

Mehdi Hosseini – Susquehanna International Group, LLP

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Ben Pang – B. Riley & Company

Operator

Good afternoon and welcome to the Applied Materials’ Earnings Conference Call. During the presentation, all participants will be in listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded today, May 16, 2013.

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

Michael Sullivan

Thank you, Kia, and good afternoon. Joining us on the call today are Mike Splinter, our Chairman and CEO; Gary Dickerson, our Company’s President; and Bob Halliday, our Chief Financial Officer.

Today we’ll discuss the results for our second quarter ended April 28. Let me remind you that today’s call contains forward-looking statements including the Company’s current view of its markets, industry trends, opportunities, growth strategies, share position, technology, cost structure, profitability and Q3 business outlook. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied and they should be interpreted in that line. Information concerning the risk factors is contained in our Company’s SEC filings including our most recent Form 10-Q.

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 quarterly financial highlights presentation, both of which are available on Investor page of our website at appliedmaterials.com.

Before we begin, I’d like to remind you that Applied will hold our 2013 Analyst Day in Santa Clara on Monday July 8, just prior to SEMICON West. Many of you have already signed up to join us and we look forward to seeing you there. If you like additional information about the events, please contact me using the number in today’s earnings press release.

And now, I’d like to turn the call over to Mike Splinter.

Michael R. Splinter

Thanks, Mike, and good afternoon to everyone on the call today. In our second fiscal quarter, Applied Materials delivered earnings that exceeded the high-end of our outlook. We fulfilled request for accelerated delivery of orders from a number of our semiconductor and display customers, while carefully managing our spending.

At this point in the year 2013 is shaking up largely as we have expected. Demand for semiconductor equipment is healthy, utilization at our customers’ factories is steadily increasing, and investment in display is strengthening. Across the company, we are building momentum for profitable growth. Over the past two quarters, we have implemented measures to reduce our overhead costs and have redeployed spending to product development and our customer facing technical teams. These changes are enabling us to strengthen customer collaborations and increased our product development philosophy.

We are focusing our R&D investments on key programs that support our strategic priority to increase our share in wafer fab equipment, while making targeted investments in display and other opportunities that expand our total available market. We see further opportunities to reduce our operating expenses and organizational complexity to improve operating margins at current revenue levels and provide significant earnings leverage as volumes increase.

I will discuss these opportunities later in the call. Major industry trends are expanding our served available market in place to our strengths in Precision Materials Engineering. We expect to grow our share of wafer fab equipment this year while winning key development tool at record positions that provide a foundation for additional share gains in 2014 and beyond. We are also building momentum in display. Customers are adding capacity and we are seeing stronger order growth. We are significantly increasing our share of the display PVD market, complementing our strong position in CVD.

In semiconductor, the mobility trend remains the biggest factor influencing industry growth. The global appetite for always on, always connected mobile devices continues to strengthen. And now the value of silicon being consumed by smartphones and tablets has surpassed that being used by PCs. Around 200 million smartphones and 35 million tablets shipped in the first calendar quarter of 2013. That’s in line with expected annual growth rate of 35% for phones and 55% for tablets.

Demand for the advanced application of baseband processors used in smartphones and tablets is fueling investment by foundries as they add capacity at 28 nanometers, begin 20 nanometer pilot production and accelerate the development of 3D transistors.

Transistor performance is the key battleground for our foundry customers. In his latest earnings call, Morris Chang described how TSMC has differentiated offering in high-K metal gate delivers better performance for their customers’ products. Applied’s clear leadership in the transistor module enables us to help our customers solve their high value device performance challenges and we are earning share gains at the leading foundries.

The mobility trend also represents a tremendous demand driver for NAND Flash memory. With bit growth in the 40% to 50% range and supply and demand relatively well-balanced today, we believe NAND manufacturers will increase their investment levels in the second half.

As sales figures for the first quarter clearly indicate, the PC market is navigating some challenging times. And as a result, customers are reducing capital spending plans for logic. Consumption of mobile DRAM has surpassed PC DRAM for the first time. Manufacturers have been migrating capacity to mobile and with tightening supply, prices have been rising.

To meet near-term demand, we are seeing some incremental investment, primarily focused on technology conversions. We believe DRAM trends bode well for increased investment levels in the medium-term. While there have been some shifts in customers’ investment plans towards mobility, we maintain our view that 2013 wafer fab equipment will be in the range of $27 billion to $30 billion, reaching the high-end of the range will require accelerated build-out of the 20-nanometer foundry node and a further uptick in memory investment.

Turning to display, we see increasing demand from emerging markets, as well as 50 inch and larger models becoming a more significant portion of global TV sales. This is driving healthy area growth, which we anticipate to be in excess of 10% for the year. The potential for undersupply in the second half is stimulating capacity investments.

We are receiving orders for new display factories in China, and expect this equipment to be installed in the fall. Demand for mobile devices and touchscreens remains robust and investment continues with focus on advanced technologies, including OLED. We’re strengthening market conditions in our shared gains, we are beginning to demonstrate the potential of our display business.

In solar, equipment industry conditions remain challenging. We are significantly reducing our exposure to the current weakness in the market by substantially scaling back our investment. We expect our quarterly operating expenses for EES to be below $25 million exiting the fiscal year.

