Applied Materials' CEO Hosts 2013 Analyst Meeting (Transcript)

| About: Applied Materials, (AMAT)

Applied Materials, Inc. (NASDAQ:AMAT)

2013 Analyst Meeting

July 8, 2013 16:00 PM ET


Mike Splinter - Chairman and CEO

Gary Dickerson - President

Bob Halliday - Chief Financial Officer and SVP

Randhir Thakur - EVP and General Manager, SSG

Tom Larkins - SVP, General Counsel and Corporate Secretary

Ali Salehpour - Group Vice President, General Manager, Energy and Environmental Solutions and Display Business Group


Stephen Chin - UBS

Patrick Ho - Stifel Nicolaus & Co.

Tim Arcuri - Cowen and Company

Jagadish Iyer - Piper Jaffray

Edwin Mok - Needham & Co.

Srini Nandury - Summit Research


Please note that today's presentations contain forward-looking statements including those regarding our industry and business outlooks, growth opportunities and 2016 financial model. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied in our current views. Information concerning risk factors is contained in the accompanying Safe Harbor slide and in Applied's SEC filings, including our most recent Form 10-Q. Today's presentations also include non-GAAP adjusted financial measures. Reconciliations to GAAP measures are included in the slides which are available on the investor page of Applied's website at

Bob Halliday

I am Bob Halliday. I have a very precise schedule here. It says, first let's just settle you down. So if any of you bring excessively rowdy, please settle down and then I am going to give you an overview of what going to do today. So, welcome. We've a pretty full day. I think a lot of about -- probably about half of you went to the morning sessions over the Maydan Center, which I heard went really well. We had some stuff on the transistor and DRAM, that I hear went great. So today, we'll have some summaries of that, little bit, Randhir will talk about SSG a lot. And if you any follow-ups on that, that'll be great.

Today, the rest of the day we will have, Mike's going to do an overview of the market environment, how the Mobile Device is driving our industry right now, as you all know handhelds, tablets and then Gary is going to talk about our strategy, how Applied Materials as a company is going to win. And then Randhir is going to focus on SSG which is really, that along with Display, with two big engines to growth for the company at this time. Randhir is going to drill in to our opportunities sort of by segment and by product. So if you look at the markets we attack within SSG, he's going to give a deeper dive on that.

We're going to have a break and then after the break, we'll welcome you back and Ali is going to talk about display. I think display is an under realized asset for Applied Materials. We're doing very well there as a business. It has attractive business model and has some of the differentiation characteristics in the semi industry too.

Then finally I'll wrap it with transition from. Take you, for everyone else told you about the markets and products and then I'll translate how the market opportunity and the products we're driving will translate in to improved financial performance. And then we'll leave it all for Q&A. So, now I'll give you the lineup.

So I think you know everybody here. Mike Splinter is our Chairman and CEO. He'll follow me, and then Gary is the President of Applied. Randhir heads up the Silicon Systems Group. Ali is going to talk to you right after the break about the Display business. He heads that group for us and then recognize me hopefully. I had a blue shirt then too.

What you're going to hear about three big messages, our customers as you've heard earlier are fighting in a battle for mobility leadership. This is a big deal. If you look at growth in the industry, huge growth for mobile phones, tablets. How to enable those is a battle, we'll talk about later on for battery life as well as performance and what's going to drive the bus in terms of getting the device performance and yield, is just not a scaling war anymore, it's device performance and yield war and the way they are going to scale these devices, there are two ways, one in three dimensions, but two material changes. Just simple playing our shrinks isn't working anymore.

And then finally we'll tell you how we are going to enable that. If you just even think about our name Applied Materials, we're the world leader in increasing the connectivity of materials, managing these transitions to enable the roadmaps. So I think we have a great opportunity. And then when I wrap the profitable growth, we are going to talk about both of words, how we are going to grow, but how we are going to grow profitability because we think there's room in the model for increased leverage around these revenue growth opportunities.

So now I am going to welcome up Mike Splinter. So yesterday just for final take we had a rehearsal right. So Tom Larkins, our lawyer didn't shave, Mike and I both had shorts on, I don't know if we looked better yesterday or today? So what you have to say, Mike? There's your clicker.

Mike Splinter

Thanks, Bob. And Bob you've now been, you've been with Applied a year and a half, but you've been CFO for 4.5 months now. You moved out to California and the other day I saw you were eating at McConnell’s. So I know that you've really become a Californian and…

Bob Halliday


Mike Splinter

That will change after the Giants win a few more world series. Anyway I wanted to welcome you all this afternoon and thank you for your interest in Applied Materials. You are here in Building One; Building One while actually not the first building Applied Materials was ever in - Applied Materials started up the Road in Mountain View in rented space, this was the first building Applied Materials has ever built.

We acquired this land back in 1973, 40 years ago. The company is 46 years old this year. We acquired this land for a whopping $435,000 and then the next year built this building. This building was the home of many great inventions that used to be a laboratory and production facility, but now is pretty much an event center and office building. But our Epi products originally came out of this building, our CVD products and also our first Etch products came out of this building.

So today, I am going to talk a bit about the market. The markets we’re participating in, why we are excited about that and I have to say that that when we start talking about the markets, it's really all about mobile. And mobile is driving our business, driving the biggest part of our business and it's where the growth is and mobility is changing the way people access data, the way people process data and the way they communicate. And it's also I think important to say that those changes are driving the electronics industry and driving what happens at Applied Materials in wafer fab equipment and display.

So as Bob said, you are going to hear a lot this afternoon about how we are driving our profitable growth. It is really the theme, we are driving momentum for profitable growth and the way we are really doing it is by executing our strategy of leveraging our precision materials engineering to solve those toughest high value problems that our customers have around device performance and yield.

And when we do that we win, we have the best capability in the world in those areas. And the landscape is really changing because of mobility, the types of problems we have to solve. This morning I'm sure you heard about many of those materials problems, Applied Materials is in [our NAND] [ph] for a very, very good reason, because we are great at materials, at inventing new materials, putting them down in new ways and creating advantages for our customers.

You may have seen a version of this chart from many different companies. From our aspect this build out of smartphones and tablets, mobility, portability is absolutely critical. The growth year-by-year is really the biggest part of what's driving our business today and there is really [a war] [ph] going on by these device makers, which we have listed here.

These companies are well resourced, they are driving innovation, they are driving new products pretty much every year, and that innovative drive drives our products as well, drives our customers to create better performance in their devices and the trade-offs here are as I said quite different than in the past, different than in the PC era.

These issues and challenges that they are trying to solve are about power, they are about performance and optimizing those two in a portability form factor that really allows people to carry it in their pocket, carry it around every day.