Overall, as we look to the second half of 2013, we see spending spread across the broader base of semiconductor customers. Memory investments look incrementally more positive and demand in display is strengthening. More importantly at Applied, we are building momentum towards profitable growth. We are focused on strategy execution and winning those critical tool selections that support share gains while in parallel making changes to the organization that will allow us to deliver stronger operating margins and increase our investment in attractive growth opportunities.

Before I hand the call over to Gary, I would like to officially welcome Bob Halliday to his first earnings call as Applied Materials’ CFO. Bob brings a strong track record of results and a wealth of industry experience in this role. He is already proving to be an outstanding leader for our global finance team.

Now, let me hand the call over to Gary for additional comments about our growth initiatives. Gary?

Gary E. Dickerson

Thanks, Mike, and good afternoon, everyone. As Mike outlined global adoption of mobile devices drives growth in the electronics industry. It is also increasing the speed of innovation within the value chain. Our semiconductor and display customers are striving to provide consumers with more capable mobile products and this is accelerating changes in device technology that are enabled by the Applied Materials’ core strength in precision materials engineering. All of this creates a great environment for us to execute our strategy and drive profitable growth.

Today, we are building momentum by strengthening our team and focusing our investments to deliver growth in revenue and operating profit. We are building momentum by increasing share and entering into earlier and deeper collaborations with our largest customers. We are leveraging our strength to help customers make major transistor and memory transition that will happen in 2014 and 2015. And we are building profitable growth in additional segments that will provide significant improvement in our overall operating margins.

In order to accelerate the execution of our strategic plans, we are strengthening our organization and business processes. We are aggressively managing our cost to drive improvement in operating margins and taking further steps to reduce overhead expenses. We are actively managing our product portfolio by focusing on our best opportunities and increasing funding for those programs that really moves the needle for our customers and for Applied.

In addition, we continue to operate our product development engine to improve our ability to define winning products and increase the velocity of our development process.

Our customers are faced with increasingly complex device performance and the old challenges, as they transition to new device technology and new materials. This is driving significant pull from our largest foundry, logic and memory customers for earlier and deeper collaboration on our next generation products as they focus on accelerating technology development and technology transfer into high volume manufacturing. These broader and deeper collaboration span our current areas of precision materials engineering market leadership and additional market segments, where we have significant potential to grow share as future device technology is adapted.

Applied’s position as the leader in enabling precision materials engineering technology is giving us insight into future device performance and yield problems that are critical for our customers. In our early engagements, we see an increase in atomic level customization of our precision films combined with enabling technologies, including precision materials modification, materials removal and interface engineering on Applied Materials platforms. This gives Applied a unique opportunity to solve some of our customers’ challenges with new solutions that leverage our strong materials engineering technology portfolio.

Some emerging materials engineering examples include improving film stability and very high aspect ratio structures, film densification, material selectivity for deposition and etch and atomic level interface engineering to improve device performance and yield by preventing corrosion and metal oxide growth.

To support broader and deeper customer relationship, we are strengthening our technical teams in the field by moving key people into higher impact position and bringing new talent into the company. In semiconductor, key market inflections are growing our available market while creating opportunities for Applied to demonstrate leadership and win share.

as the foundries start their transitions to 20 nanometer technology, we see Applied serve the market opportunity growing approximately 25% relative to the 28 nanometer baseline. Our strongest positions are at the foundries. And as they focus our new transistor technology, this placed to our strength and provides a great platform for us to grow share with our leadership products.

The architectural advantages offered by our epi, thermal, metal deposition, CMP and implant product, combined with our ability to integrate these processes are enabling customers to solve major device performance and yield challenges associated with the move from oxynitride transistor scheme to a high-K metal gate glass devices.

In addition, we see increased urgency in the development of FinFET technology where the interplay between deposition, annealing and implant steps is even more important. When the FinFET inflection occurs, we expect our served markets to incrementally grow by 5% to 10% on top of the 25% increase during the 20 nanometer transition. Beyond our increasing opportunity in foundry and logic, we expect our served market to grow by about 25% on a wafer start basis as memory customers’ transition from plainer NAND to the first generation 3D device technology.

We anticipate shipping production equipment for 3D NAND in the fourth quarter of 2013 for the initial ramp of these new devices, another market that has potential for profitable growth is CMP. We are seeing an increase in the number of CMP staff for leading edge device technology. We recently began shipments of new CMP technology that we anticipate will enable us to increase share starting this year and we’ve already secured new positions with large foundry customers.

We are also building profitable growth in additional segments. Inspection represents a great opportunity for profitable growth, and we are focusing on segments of the market while we are strong and have differentiated technology. We are demonstrating solid momentum in wafer and inspection, and with recent wins at leading foundry and logic customers, we are very well positioned for share gains in 2013 and 2014.

In etch our strategy is to increase share and applications in foundry and memory where we have valuable and sustainable differentiations. In the past quarter, we received production orders for memory customers and one new development tool record positions that gives us momentum to deliver a significant improvement in etch financial performance.

In display, we have great momentum. We are increasing our market share and during the second quarter, we secured 100% of the CVD and PVD business for a new factory in China. As the market rebounds, we see the potential to book more than $800 million of orders this calendar year.

The structural changes we have made to our display organization during the downturn provide us with strong operating leverage as volumes increase. As the industry moves to new transistor technology and OLED from mobile applications in TV is becoming more process and material technology intensive. This plays to Applied strength in Precision Materials Engineering for large area application. In TV 4K resolution and increasing average screen sizes create a number of engineering and manufacturing challenges. Larger areas and smaller pixels make some uniformity and particle performance increasingly important.

Our CVD and PVD systems have clear architectural advantages in device performance and yield that enable us to deliver increased value to our customers. Applied has been the clear leader in CVD for many years. And now we are demonstrating excellent traction with our pivot PVD tool and expect to significantly grow our share in PVD in 2013 and beyond.

In summary, our semiconductor and display customers are in arrays to deliver differentiated products to gain share and mobility. This is driving a big push by customers to accelerate time to market of new devices and new materials. These inflections create a great opportunity for Applied to leverage our leadership in Precision Materials Engineering and earlier and deeper engagements with customers to solve their major device performance and yield challenges and drive profitable growth.

We are building momentum by strengthening the Applied team and focussing our investments to deliver growth and revenue and operating profit. We are very excited about the momentum we are building for profitable growth and we’ll discuss our plans and opportunities in more detail at the Analyst Meeting on July 8.

Let me now hand the call over to Bob for further details on our performance. Bob?

Bob Halliday

Thanks, Gary. I look forward to working with everyone on the call again in my role as the CFO for Applied Materials. I’ve been a part of the Applied team for over a year now, and I’m extremely impressed by the depth of technology and talent we have across the company.

I was immediately impressed with Applied’s ability to design and build great products. As a product company, there are three legs on the profitable growth stool. The first leg is the ability to design and build great products. Applied definitely has that ability. What also struck me was the economic power of these products.

Applied’s integrated solutions combine superior hardware, chemistry, and process support. The economic value to customers can be great and the economic value of these strong products leveraged off of a common platform is also great for Applied Materials. The second leg of our strategy for profitable growth is the ability to solve customers’ high value problems.

I have been increasingly impressed over the last year that our improved internal capability to learn and solve these problems. The increasing ability to understand customers’ high value problems combined with our ability to design incredible products results in a more products that hit the market requirements. As I said before, products that hit the market requirements result in very good businesses for Applied Materials.

The third leg of our profitable growth strategy is our ability to fund growth and increase investor returns. We’ve already taken number of actions in recent quarters to redirect spending to fund new product development and strengthen our technical marketing capabilities. These actions include steep reductions in solar spending, our gain integration synergies, the global workforce actions we announced in October and a reprioritization of our R&D projects. We are reinvesting that savings in product development to drive our growth.

Looking at our financials, R&D spending as a percentage of R&D plus G&A has increased from 53.3% in Q2 of last year to 57% in Q1 of 2013 and 58.5% in Q2 2013.

The next question is can we fund growth and increase our profitability at all levels of sales? In my first couple of months as CFO, I’ve had the opportunity to examine each of our businesses in greater detail. And I see opportunities to lower our cost and improve our efficiency. I plan to review our detailed operating model in timeline with you at our Analyst Meeting in July.

At this time, I will share some initial perspectives on seven areas of our business.

First, in EES we have very aggressively reduced our losses. Our non-GAAP losses in Q2 decreased to $34 million and are down 40% from the same period last year, despite half of the revenue. We will continue to reduce our spending in losses.

Second, in display, Q2 non-GAAP operating margins more than doubled from the prior year to 16.5% on slightly lower net sales, our display business has a very attractive business model and managed to stay profitable throughout the worst downturn in its history. We see significant leverage returning to this business in the up cycle.

Third, in SSG, Q2 non-GAAP operating margins were in line with the prior year when normalized for revenue despite an overall increase in SSG R&D spending. In SSG products, where we have significant share, the operating margins are very good. With increasing customer pull and a higher hit rate on product development, we believe that some of our lower share products are on the verge of significant increases in operating leverage. For us in AGS, non-GAAP operating margins increased to 23.2%, up 3 percentage points relative to the same quarter last year. There is an opportunity to grow AGS revenue and profitability.

Fifth, the efficiency of resources allocation can be improved between our businesses through a comprehensive product portfolio process. We should have low sticky assets in the company that we embarking on that process.

Sixth, in operations the vast majority of our product cost is materials. we plan to work aggressively across the company to design for lower cost, and also save money on existing products. This will take some work, but it is another significant opportunity.

Seventh, and finally, all of the functional organizations including operations, supply chain, finance, legal, human resources, IT and facilities need to be efficient and scaled appropriately for all of our business levels.

Now I’ll cover our second quarter results and comment on changes from the prior quarter. Orders grew 7% led by strong demand for our semiconductor and display equipment. We generated net sales of approximately $2 billion, which was just above the high-end of our guidance, led by strength at Silicon Systems. all segments other than EES were at the high-end or exceeded our revenue expectations. Non-GAAP gross margins was 43.2%, up 3.4 points, driven primarily by the increase in revenue and lower inventory charges. Non-GAAP operating expenses were $567 million, in line with our guidance with G&A expenses down slightly relative to Q1.