The build out of the mobility era is going to go to over 3 billion devices cumulatively. This changes the landscape in the industry because software developers, the ecosystem that these companies bring are really going to center their developments around smartphones. It doesn't certainly mean that the PC and notebooks are dead, I think there is going to be a significant response from those companies as we go through time to get more portable and more mobile and be able to compete with tablets and smartphones.

I couldn't pick a better example here of looking at the dichotomy of the challenges that our customers are facing; if you look what happens in the smartphone, the applications processor, let's say that performance is 1x, it takes a couple of watts, and of course it has to operate at a temperature, near room temperature so that you can hold it in your hand or set it on your lap.

Meanwhile the next two devices, graphics processor and CPU require a lot more processing power but they require a lot more power. So it's 80 watts or so on a high performance Ultrabook compared to smartphone, that is a dramatic difference and it really shifts where we have to focus to help our customers solve those very, very critical problems.

And that is where this war on mobility is going to be won, the companies that can solve that battery life, the high performance and functionality, the portability, the user experience, those are the companies that are going to win. And certainly, I think I've probably been saying this for 40 years now, but we are really still at the beginning of this adventure.

The capabilities that are going to be created in the future, you can just see that continued increase in data. We expect the data to double, data usage, data creation to double in the next two years. It's already at zettabytes, that is 10 to the 21st bytes, I am not sure what comes after zettabytes, but I don't think that there is any slowdown in data creation largely unstructured.

How this data is going to be analyzed is going to create more cloud computing, more storage on devices, but we are going to re-imagine how we use things. Your smartphone is not going to be used for money, it is going to be used to be the central controller for many other devices, maybe like this fitbit, I saw at least one other person wearing this - it largely tracks what you do all the time, even when you are sleeping, I did not allow my wife access to see where I am, but there are other devices that you can trade, you can be tracked, you can connect to your car, this Internet of things is just starting to happen and we think that by 2020, there will be something like 50 billon of this devices that are interconnected and we are well on the way to that number, already I think by next year we will expect 15 billion close to double the number of people on the planet.

We will also see wearable devices enabled by flexible displays, on your wrist, glasses who knows what the next wearable device will be and then finally new and better human interfaces. Today we are still pretty much stuck with touch, I think in the future we will have much better voice and we will require more processing power on the devices. We will have better gesture recognition, handwriting recognition and the like.

So when you kind of sum up this big competition today for the volume and the future competition for what is coming next and being created, it really comes down to just a few things that are important to our customers and our customers' customers.

Functions and features like the smartphone do, battery life, that interface experience how you are interacting with the device, the form factor and finally it all has to happen at the right cost. This is how our customers and their customers are going to compete. Now what does that mean for us? Let me get down to the technology that we are working on, functions and features, battery life, interface experience are listed across the top, kind of the things that we're working to enable are listed on the vertical column here.

Better transistors, better transistors are really at the fundamental level of integrated circuits, you have to have a better transistor every generation, it needs to be higher performance and lower power, it is the beginning, it's the foundation, it enables those things like battery life, like performance. But several generations ago, transistors stopped improving when you scaled, in fact they started to get worse, they leaked more, it was hard to get better mobility. And so we've had to resort to quite a number of changes from metal gate to high-k dielectrics in planar transistors. And now as Bob said, vertical transistors and logic and certainly many vertical memory cells in 3D NAND and we're going to see that trend to continue, because it is the only way to continue to improve the performance of transistors.

But even if your base transistor operates at high speed, the thing that you have to have to deliver that performance to the outside world is interconnect, Applied is clearly the leader in interconnect, in metals, we have been for many, many years. You're going to hear later from Randhir, how we're going to see that market grow over the next few years, as the complexity of the Internet increases, as it becomes more difficult to get those signals out. Better display is so important because it is the human interface. We see these displays continuing to increase resolution, go to flexible displays as we move through time.

Then 3D memory, critical to be able to store more information on the device. And finally scaling and patterning, the scaling and patterning are important in growing markets and you'll see our increased participation there. But today, they are not fundamental to the performance of these devices. They are fundamental to the cause because they help get more transistors into a specified area, but they don't change, the scaling does not change the performance of the device any longer.

Now the thing that's happened over these last few years is we're having the build out of smartphones and tablets. And what you can see in this chart is that, the electronic component, the electronic content of these devices dramatically increasing over feature phone by 4X and this is the huge change over that's happening, because all of these feature phones are being replaced by smartphones and this market obviously is approaching 1.5 billion units on a worldwide basis, it creates a huge drive for new capacity as well as new technology.

Now if you translate this into what it means to Applied, you'd think from this chart of course new PC would be much better for us than just new smartphone or tablet. But when you really analyze the situation, you look at the overall complexity of devices, the ability for our customers to reuse their profitability is involved in this equation and certainly our share at the various customers producing these devices, it's actually better for Applied -- an incremental unit of either smartphone or tablet is better for Applied Materials. So this age of mobility, this build out of mobility is a very strong and positive event for Applied Materials.

Now we look at the resulting wafer fab equipment spending and how that's changed during these last few years nodes of technology. If we look back to the '06 to '08 time period, it was clearly still the PC era and what you see is large memory investment during that period of time, a modest logic, but I think the big start difference here is that's foundry was only 11% of the overall wafer fab equipment spending during that time.

During the last few years, as the mobility build out has gotten underway and gained momentum, wafer fab equipment has shifted. Foundry spending is now 3 6% of the total. Memory overall has shrunk from over 50%, the high-50s, to a little over 32% I guess in this timeframe. We expect this trend to continue and with increased process complexity, generation over generation in the next few years we expect that foundry spending will have to increase.

We expect that NAND spending will also increase as they start building out 3D NAND factories. These 3D NAND factories will all be greenfield factories. There is no reuse when you move to these new generation of technology because of the stark difference between it and planar NAND. We also think that DRAM is going to have some level of reinvestment because the bits per box in smartphone of mobile DRAM are going up at a fairly dramatic pace, 65% or 70% kind of growth rates per year. Now overall DRAM bit growth rate is not nearly that large, but we see that growing on an absolute value basis as well.

Now as we look at our projections, we said that our view of wafer fab equipment spending in 2013 is flat to down 10% or between 27 and 30 billion. We continue to hold that view and the things that are happening in the market today are pretty much, we pretty much understood those as we made that forecast during the last couple of quarters.

As we looked to 2014, we think 2014 is going to be a better year for wafer fab equipment spending because of the continued mobility build out, the increased complexity in the processes at the 16 nanometer node and 14 nanometer node, especially around this really strong race to establish finFET at all the foundry customers and then we do expect the start of the 3D NAND build out in 2014 and some modestly increased spending in DRAM.

Now, this is a chart that perhaps, I showed last year in a different form but I just used this today to point out a couple of key items. First of all, there are new devices coming out every year. That group of device manufacturers are driving innovation, they are driving new devices every year. These new devices have to have new features and better performance. That's driving innovation back to us. In part, that's why we're seeing a very, very strong drive for finFET transistors so that capability can get in to the next generation of technology.

And when you get in to that next generation of technology, your ability to ramp and ramp very quickly is absolutely critical. We hone that capability at Applied. It's why we're very focused on our speed and speed of execution. It's why we're increasing our spending on R&D to be ready for these new product cycles and be ready when our customers need these levels of innovation.

The team this morning talked a lot about the kinds of new products that were coming out with, new capabilities that are going to continue to improve performance of the transistors are going to continue to improve the performance of internet, interconnect and how we're going to participate in 3D NAND and the improvements that we're making in display as it becomes much more of a materials and technology play than the size play it was for so many years in the display industry. But this in the end is all about device performance and yield.

So what you are going to hear from the next few speakers is really how we're positioned for profitable growth, how we're going to gain share and meet our commitments on gaining share, how mobility really is giving us the opportunity to really innovate and create new products and to help our customers with their toughest problems with their key device performance and yield and how we will leverage our leadership in precision materials engineering to enable that profitable growth.

And with that to talk a little bit more about our strategy and how we are going to go about that, I would like to invite our President, Gary Dickerson to the stage to talk with you a little bit about that. Gary?

Gary Dickerson

Thank you, Mike. I'm going to talk to you about our strategy at Applied Materials for profitable growth. The engine for profitable growth at Applied Materials is our leadership in precision materials engineering. It's what we do better than anyone in the world. We have better and broader technology, very deep talent in precision materials engineering and this is really what defines Applied Materials and our growth opportunities.

So why are we so excited about precision materials engineering? This really provides differentiated device performance and yield solutions to enable the major mobility inflections. This is going to be a theme, you are going to hear about many times today. Materials innovation is really driving differentiation in the transistor, in memory, in display and all of the different industries that we participate in and Applied is the clear leader in precision materials engineering and materials innovation. This creates a great, great, opportunity for us.

We are also increasing our focus in investments in SSG. This is our number one, number two, and number three priority as a company to grow our semiconductor business and the investment and focus on products, technology and customers. It's the innovative products that we have and the technical support that we have in the field that drives the engine for profitable growth for Applied Materials. We are shifting our investments into the areas where we have the greatest returns and we will talk more about that today.

So Mike talked about the war for mobility and driving major inflections in the transistor, interconnect, display, memory and new materials. These are the areas that we are driving. We are solving these problems with unique technology that provides the device performance advantages for our customers in this war for mobility leadership through precision materials engineering. I have to tell you for all of us here at Applied, this is a tremendous amount of fun. We have great, great technology and all of us spend seven days a week, 24 hours a day with tremendous passion focused on these inflections with the technology that we have. This provides a great opportunity for us to grow the company.

We are the precision materials engineering company enabling the materials innovation in the mobility war. One aspect of this is precision films, PVD, CVD, metal CVD, metal ALD, many, many technologies where we have clear market leadership with precision films. Precision materials, CMP, [H] and Randhir is going to talk about an emerging area that is going to grow to a very large size up to a $1 billion over the next several years and selective materials removal and Applied has a -- we have great technology, we are working with the technology leaders and we have a great opportunity for significant growth in selective materials removal.

Persistent interface engineering, interface engineering is becoming more critical for our customers. You can imagine as you are going to these advanced technologies more and more new materials managing these interfaces to eliminate corrosion, native oxide growth, factors that impact the device is becoming a bigger problem for our customers and a great opportunity for growth for Applied Materials. Randhir will talk more about this later today.

An another area is materials modification, implants, electrical modification of substrates, physical medication of materials, RTP, modifying the device and also modifying the films, is growing in future technology nodes RTP.

So you look at these technologies. Materials innovation is a key and above the war from mobility leadership and Applied is the leader in providing these solutions, the device performance in yield for our customers.

Now I want to talk about the importance of materials engineering in the war for mobility leadership. [Morris Stang] recently talked about two reasons, why TSMC is winning, one is because they have better yields, and the other one is around device performance and transistor technology.

When we work with all of the foundry customers, TSMC stands on global foundries and also with Intel. All of these companies are focused on more features, better performance, longer battery life and the transistor technology, 20 nanometer finFET technology, this is the key focus for all of these companies.

This is the big war that's happening between all of the foundry companies and this is right in the sweet spot of where Applied has a leadership position. Also 28 nanometer, one of the very large fabless customers talked about what is driving performance gains and we compared litho scaling to materials innovation and device architecture innovation.

So if you were to think about how much of the performance gains is driven from litho scaling versus materials innovation, how would you think that breaks down, what percentage for litho scaling, what percentage for materials innovation?

So what he said is that 90% of the performance gains are driven through materials innovation and this percentage is increasing for each technology node. And you can imagine as you move to finFET technologies and completely different device architecture's bigger changes than we've seen in decades. Materials innovation is the key focus for our customers.

One of our large logic customers recently presented on materials complexity being a key challenge in the semiconductor industry. And if you look at this chart, what it shows is that there is a large increase in new materials at a 22 nanometer node and Randhir will talk about, when you go to 14 and 10, it's even that bigger problem.

Materials innovation, driving device performance, leadership in logic, so what is this mean for Applied? As I talked about before we are the company that has a leadership position in precision materials engineering. So what's happening is the customers are pulling us in to earlier and deeper engagement Applied is strategically important for our customers and providing the solutions in materials innovation that creates a great opportunity for us to grow our business in logic.

So let's look at memory. This is from one of our leading memory companies. One of the largest customers for Applied Materials and what this shows is capital intensity for different technologies as you are moving to different device nodes. So 3X, 1X, 1Y are all planar NAND technologies.

And then you got to the 3D technology node, and what you see here is that litho intensity is going down. How many people were in the morning session? So a few of you. All of you that were there know that litho is going from about a 10 nanometer feature size to a 50 nanometer feature size. As you make this transition from planar NAND to 3D NAND, that transition is all about materials and plant in thermal is increasing, CDD is increasing and the [text] is also increasing.

It's about deposition [and H], the transition in vertical devices in 3D NAND. What we will also talk about is not just our temp opportunity here, but we also had great opportunities to grow our market share as these transitions happen because these are in the sweet spot of where Applied Materials has technology leadership, we have the enabling technology.