We plan to reduce the G&A and manufacturing overhead components of our spending more time, both in absolute dollar terms, and as a percentage of non-GAAP operating expenses. we will continue to update you on our progress. In Q3, we expect our non-GAAP operating expenses to be in the range of $550 million plus or minus $10 million, which includes a shutdown in the first week of July.

Our effective tax rate was 24.9% on a non-GAAP basis. We still expect the full-year rate to be between 24% and 26%. Cash flow operations was $224 million or 11% of revenue, reflecting severance payments relating to our previously announced workforce reductions and higher working capital requirements associated with the increase in revenue levels. We used $100 million to repurchase 7.5 million shares and returned $108 million in dividends.

The first payout at our recently increased dividend level will occur in the third quarter. Our capital allocation priorities remain unchanged. We will continue to invest in attractive opportunities in our core businesses, increase the dividend in line with the growth of the business, and utilize share repurchases to manage dilution and return excess cash to shareholders. Cash in investments ended the quarter at $2.85 billion, up slightly from Q1.

Next, I will comment on our Q2 segment results as compared to the prior quarter. SSG orders were up 14% to $1.55 billion primarily driven by increases in NAND and DRAM. Foundry again represented the majority of our orders and remained highly concentrated.

SSG net sales increased 33% to $1.3 billion at the high end of our outlook of up to 20% to 35% driven by foundry and stronger DRAM spending. Non-GAAP operating margin increased to 25.5% driven by the higher revenue. In AGS, orders were down 12% to $481 million due to the seasonal effect of service contract renewals and a slightly lower than anticipated improvement in customer utilization rates in wafer starts.

AGS net sales were up 10% to $517 million at the high end of our outlook. Non-GAAP operating margin increased to 23.2% due to higher revenue and our cost management initiatives. Our display orders increased 41% to $195 million, reflecting the investment in new TV fabs in China along with share gains in multiple product lines. We expect orders to continue to increase in Q3.

Display net sales increased 46% to $127 million above our outlook of flat to up 25%. Non-GAAP operating margin increased to 16.5%.

EES orders were $39 million and net sales were $38 million. EES posted a non-GAAP operating loss of $34 million and we wrote off the remaining goodwill for the solar business in the quarter. We are lowering our spending in EES and the non-GAAP OpEx run rate is below $30 million per quarter exiting Q2. As mike mentioned, we expect to reduce EES quarterly spending to below $25 million exiting the fiscal year.

Now I will provide our third quarter business outlook. Overall, we expect the company’s net sales to be up slightly from the second quarter and non-GAAP earnings per share should be in the range of $0.16 to $0.20.

Here is my conclusion. We have very good product development people and IP. If we can get a high hit rate on understanding customers’ high value problems and new fabs internally, we can significantly increase profitability.

Mike, Gary, and I see a clear path to profitable growth and we look forward to sharing more of that with you in July.

Now, let me turn over the call to Mike Sullivan for questions.

Michael Sullivan

Thanks, Bob. And to help us reach as many of you as we can, please ask just one question and no more than one follow-up. Kia, let’s begin.

Question-and-Answer Session

Operator

Thank you, sir. The first question will come from Terence Whalen with Citi.

Terence Whalen – Citigroup Global Markets Inc.

Hi, thanks for taking the question. So, the EES OpEx run rate is targeted to be about $25 million year end. Any sense for where that was this quarter. Thank you.

Bob Halliday

Yeah, we exited the quarter as I mentioned, at $30 million and it might have been touch over that - the quarter, but we exited 31 going down for the rest of the year.

Terence Whalen – Citigroup Global Markets Inc.

And then my follow-up question is on the gross margin side, you said that part of the positive variance in gross margin was due to fewer inventory reserves, can you help us understand going forward whether you see that trend continuing or any insight on gross margin going forward would be helpful? Thank you.

Bob Halliday

Gross margins are pretty good this quarter. The year-on-year comparison was aided by couple of things. We had some inventory reserves last year and then this year we had a good drop, so we had incremental revenues, which dropped through the gross margin line. If you look at our overall sales and expense and profitability guidance for next quarter, it implies reasonably positive gross margin opportunities next quarter also.

Operator

The next question will come from Edwin Mok with Needham & Company.

Edwin Mok – Needham & Co. LLC

Hi, thanks for taking my question. So first just in terms of guidance, can you help us directionally how you think about the four segments that you guys have?

Bob Halliday

I will give it a shot, Edwin. Most are up a little bit, I think our sales will be up somewhat and I think it’s pretty much across the board.

Edwin Mok – Needham & Co. LLC

Okay, that’s helpful. How about your booking trends, this quarter your booking was quite a bit about your revenue, but next quarter you’re just guiding to a modest increase in revenue. Does that mean that there is some comp softness in booking or how do you think about that and what are the moving parts between the foundry, logic et cetera?

Gary E. Dickerson

Edwin, as you know, we don't give the bookings guidance. We continue with the overall CapEx guidance of flat to down 10% as Mike talked about earlier. We're incrementally more optimistic, it’s part of what happens in CapEx, it depends on just a few customers in foundry and memory spending later in the year.

So, overall, the key message I think for us is around the transition in transistor technology as Mike talked about earlier. That's the key battleground in mobility and that opportunity in the transistor inflection starting in 2014, also 3D memory, those are extremely positive opportunities for us to grow overall share.