So how do these major inflections grow our opportunity? Moving from 28 nanometer technology to 20 nanometer in finFET is about a 25% to 35% increase in our temp as we move through this transition, and this is really going to pick up steam in 2014 as 20 nanometer technology ramps.

In 3D NAND, again this is about deposition in H. So if you look at just the deposition of H, that is going up maybe 50% to 75%, but if you look at the overall Applied Materials temp, it's going up about 25% to 35% as we are making this transition from planar to 3D.

Mike just talked about this chart on device performance and yields for materials innovation winning them work for mobility. It's about materials innovation, precision materials engineering, so I want to give an examples for better transistor, better interconnect, better display and 3D memory and device scaling and talk about how is Applied enabling these transitions.

So first better transistor, Applied leads in all of the critical technologies around the transistor, this is the battle for Samsung, TSMC, global foundries, all of our foundry customers, and we are leading in implant, thermal ALDs, CDD, PDD and CMP great opportunity for Applied, strategically important to our customers.

Some examples are (inaudible) enabling an increase in transistor speed up 30% by strain engineering. And when you go to future technologies and new channel materials for better channel mobility, this impact is even larger and the opportunity for Applied Materials is larger.

100X lower, leakage currents for the device, that is a big deal. We all want batteries that don't go dead, and so it's about leakage, device leakage, Applied is enabling this key technology inflections for the customers, in this case is PDD, ALT high K metal gates, big opportunity for us. And Randhir will talk about how some of these opportunities are growing going forward.

Better interconnects Applied is the leader in interconnect technology. CDD, PVD, CMP and gaining share and H. An example here is integrated PVD, ALD and CVD enabling 3X improvement in contact resistance, this is integrated on a single platform.

Randhir will talk about the importance of integrated platforms going forward, this problem with interface engineering is growing and Applied is the only company that has these combinations of technologies that can solve these types of device performance and yield problems.

3D memory, I talked about 3D memory growing, it's not about lithography, it's about deposition in H, that's where temp growth is coming, but it's really more than that for Applied, this is in a sweet spot of our technology leadership. So if you look at these key technologies, staircase deposition, staircase-H, metal hardness, high aspect ratio H which we have greater than 75% of the development tool of record positions at the top four memory customers. Now heard over the question earlier today and people were talking about staircase deposition, I think can't the carousel architecture do a good job with that. You cannot use the carousel architecture in building up our 32, 24, 64, layer stack. It's in Applied Materials sweet spot from a standpoint of our architecture, it's in a single chamber, building these multilayer stacks that have a big impact on the device performance. This is the sweet spot of Applied and where we have technology leadership.

One example in 3D memory, it's staircase-H, where we have a strong position at all four of the major customers enabling a 60 to 1 aspect ratio with the distortion free profiles, 60 to 1 aspect ratio, great opportunity for us to grow our business.

Also in device scaling to lower cost, we have opportunities in Brightfield inspection, metal hardness and I talked already about selective material removal, big opportunity for Applied Materials. One example here is in Brightfield inspection. In the last six months, we've increased investment in R&D, we've increased in investment in our field technical support and we've increased our layer qualification by 30%. So you can imagine if you are going from 40% of the layers to 70%, that create a great growth opportunity. And we're seeing that in the fact that we had a record order quarter last quarter in our Brightfield inspection business. A lot of momentum for profitable growth.

Also, we're taking the precision materials engineering technology leadership into new market. In display, we are the leader in large area precision materials engineering. We have clear leadership in CVD technology and we are gaining significant share in PVD. Ali Salehpour will talk to you more about this later today.

Applied CVD and PVD technology is enabling low temperature polysilicon and organic LED technology for higher resolution screens for smartphones and tablets. Another factor driving our display business are larger TVs with higher resolution and me for one I got four year old twins and ever they like these large display, large high resolution displays. If you look at 60 inch televisions, they are now about $900, the cost is coming down significantly and then everybody wants higher resolution displays, when you go to ultra high definition, you have a 4X increase in pixel sizes.

So what is this mean for our business? As you go to these larger panel sizes and one-fourth the size pixels, it's the same driver that we've seen for many years in the semiconductor industry, larger area devices, smaller feature sizes, you need a 10 to 100X reduction in particle size, you also need a 3X improvement in uniformity. This is in a sweet spot of where Applied Materials has leadership in device performance and yield, it's driving growth in our business and Ali Salehpour will talk to you about how we will grow the display business to a $1 billion or more with very, very high operating leverage over the next few years.

As I said before, we're also increasing funding for the semiconductor business, products, technology and customers. Finding the areas that have the highest growth potential for Applied Materials, we're increasing the R&D percentage of total OpEx from 2012 to 2013, we went from about 56% to 59% and we will keep driving this higher because this is the engine for profitable growth.

We're also, as Bob Halliday has talked about at the beginning, focused not just on growth but profitable growth. So we will drive down the percentage of OpEx as a percentage of revenue from 25% to about 20%, driving lower investment in overhead functions and improving productivity across the Company. Bob will talk more about this when he talks about the financial model later today.

So, I don't know if you can sense but we are all tremendously excited about our opportunities to drive profitable growth at Applied Materials. The engine is precision materials engineering, if you don't remember anything else today, remember that Applied Materials is the precision materials engineering company. We are driving the innovation in materials to provide the device performance and yield solutions in this war for mobility leadership. This is the sweet spot for Applied Materials.

We're also investing in the areas where we have the highest opportunity for profitable growth. We're all tremendously passionate, excited about this. We have tremendous opportunities and now I would like to introduce Randhir Thakur and he is going to talk about how we're building momentum for a profitable growth in SSG. Thank you very much.


Randhir Thakur

Thank you very much, Gary, and good afternoon everybody. I got a chance to say hello to many of you in the morning session and hope you enjoyed the trip to Maydan Technology Center as well as the breakout sessions by the team.

I'll talk about building momentum in Silicon Systems Group. I think the theme for here today is our number one, number two, number three priority as a company is to grow our silicon business. Precision Material Engineering our focus and you will see through the presentation towards the end as a result we'll demonstrate that in the silicon business we will gain market share.

I want to talk about our silicon business strategy. The foundation of our silicon business is really about earlier and deeper engagement with customers. Today, as that customers are moving to 20 nanometer and beyond, in all sectors of device making, logic, in the foundry space, in the memory space, really the key is that longer development cycles are necessary, many challenges that our customers face need longer development time and earlier engagement with the customers as a result. Precision Material Engineering is the foundation of our strategy. The reason is as Gary showed, there are so many new material innovations that have to be integrated and that integration, the acceleration towards it accelerating very fast.