Operator

The next question will come from Tim Arcuri with Cowen & Company.

Tim M. Arcuri – Cowen & Co. LLC

Hi, a couple of things; first, Bob, just based on the answer you just gave can we assume that revenue in SSG will be up, I know you don't want to talk about bookings, but revenue will be up, is that right?

Bob Halliday

Yeah, let me give you a little more color than I gave to Edwin. If you look at where the increase is, the increase is more concentrated in SSG and display and less sold in solar and AGS. So of our fix, SSG should do relatively well of the four.

Tim M. Arcuri – Cowen & Co. LLC

Great. Okay, thanks. And R&D was up to a record high, I was going back to my model and I couldn't find anything this high. I know that you talked about 450 being less than a $100 million in fiscal 2012, but you haven’t talked about what 450 will be this year. Is the increase due to 450 and maybe you can give us some sense of what the spending will be on 450 during this entire fiscal year? Thanks.

Gary E. Dickerson

Just as we said last quarter, really no net increase in 450 spending in our current plan. The key focus for us are around these technology transitions in the transistor and 3D memory. Those are big opportunities for us. As Mike talked about, the increase for us is about 25% in the gate-last technology, another 5% to 10% in FinFET technology, about 25% opportunity increase for us in the first generation of NAND Flash technology. So those are the areas where we’re really focused on in terms of our R&D investments.

Michael R. Splinter

Yeah, Tim, I’d add to that, we’re seeing really good customer pull right now for the new products that we have in a number of areas. But even in inspection and Etch, which have traditionally been weak for us, customers are really pulling on us to offer new and better solutions as we go through the transistor change to 3D. We have some really good capability there that I think is quite differentiated.

Gary E. Dickerson

We’re also increasing our investment in application support in the field. In our PDC business, we have the second highest bookings quarter, orders quarter in the history of PDC, and the highest ever orders quarter for our Brightfield business. So we’re making investments in R&D, but we’re also making investments in the field and application support and also focused on earlier and deeper collaborations with customers as they go through these device transitions.

Tim M. Arcuri – Cowen & Co. LLC

Thanks, gentlemen.

Operator

The next question will come from Krish Sankar with Bank of America Merrill Lynch.

Thomas Yeh – Bank of America Merrill Lynch

Hi. This is Thomas Yeh calling in for Krish Sankar. Thanks for taking my questions. Just maybe some more color on the overall order sustainability heading into the second half, qualitatively; you noted order strength driven partially by memory. I was wondering if you saw any pullings related to that and wanted to get your perspective on the first half versus second half and what that might imply for the run rate heading towards the second half?

Michael R. Splinter

Hey, Thomas, may be I can start with the market and then let Bob or Gary talk a little bit more specifically about order sustainability. What we are viewing on WFE for the year is that second half will be stronger. We think about 55% 45% range there. If you think about that relative to last year, we said this year that WFE will be flat to down 10%. And year-over-year when you are thinking about that, most of the down is in foundry because of the supply chain changes there. So I think the thing is that foundry is still a major, major part of the overall make up. But in the second half, we are seeing some increase spending from, in particular, memory, primarily from NAND Flash. But we’re also seeing a little bit of pick up in DRAM as there are some supply constrains there with, in particular, mobile DRAM.

Thomas Yeh – Bank of America Merrill Lynch

Thank you. And Gary, you mentioned expectations for the total served available market increasing by 25% with the transition to 20 nanometers. Can you highlight which particular product segments within SSG that could provide the most areas of opportunity for you?

Gary E. Dickerson

Yes, the transistor, as we’ve talked about before, is really the sweet spot for Applied Materials that where we have the strongest positions that includes epi and annealing, the implant business, CDP is actually also an area that’s growing through new transistor technology. So those would be the areas that are going to grow the most and PVD is another one that’s going to grow as we go to next generation transistors.

Operator

The next question will come from Jim Covello with Goldman Sachs & Company.

Jim Covello – Goldman Sachs & Co.

Great guys, thanks so much for taking the question, I appreciate it. Mike and Gary and Bob, you guys referenced the fact that some of the logic spending is coming down commensurate with some of the weakness in the PC segment. Do you think we felt the brunt of the impact there already, I noticed some of the big logic customers are significantly underspending their stated budgets. Do you think that we’ve seen the worse of that in terms of order or shipment declines or do you think some of that could still impact the second half?

Gary E. Dickerson

Well, we believe that we have, but of course, we have to be able to see what the trend is like for back-to-school, sales in particular, certainly at this point, utilization is moving up. We expect spending in logic to move up modestly in the second half. And part of the reason we kept our overall WRP forecast flat was that, we saw some increase in foundry spending. We saw pretty much a commensurate decrease in logic spending. That’s our best estimate at the current time, Jim. So that’s kind of where we are.

Jim Covello – Goldman Sachs & Co.

That makes a lot of sense. And from my follow-up, you guys have mentioned customer pulls in a number of areas, you specifically talked about, Mike even in some of the areas where you traditionally haven’t had the strength. I’ve heard you guys comment over the last 9, 12 months that some of the greatest pull from customers is in the process diagnostics areas, that’s still kind of number one on the list of where you’re seeing the customer pulls?

Gary E. Dickerson

Yeah, Jim, as I mentioned, we had our second highest quarter’s quarter in the history of PDC last quarter and our highest ever in wafer infection.

Operator

The next question will come from Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria – RBC Capital Markets LLC

Thank you. Thank you very much. Since you’ve been talking about the transistor technology, I have a question on your exposure if I divide the wafer fab equipment into front end of the line and the back end of the line, what’s the overall spending split and how is your exposure different, because you have higher transistor exposure?

Michael R. Splinter

I don’t know that. I think one of things that Gary has been alluding to is how fast certain areas are growing for us. And we think the complexity around the transistor is going to grow significantly to be able to make these advanced 3D. There is a huge race to get the FinFET and advance the transistors and logic, there’s a huge race to get the 3D devices and NAND Flash. And I think that’s where we see the big growth or the exposure is growing fast there, I think about 25% in each of those areas. So that’s really also in our sweet spot and our strength area and that’s where we’re also investing a lot of our new R&D dollars there to ensure that we can be there with the solutions our customers need.

Mahesh Sanganeria – RBC Capital Markets LLC

And then this – my follow-up is on the OpEx, you said in your next quarter’s OpEx guidance you include one quarter or one week of shutdown, so will the OpEx increase in Q3?

Michael R. Splinter

The overall OpEx guidance was $550 million, plus or minus $10 million, which is down from Q2’s $567 million. We get some benefit from the shutdown, but we’re also managing other expenses pretty tightly too.

Mahesh Sanganeria – RBC Capital Markets LLC

Okay. Thank you.

Bob Halliday

Welcome.

Operator

The next question will come from Stephen Chin with UBS.

Stephen Chin – UBS Securities LLC

Yes, thanks. Maybe a follow-up question, Bob, on the last point about just trying to deliver higher operating margins and higher revenues, just listening to your seven observations, I mean, is it fair to assume this is mostly going to be done from say more efficient OpEx management and maybe less there from higher gross margin since there is going to be three big silicon customers?

Bob Halliday

I think it’s – I’ll do below the gross – I’ll do the gross margins lines a bit. I think we can efficiency and cost savings on both expense line and the cost of goods line. And I think the opportunity is kind of half and half to be honest with you. I think R&D efficiency is also going to drive the faster product development and to certain extent it will be self funding between efficiency. I think on the gross margin line above that, people sometimes ask me about the question, can you increase your peak operating profit versus say 2011, we did all fairly.

So if you look at gross margins and you look at gross margin today we have a few things going in our favor. One, we have good mix between the segments where our future growth will be more incenting versus solar for instance in 2011. Secondly, we will, I think, will drive this cost reduction which I spoke of just a minute go. And thirdly, as we start to get some traction in some of these high value businesses, I think those have favorable pricing components. So actually the gross margins look okay, it’s a combination of mix between segments, some potential mix between products, cost of goods sold reductions and pricing, you commercially negotiate all that stuff.

Stephen Chin – UBS Securities LLC

Okay, thanks. But may be a question, Mike, for your early thoughts on 2014 with wafer fab equipment spending yield, even if we assume end market demand for electronics to stay normal with all these silicon technology transitions that you are talking about happen in your 3D since that 20 nanometer, can we assume you’re investing this year for another strong year in wafer fab equipment spend for next year too? Thanks.

Michael R. Splinter

Thanks, Steven. I don’t think we really formulated a detailed view on 2014, but maybe just a couple of thoughts. Assuming that let’s say we can have another 30% plus year growth in smartphones and a 50% growth year in tablets, I think the foundry spending is flat to up and maybe up a little bit more than that because of complexity increases in the 20 and 16 nanometer and the push to advance transistors. And then I think we are going to see an investment cycle in NAND Flash, not quite, we don’t precisely have that pegged yet on exactly how the cycle will go, but I think it will certainly start in 2014.

So in general, would be a positive view on 2014 and the downside is where is logic spending going to end up. But I would also say relative to where are we investing, we are absolutely focused on these technology transistors, the technology transitions. The transistor is a key battleground in mobility, 3D NAND is also a key battleground. So the opportunities for us are significant and that’s the focus of our R&D dollars.

Operator

The next question will come from Satya Kumar with Credit Suisse.

Satya Kumar – Credit Suisse Securities (USA) LLC

Thanks for taking my questions. I was wondering if you could give a little bit more color on your estimates or CapEx for the year. You mentioned that’s between $27 billion, I was wondering if you could give us – give some color on the mix between DRAM, NAND, and logic, and specifically, within NAND Flash, I was wondering what part of the spending are you seeing happen in the first half versus the second half?

Michael R. Splinter

Sure, thanks, Satya. So first of all, I think one of the big trends is in and around foundry, spending has been quite concentrated as Bob alluded to. And we think in the second half, foundry spending will be roughly flat, but spread out among a wider array of our customers. We think that’s the important factor is, you just started to think about what’s going to happen here in the second half of the year. We think logic spending comes up from reasonably low levels in the first half of the year. And then we’ll see growth in both DRAM and NAND spending, but we don’t think they exceed 25% of the overall wafer fab equipment spend, that’s putting them together, and I think some customers have fundable spending there. so we see positive trends in NAND and mobile DRAMs, so I think it moves up from sub 20 in the first half of the year on memory.