To the right I show what are the pillars of our growth. These three pillars; number one transistor, transistor is really the heartbeat of any device. Transistor is for the first time is going in last two decades, going from 2D to 3D transition. This transition where we -- people call about thin fab and this transition is leading for our to accelerate the development whether it is in app area, whether it's in the implant or the thermal areas, there are several suite of products that we have in the area of transistor. Because this transition is happening, therefore this space for us is growing. This is critical inflection for Applied Materials.

Second is about extending our leadership in interconnect. Historically, Applied Materials has had a very leading position in defining the wiring for the devices. We always had our leadership position in the interconnect space.

And third in opportunity space that we are very excited about is change the rules in patterning and in inspection. This transition is leveling the playing field for everybody. As a result our differentiated technology, that I'll share with you, are becoming more and more predominant where customers are pulling in for us to work in the patterning and inspection area in the new product. So I'll share that with you. Therefore three areas of growth it is transistor for us the interconnect expansion and changing the rules given the new dimensions of technology.

Now Mike talked about this is about the war for mobility. What does that really mean? What was then before the mobility was started? What it was that 2D devices were largely litho enabled, whether it is NAND or logic it was mainly litho scaling going on. What has happened now with the 3D inception is that the material enabled changes are taking place. The transition are more dependent on materials in the transistor space this is about Selective Epi. It is about bringing in different kind of new [dope-ends]. It is about high high-k/metal gate. It is that material change which is enabling the transition to the 3D transistor.

In the memory space as Gary highlighted about it is going away from the litho and on to the critical edge step, the critical deposition step, new kind of deposition materials. So transition in the mobility era is driven by the material changes. What else is happening? The conventional processes today the interfaces need to be very pristine. These structures which are 3D are very narrow, very tall. 60 to 1 aspect ratio is a very deep well with very small opening at the top. Therefore the pattern collapse, these structures are [preserved].

What becomes important is you should be able to put material anywhere selectively and remove that any material selectively. This is a very, very important competence. The reason we have differentiation in this area is because we started app was our first product as a company some 40 years ago and we started working on the Selective Epi. We have years of experience in doing the selective materials. So that capability is becoming now extremely important as new materials, new architectures are changing going forward.

Bulk dominated in the previous era but interface engineering is becoming important. Today there are very few electrons in the storage cells. The structures need to be very, very -- having very pristine interfaces. This is extremely complex. This takes years of experience doing chemistries, having the chamber designs that are right, that can be transferred into manufacturing. This becomes a very, very big deal. Selective material removal, interface engineering extremely critical.

What else is changing as we go forward, it used to be standalone tools where you could move the wafer from one machine to the other but in critical modules, in critical modules, whether it is high-k/metal gate it is Selective Epi, or it is in the back end for the copper barrier-seed integration becomes very important. No air brake. To achieve that you need the platform that are able to handle it and are able to carry these different processes on the same platform in a closed environment without air brake.

Applied Material for the longest time have been a single wafer platform company. That has been our strength. So for us to adapt these new materials, put them in the platform which are mature, are manufacturing worthy and get these capability to our customers faster nobody better. That's what is the difference. That is why it is exciting for silicon business. That is why the silicon business going forward is going to grow.

Mike also talked about the mobility inflexions. So I looked at what it really means for us. First is the end user benefit, the function and features, the battery life. I was talking to Halliday and one of the thing I mentioned was that in our phone if we look at this phone today we improved through Selective Epi and through our metal gate processes which is in these chips. The battery life by about 20%. That is what is in my phone. So this is real, point is that we are very critical piece of the semiconductor value chain. What end user is experiencing today and that experience, we impacted directly, therefore our innovation and our ability to make sure that we have coming to the solution very fast is extremely critical for the semiconductor value chain.

Gary talked about the metal section around the what kind of high value problems our customers are facing, these are in the area of transistor, in the interconnect, in the 3D NANDs and patterning and to the right is our precision material engineering solutions.

These solutions basically enable all kinds of performance requirements that our customers are facing. In the transistor, it is about speed and the battery life, it is about performance. In the interconnect this really is about the reliability. We go into the form factor lot of this is carried out by because we are able to deposit and we are able to process it in [formal] materials and have those properties.

We are able to make sure that this translates so that the form factor is of the size that can go into some of these mobile devices and patterning, patterning very important for us because of the litho challenges and push out of the EUV several times, the patterning part is where we are getting lot of traction and I will share in details some of the disruptions that are happening in that area. So basically the mobility is impacting our business but also it makes us a critical part of the semiconductor value chain.

Let's look at the material engineering, this is really the leading customer feedback as Gary showed you from 130 nanometer onwards to 30 nanometer. We just extrapolate that some of the new materials that are being developed in our Maydan Technology Center that you saw today. These materials are almost more than doubling, the kind of capabilities, kind of new chemistries that are to be brought to forte for the advanced technologies at 20 and 10 nanometer.

This is on one hand a challenge, on other hand this is an incredible opportunity, thousands of Applied Materials engineers every day love and live to do this. And therefore the point of what our overall strategy that this industry is about Precision Material Engineering going forward and therefore it is moving to our sweet spot.

Gary showed you about the growth in the foundry and the 3D NAND, we look at the scope of this huge growth opportunity, the key point is that NAND as well as the foundry is where the Greenfield fabs are happening, new fabs. So there is not any reuse and along with that if you go into 3D NAND some of the conventional technologies and the past that we have conventional CVD is going to be new machines that have to go into enable the Greenfield fabs.

That is very important point, because lot of what we are seeing is that the Greenfield fabs moving to our sweet spots, our products, our technologies, going into these fabs that's where we will see the growth, 25% to 35% in the foundry and in the NAND space.

Now I want to talk about the first pillar that I mentioned, you know what strategies, the first pillar is transistor, the speed and battery life is very important and the 3D transition is just a beginning, what you see is that in left hand side all of our market segments, we have number one position, selected material that Epi delivers the needed speed in the performance initially we saw higher performance 30% is typically what our customers are able to extract on an Epi generation after generation, along with the metal gate and other combinations.

Very important point there is the PVD integrated metal gates, metal gates what used to be in the planner devices simple polysilicon one pass, one film is multiple films. This is growing. We see growth in this, PVD has, as you know, has been really the work horse of the semiconductor industry in delivering the PVD solutions.

We are able to integrate it to make sure that the metal gate works, implant and annealing, we really believe in our leadership on transistor. Onus is on us behalf of our customers they expect us to deliver the transistor solution and transistor is something that our customers never compromise on so one of the key advantage for us is we are integrated in the transistor solutions suite of our products are there and customers do not change the direction on transistor, don't change that tool set easily therefore we are building upon what we already have as a basics.

We acquired Varian because doping plays an important role, will continue to play an important role to enable the transistor. We have sound annealing capabilities, thermal budget is so important for the performance of the transistor we'll continue to enable that. Transistor has become complex with the FinFET and as it happened the complexity actually is going into the sweet spot for us, complexity is good for Applied Material, as far as transistor is concerned.

How does it break in dollars and cents? The total impact revenue impact of all of this opportunities by 2016 is $800 million in incremental revenue over 2012, $800 million incremental revenue over 2012 when Bob will share with you our models, he will show this as one of the basis of growth where we are growing. That's the strength on transistor for us, let me give you a couple of examples if we look at the Epi, Epi delivered the performance, the speed and the performance. It is a slow process, we are really our engineers everyday are battling physics here, it's very difficult process to do, but we have been -- it's been great business as well, very big opportunity for us going forward, as the [steps] are increasing, we are going at 20 nanometer from PMOS Epi to NMOS Epi as well.

Today we also launched the product the new RP Epi product was announced this morning for the NMOS Epi, this is the net new application, and this is a growth business, strong business for us. Market share is pretty high we have about more than 500 systems shipped and we are counting, we have -- this is incredibly sound business about $250 million in incremental revenue in 2016.

Metal gate on the metal gate this became very critical because it enables the high k/metal gate really enables the battery life. Low leakage is the must have, we optimize the performance in the Selective Epi where you saw that the adoption is increasing in the Selective Epi, the number of steps are doubling.

Now in addition to enable the whole transistor the metal gate steps are increasing, customers switch to the gate [last] process at 20 nanometer, which results in a lot of what was enable is the metal gate steps that went into this process. So as a result we see the transition from planar metal gate to the thin fab is resulting for us into 8x increase in the steps and we see the revenue growth impact as a result.

Finally, we look at Selective Epi, we look at the metal gate, there is no other wafer fab equipment company that can make these two capabilities; this is our differentiation that is how we enable our customers. So to put it all together in terms of market share, transistor has grown in complexity in architecture, transistor has grown in complexity in introducing several new materials as I highlighted.

We are form in all key markets, if you look at our total share gain we have more than 70% market share in lead areas like Epi implant metal gate and transistor CMP and as the transistor road map evolves, we believe with 14 nanometer and FinFET adoption this is just the start of our growth in the transistor area. This is very exciting for us because we have been here early, we had the capability and put together the suite of product through our organic growth as well as through the acquisitions.

The next pillar of our growth is interconnect, Mike highlighted about mobility the low resistance and reliable interconnect becomes very important. The growth here, this has been our field where for last two days decades, we have had a strong position enabled our customer.

Interconnect delivers the performance that transistor has generated, therefore they need to be very reliable, just think of if we have a, in terms of transistor, a really fast car, we need road that is reliable, that is smooth, where that car can run as fast as it is built to run. If interconnect, interconnect is that road. So therefore, for us to deliver the transistor performance that I just highlighted a reliable, fast and proper interconnect, from device architecture standpoint, whether it is local interconnect or global interconnect, it has to be very, very fast. This is changing. Because some of the materials, again going to the precision material engineering, this is changing, because new materials have to be brought in to make it faster.

The second is that we cannot tolerate the RC delays, the resistance capacitance delay that builds in these wires, in these interconnects. To remove these barriers, one other thing you have to do is change the basic processes. Here I'll talk about the integrated PVD, CVD, ALD these are different type of chambers all put in on our flagship Endura product. So that they can -- without where you don't have to have the air brakes. No other company has the capability to be able to integrate the different films of interconnect on the same platform. This is also our differentiation and we have decades of learning experience, our engineers have that goes into this to make sure that we are able to grow this.

What does the total growth in terms of dollars mean for us? We are looking at as a result of all the innovations, in the interconnect. Going forward by 2016 a net $400 million revenue increase from 2012 baseline. What are the growth drivers? I just want to share with you example, first thing is on the transistor density, then growth in the wiring levels is happening. That growth in wiring levels basically having the local interconnect is what our customers are adding in as they are switching to the new transistor density.

The second is from the reliability and the patterning standpoint, in order to be reliable, interconnect new process steps are being added, those process steps are selective metal capability, hard mass deposition. These steps are increasing our available market. The third is the fill and the reliability, where integrated barrier-seed processing becomes extremely important and here what we are seeing is from the basic PVD capability, the number of steps that are growing, these are the deposition and yields and the re-flow steps that are going. So the combination of these different areas leads us to have the net revenue increase of $400 million in 2016. This is happening today.

Now, I want to talk about one capability in the interconnect, just to explain that why should the new materials we adopted. Selective metal deposition became extremely critical. If you recall in transistor, I highlighted the Selective Epi deposition. It took years for us to really selectively put these films, to characterize these films and repeatedly build these films in manufacturing. That experience from the Selective Epi, we had the confidence, our engineers did a great job of coming up this selective metal processes.

These processes I showed you in the mid and central presentation this morning there are two new steps that got added. There are the on the CVD metal as well as the select metal. What we see total picture in 2014 is five new metal deposition steps going in production next year. The work that has been done in for the selective metal deposition for the interconnect has just been an incredible change and this change is new, this change is new because of the speed and the performance of transistor that need to be delivered through the reliable interconnect.

So unique PVD, CVD, ALD capability and having the first time delivering selective metal deposition. Why this can be implemented so fast, if it is a new material and a new process. The reason is we built this on Endura System. And every fab in the world today have an Endura System. So for us to get this capability out to the end market faster out [was] just there.

So that's how this, new capability, very new capability on Selective Material deposition in the interconnect space could go very fast. This goes through our strength in the integration, capability of the platform as well as developing the selective processes as a company, took years of experience but that's what it resulted in to.

Now the third leg, a lot of opportunity for us to grow, what we see is growing in patterning and inspection. Our strategy here is, as Gary highlighted, we have increased our R&D spending in these opportunities areas, inspection for example, Etch, we are investing heavily, but in addition to that, we have beefed up our talent in this sector. We have brought in lot of good people, very smart people who are driving these opportunities in the inspection and patterning area. We are already seeing the impact, we are gaining share in the inspection space. We are gaining share in the Etch space as a result.

Our strategy in the patterning and inspection area is first is defend our core position. I'll show you today, we launched another product in the inspection space. We want to make sure that we defend that position. We have strong position, the high aspect ratio at and in the patterning films area. We also have head-to-head battles and there we are winning. Customers for the first time have pulled for us in space like foundries, in the Etch and inspection area we have strong momentum.

Lastly, change the rules. Inflections that have come as a result of transition to 3D, that is 3D NAND or 3D FinFET, as a result of this transition, we're able to change the rules because it has leveled the playing field. Any company which was doing say Etch and it doesn't the historical presence is not a competitive advantage in change the rules area where new capabilities have to be brought in to play. So change the rules and deceptive inflection, for me, is extremely exciting because this is where we are seeing strong momentum as a company.