Satya Kumar – Credit Suisse Securities (USA) LLC

And Mike, I guess like on NAND, are you seeing much wafer capacity additions in the back half? Do you have an estimate for how much wafer capacity is, that you think is being in NAND Flash this year?

Michael R. Splinter

I don’t have a precise estimate, I think there’s still capacity expansion within existing fabs that’s everybody’s first move because 3D NAND isn’t ready yet and I don’t think we’ll see big expansions until we get to 3D NAND. And then as I said, we’ll see a build investment cycle in NAND, but I think most of that’s next year.

Satya Kumar – Credit Suisse Securities (USA) LLC

All right. Thank you.

Operator

The next question will come from Vishal Shah with Deutsche Bank.

Vishal Shah – Deutsche Bank Securities

Yeah, thanks for taking my question. Mike, I just wanted to better understand the mix between 28 and 20 nanometer bookings that you see in the foundry space between the first half and the second half?

Michael R. Splinter

Well, the first half is pretty much all 28 nanometer. So we see 20 nanometer starting to pick up in the second half of the year, and still pilot production in the second half of the year. So maybe if you add up across the industry, you get between 25,000 and 50,000 wafers. But I think the key thing is working with customers on those real technology and yield problems as these new technologies get into production, that’s really where our focus is with customers that’s what – why they are calling us and why we are excited about not only the rest of this year, but the subsequent years.

It’s very difficult to actually to – customers don’t buy for one generation. So even though – initially go into 28 nanometer production, certainly they are looking forward to what are they going to do in 20 nanometer, 16 nanometer, and that’s actually helping us pull some of our inspection tools, CMP tools and other products into 28 nanometer orders.

Vishal Shah – Deutsch Bank Securities

That’s very helpful. I guess, the reason I was asking is, is there any sense from your standpoint of conversation with the customer that 20 nanometer production may get pushed out a little bit just as these customers try to open the new problems. And then you also mentioned that you had a really strong order quarter in the PDC business, are you seeing that strength from the foundry segment or is it coming also from memory space? Thank you.

Michael R. Splinter

First of all, I don’t think we’re seeing anybody slowing down on 20 nanometers or thinking that this is going to be a small note, quite the contrary, they want to get this next generation of shrink in the production quickly, get the yields up, put in the 3D- transistor as quickly as possible. This was a real race and Gary?

Gary E. Dickerson

Yeah, on PDC, the strongest order, Paul, that we are seeing right now is from foundry and logic customers.

Vishal Shah – Deutsch Bank Securities

Thanks, guys.

Operator

The next question will come from Jagadish Iyer with Piper Jaffray

Jagadish Iyer – Piper Jaffray, Inc.

Thanks for my question. Two questions, first, Gary, you talked the SAM growth on the front end, how much of it will be visible in 2013 and how should we kid of reconcile this with the share gains you alluded earlier in your prepared remarks in the silicon?

Gary E. Dickerson

I am sorry.

Jagadish Iyer – Piper Jaffray, Inc.

I just wanted to find out how should we reconcile this with share gains that Mike alluded in the prepared remarks as you talk about the SAM growth in the front end, how much of it will be visible this year and how should we think about it going forward and then I have a follow up. Please.

Gary E. Dickerson

So the two major transitions that we are focused on right are the 20 nanometer gate-last transition, that’s going to really be more in 2014, maybe at the end of 2013 and the other one is in 3D memory and certainly that’s more – also more of a 2014 story.

Jagadish Iyer – Piper Jaffray, Inc.

Fair enough. And then I think you guys mentioned about the strength in the display segment. Can you help us there whether there is broad-based ordering in the display segment? You did allude to a major Chinese LCD factory coming up, are you seeing any other factories over Gen 8.5 coming up in probably the second half of this year or potentially in the horizon? Thank you.

Michael R. Splinter

Jagadish, you asked about factories larger than 8.5? Okay, anyway, I think we’re seeing very strong orders in display right now. We are projecting $800 million for the year, which is doubling over last year. And we are seeing most of the build out from multiple customers in China and no factories above 8.5 at this time. Although, we believe as the TVs get larger above 60 inches and they become a significant part of the overall mix that we will see customers move to Gen 10 and Gen 11.

Gary E. Dickerson

Thanks, Jagadish.

Operator

The next question will come from Mehdi Hosseini with SIG.

Mehdi Hosseini – Susquehanna International Group, LLP

Yes, thanks for squeezing me in. Mike, a question for you, you mentioned second half bigger than the first half, you mean shipment and revenue, it doesn’t really say much about booking because due in lack of visibility into spending in 2014, bookings could be down or flat into the second half, correct?

Michael R. Splinter

Well, I think that’s unlikely, but I think we are projecting, and when I look at our backlog, I think that’s unlikely. Our backlog has been growing. I think it will grow into the third quarter, but it’s not that far ahead of what we think shipments of revenue will be in the second half of the year especially if our 55-45 second half, first half mix comes out to be relatively accurate.

Mehdi Hosseini – Susquehanna International Group, LLP

So I’m confused, are you saying that both revenue and bookings will be up in the October quarter?