So as a result, the patterning and inspection becomes really our third leg of the third pillar of the growth of silicon business. Showing here is about, we have traction. For example, number one defect review, Gary talked about our Brightfield share. We are seeing a strong pull from the customer on this, but most importantly in the 3D transition for NAND, for the first time we are seeing momentum, a strong momentum in the CVD and Etch area and I'll explain why. This is so important.

Selective material removal, the disruptive innovation and I'll talk about it separately. All of these areas are contributing in 2016 to a $400 million revenue increment over 2012. These opportunity space is exciting. Let me give you some of the proof points.

We today announced that G6, this is our defect review product. We have number one position in this product. This is becoming more and more exciting. There's so much pull for this product and it really has stayed as a cornerstone of the industry in terms of making sure that identifying the right defects. It is highly automated. We are able to, the customer does not lose any time in the analysis. This new product launched today is further going to give us the momentum in our inspection space.

As Gary highlighted about Brightfield inspection, huge customer pull for us. This is a large market. This is $1.5 billion market and we are gaining shares. 30% increase in qualifying layer at the leading customers. That's how strong the pull here is. Therefore we are seeing the market share gain in the inspection space. As we continue to innovate, strengthen the funding, getting in to the new products in the inspection area, we really are very confident that this is a strong growth area and therefore a critical part of our strategy going forward for the growth.

I talked about the CVD and Etch opportunity for the 3D NAND. This is the growth that we see. Our TAM is increasing by 50%. 2D, remember two-dimensional enabled by litho, the three dimensional device architecture is really enabled by Etch and the CVD capabilities.

Now shift is from the lithography and the total market size we forecast about $500 million opportunity for us per 100,000 wafers [stacks]. This also is important as I highlighted earlier because this is a greenfield opportunity. There are NAND fabs being announced that are announced and are being built. So where does it build? The 3D NAND with us also grows our standard markets because there really is not any reuse, so we see our sub atmospheric CVD, our high density CVD capabilities growing.

We also see the Staircase Deposition. We talked about, Gary gave you the example that why Carousel is not able to do these staircase type deposition. We have strong products with in situ metrology capability that is very, have a strong pull from our customers. This all has to be done in one chamber, this is again more of a chemistry and new material. So we, this CVD staircase is a market for us that is growing, the patterning in the new Etch and hardmask test. Though the combination of all of this is a big opportunity for us in the NAND area.

The staircase patterning Etch I just want to share with you one example and that's why I said earlier that we like where the rules are changing because here is a new structure, this is a 3D high value problem that our customers have. On the top we show how the context are uneven steps and profiles are not right. We announced the Centris Mesa product about two years ago.

We have had this in critical customers in position and in development. As a result, we are able to have the Etch solution which is fixing this problem and therefore giving us a business opportunity in staircase patterning Etch. Precise control and step and profile is becoming very important it is a device performance dual enabler and that's why we are winning most of these selections.

So if we look at the 3D NAND Etch and CVD momentum this here shows four of our customers. I show what is in the Etch there is high aspect ratio Etch, the high aspect ratio Etch is where you are [etching] through and today in the breakout session [Prabhu] talked about it where we are cutting through the whole structure. And we have that position because earlier days in the [changed] Etch for the DRAM we had the high aspect ratio Etch product which was very strong. That is deployed into this, the 3D NAND structure because structures are very same. So you go through very high 50 to 1 aspect ratio type Etch and then we look at the staircase hardmask deposition as well as the staircase deposition. This is the scorecard that's why we believe in our growth in the areas these opportunity areas where we have momentum in the patterning and inspection space.

In the patterning with 3D NAND and CVD Etch this scorecard shows our position. We pretty much have strong position in each one of these customers. This is what is changing. This is what is leveling the playing field where Etch all of a sudden becomes extremely critical and our capability is able to resolve the problem. Where CVD because of the new piece and new materials new capability is required we are able to go in work with our customers. Remember I said in our strategy about strategy is collaborating early and lead with the customer. That's what we did on these products and the scorecard looks extremely encouraging as a result.

Now I want to talk about something that we as a company are really excited. This is a big deal for us. this is a disruptive product for us. Many applications in the transistor, in the interconnect and in the patterning area, what happens is in the 3D structures to the left I show what is the structure and generally once you put together the structure you have to do wet clean. You do the wet clean you can see how the pattern is collapsing. But you see the solution of what we call a selective material removal. This solution is able to fix the pattern collapse. This is so important, the way it came about is because I talked about integrated system, today we announced the Epi product, it has a pre-clean what we call as [Hiconi], it has a pre-clean integrated with Epi and that's how we are able to make sure that there is no oxide in the integrated system that's how the selective process works.

We therefore have the experience in developing the material removal capabilities for the last five, six years, what ended up happening here is with some lot of innovation that went into it in the chemistry as well as in the hardware, where you are able to put remove selectively the material from very high aspect ratio structures. You are able to clean these structures, because of the chemistry, because of the proprietary hardware that we put in place and this became very, very important part.

Today we have one majority of selections in logic. This is such a strong product this is a basically taking away part of it is new application, but bit part of it is taking away from the wet clean, taking away some of the portion of that market and transferring it into this product for the selective material removal as we go into 3D structure.

So very big deal, very exciting we expect that market to be up to $1 billion in 2016. A big part of the development here really is what we [gave] important is, the years of experience that we have in materials engineering, what materials, what combinations will work best, and that really came handy for us to be able to deliver this product, so important.

Now in order for us to really be measured, what you can expect over the next year in these three areas; in transistor, in the ,interconnect and patterning and inspection, this is my way to say there is a line of sight to the share gains that I will talk about next.

Lot of this product applications for us are in the bag or are being actively developed at the customers. We believe that 20 nanometer foundry part that Gary highlighted and the 3D NAND some of this business is going to come as early as next year. Epi and PVD because of the strength and multiple steps is going to grow and we have the momentum in inspection in Etch area you can see in all of these areas, the different products that would be coming out in the next year.

So putting it altogether, looking at our three pillars of growth, starting from the transistor to the interconnect, to the patterning and inspection. We have huge revenue opportunity, if you look at our position in the transistor the suite of products is strong, the position is strong, the market share position is number one in these areas.

In the interconnect space because new materials are coming on board, as a result we are seeing momentum for growth in the interconnect space. In the patterning and inspection we are changing the rules, as a result, we are seeing huge opportunity in the 3D NAND space, we have new capabilities like new selective material removal, capabilities that are in place which are growing to grow our market share in this area.