Michael R. Splinter

Well, I’m not making a projection for October quarter at this point. Just talking with what the information we have today, looking first half, second half, whether – we don’t see a scenario if spending is 55% of the total that bookings would be down in total in the second half. I mean, quarter-to-quarter, there can shifts.

Mehdi Hosseini – Susquehanna International Group, LLP

Okay. And one question for Gary, I’m going to ask you what I asked last quarter, you’re talking about the share gain and everything, but can you please explain to me in a simple way other than ASP, what is it that you were doing to enable you to gain market share in a oligopolistic environment? You only have one competitor in each segment, so what is it other than ASP that enables you to go and actually gain market share without giving out much margin?

Gary E. Dickerson

Yeah, the key thing for us is to focus on the key – high value problems for our customers. If you look at display for instance, this concept applies to all of our different businesses. We’re focused on the key device performance and yield challenges of our customers. So as they go to larger panel sizes and smaller pixels, the particle requirements are increasing from 10 to 100 times to get equivalent yield. So our focus there is on how do we have an architectural advantage that delivers better particles than our competitors. The same thing is true as you go to larger panel sizes. Customers if they had a – if we have a certain uniformity on our product, they can sell the panels into their own brand.

If they have a worst uniformity, they go to an OEM brand at a much lower margin. So the leverage in yield and the leverage in device performance for our customer is significant and that is the strategy that we are pursuing that is growing share in the display business today. The same thing is true in the semiconductor business.

As our customers move to new transistor technologies, as they move to new 3D memory technologies, these transitions as you go to FinFET or other devices are extremely difficult. They have big challenges in trying to drive time to market for these products and it is the key battleground for our customers in mobility. Our products that enable those transitions in the architectures that’s where we are focused, that’s why we are increasing our R&D spending, that’s why we are increasing the technical support of our customers in the field and that’s the formula at least for me and 30 years in this industry, that’s the same formula I’ve seen work in every one of these different businesses.

Mehdi Hosseini – Susquehanna International Group, LLP

So…

Gary E. Dickerson

Thank you, Mehdi.

Michael R. Splinter

We’ve got time for just two more questions please.

Operator

The next question will come from Patrick Ho with Stifel, Nicolaus.

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Thanks a lot. May be just following up on that comments you made about the drag towards 14 nanometers FinFET with the foundries. Customers have talked about accelerating that from 28 through 20 and possibly even skipping some of the 20 and going straight to 14-nanometer FinFET. I guess, how do you rationalize, I guess, what the customers are looking for there? And from what process segments do you see, I guess, an expansion at the 14-nanometer node, is it the same one as 20, or if you see areas like CVD also growing faster than the marketplace?

Bob Halliday

So the first transition that will make a tangible difference to our growth in share and revenue is really 28-nanometer gate last. And then customers will move to FinFET technologies at 16 and 14 nanometers where there’s still more incremental opportunities for us. The really big areas of focus for us are around the transistor as I talked about earlier with epi, anneal, implant, PVD, and there are more CMP steps as the customers move to FinFET technology.

So those are the ones that with these transistor technology changes that there are the real big opportunities for us. I would say also, I talked a little bit about combining the precision films with precision materials removal, material modification, and interface engineering, and we’re certainly seeing more of those types of issues where combining these precision materials engineering technology could provide our customers with a real device performance and yield advantage and also be very positive for Applied Materials as we combine these technologies on our platforms.

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Great, that’s really helpful. Bob, a question for you on the materials cost reduction that you talked about on the call, is it more of the design phase that you’re going to be working on helping to reduce that front or is it the supply chain or is it a combination of both?

Bob Halliday

It will be both. We’re going to do both and some of the things we’re going to do to enable both is getting tighter alignment across the organization between operations, the business units, the guys who control the releasing of products to the suppliers. So there is a path to do this., I would say that, we’ll get incremental progress on both and it will be cumulative. The good thing about materials cost reduction as you start to build the momentum, it’s annuity payment, right. You get it every year on equipment, you get it on spare parts. So it’s an annuity payment that every year goes up, you had several points of cost reduction, it’s cumulative over time.

Patrick J. Ho – Stifel, Nicolaus & Co., Inc.

Great. Thank you.

Bob Halliday

You’re welcome.

Operator

The next question will come from Ben Pang with B. Riley & Company.

Ben Pang – B. Riley & Company

Thanks for squeezing me in, two quick ones; first, relative to the $27 billion to $30 billion you referenced for spending, what’s your served available market for 2013?

Michael R. Splinter

Roughly half, it’s 51% or 52% I think of that total.

Ben Pang – B. Riley & Company

Okay. And then in terms of the 3D NAND, you mentioned some early shipments, second half of this year, is it easy for the customers to deploy that for planer if they want to or are there significantly different configurations for the tools that they’ve locked in, if they make a decision on 3D NAND right away?

Michael R. Splinter

Yeah, the customers that are making those early transitions are really focused on the 3D NAND technology, and they are very different. Some of these steps are very different than what you see in planer NAND.

Ben Pang – B. Riley & Company

Thank you very much.

Gary E. Dickerson

Thanks, Ben. And I appreciate your questions. 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 PM Pacific Time today. And we’d like to thank you for your continued interest in Applied Materials.

Operator

Ladies and gentlemen, thank you for participating in today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!