So 2016 incremental revenue from 2012 baseline for us is shown here, $800 million coming from the transistor, $400 million from interconnect and $400 million from patterning and inspection, what does this means, it means about two to four points of WFE share gains by 2016.

We are very excited about this because we believe that the position we have currently and the precision material engineering moving to our sweet spot and as these advanced nodes are coming we have very high confidence in our ability to execute on these share gains.

So silicon business is transforming, we are transforming for the mobility war. We have increased our investments in silicon business, we have expanded our talent base, we have refreshed our engagements with our key customers, where we are going deeper and really collaborating closely.

Precision Material Engineering is providing the tremendous opportunity of growth for the silicon business. We are increasing these investments on products technologies customers, to field this is something that we changed, the changed it in last year. We really are excited, today you see the excitement as you spend the time in the Maydan Center and in the breakout session.

We as a company in a long time have seen now that as things move to our sweet spot, as the material continues to evolve the big challenge for our customers these opportunities are moving to our sweet spot. I'm more confident than ever that given the investment, given the total focus of our company onto growing the silicon business that we will deliver for our shareholders by delivering 2 to 4 points of share gain, thank you very much, at this point --

Bob Halliday

Thank you, Randhir.

Unidentified Company Representative

Okay, we appreciate it.

Randhir Thakur


Michael Sullivan

Okay, so just a quick housekeeping announcement then, so what we'd like to do is offer you a 25 minute break, we'd like ask you to please return to your seats at 2:50, 10 minutes to 3:00, thank you.

So, we spent most of the morning, we're going to get a rest of the folks in. We spent most of the first half of this session talking about the semiconductor business. Somebody asked me at the break, what were some of the things that interested me, surprised me, excited me most that I didn't know about, I knew about the semiconductor business here. When I first joined Applied in last year, so I didn't much about the display business, I really liked the Display business at Applied. I don't think most people in a room know the Display business, you say why do I like it? It's a very good operating model in terms of when business is slow, we're okay, when it ramps up a lot of the profit drops through, our share is strong, our differentiation is strong, I think our strategy is really good there. So that I think the display business, although it is not as big obviously as the semiconductor business, I really liked the strategy and execution of that business and Ali Salehpour come on down, he is driving that strategy and execution. Come on down Ali, and I even like Ali a lot.

Ali Salehpour

Thanks, Bob. Good afternoon. So where is Michael Sullivan?

Michael Sullivan

Right here.

Ali Salehpour

So he asked me to first introduce myself, since I'm only seven months new into Applied, he thought it'd be a good idea to tell you a little bit about myself, a little bit about my background. So, while I'm new only seven months at Applied, I've been plenty involved in the semiconductor equipment business for over 25 years. So, I'm excited to be here at Applied, he also asked me to talk about what my passion really is and what makes me tick. So, very simple, as simple as I can put it, I love competitive situations, I like putting together competitive winning product roadmaps and really the emphasis on roadmaps, I like to think ahead, work with the teams to put out 3-6 year roadmaps that allow products to win over and over profitably.

And so that's been exciting for me to, it's been exciting for me to join the Applied team and work with them especially in the Display thing on building a roadmap that allows us to hopefully continue to gain share and be successful. So with that I'm going to spend three slides. Tell you a little bit about the environment in Display, and to switch you over to the most important group at Applied which is the Display Group. So let me first start with what's been going on in Display and what's been going in and around us.

It's been a quiet revolution, it wasn't until I joined Applied about six or seven months ago, that I started to really become aware of the number of displays that are finding their way around us. And so this is over the last five years or so, no matter where you go, you'll find larger and larger displays and you'll find more and more number of displays. And we think this really four mega trends that are kind of driving these the display adoption.

First, consumption. Mike talked about massive amount of data that's coming our way that's generated every year and in large format displays be it in Wall Street or be it in our desktops, we really consume tons and tons of data. The other area is information, if you only you have to do is walk through an airport terminal and the (Inaudible) displays have been all replaced by LCD displays. And if you go back to the same airport a few months from now, you'll see that they have larger displays in place of their smaller displays that were in place.

And then last but not least, you'll see a substantial push of the information and what we've menus at the local McDonald or the restaurants again larger and larger displays replacing all kinds of static data and all kinds of static data advertising.

The other mega trend that really is driving adoption of display is this whole emerging experience. Up unitl recently, people thought this is aspect ratio to how far your, how big your house is determines how big your TV should be and how far you are from the TV really makes determination of how big the TV should be. We know now that actually that no longer that's a logical conclusion, it's logically correct, but emotionally incorrect. And that's people if you bought an display, if you bought a 37 inch display a few years ago, you will walk in and buy a 55 if not a 65 inch display, and so what we find is people want to be immersed and peripheral view be down. You want to be immersed in the experience in larger and larger displays are finding their way in homes. People are in fact designing certain portions of their house around larger displays.

And there is public space. I can't tell you again just being here, having joined the display group. Here you start to see these displays everywhere, no matter which bar you go to, no matter which eating place you go to, you will see larger displays and then larger displays and then larger displays. And most of the new establishments are built around this whole emerging experience.

The other area that's obviously prominent and everyone is aware of is this whole man machine interface and what we find is we have a picture of a Tesla here. How many people drive in a Tesla? There it goes something like five to six people. So one 17 inch monitor right in the center of the (inaudible) and the amount of information that you can generate out of that display and the amount of interaction you can have instantly with the machine is just absolutely remarkable, but you don't have to buy a Tesla. All we have to do is go, look at the latest Camry at your local Toyota dealer and you will find prominent center dashboard, a touch displays and these displays in cars are getting larger and larger. In fact they become a source of differentiation. All the analog interface eventually is giving way to digital interface.

And then the textbooks. More and more people are replacing you know the printed media, printed textbooks, with interactive textbooks and that really calls for larger and larger tablet displays with better and better battery life and higher and higher resolution.

And then last mega trend that's driving adoption of displays, we believe is this whole concept of emotion, we are all attach to our phones, and in fact the phones have become a status symbol. Every time Apple comes out with a new phone or Samsung comes with a new phone, there is a rush to buy the latest status symbol. And we think display will play a prominent role in terms of defining what the next generation devices are going to look like.

So what I want you to do in the next 44 hours is count the number of large displays that you see around you and I want you to remember that every one inch increase in average TV size equates to (inaudible) factory for us. So as these displays get larger, as these displays get bigger, opportunity for us goes up substantially and they are all around you.

So two things I want you to remember. Mike mentioned that it's not just about size and the area increase, but it's also about technology inflection display. Remember I told you, my passion is to map out roadmaps and understand what the customer requirements are so, that's what we've been busy doing and I'll share a few of our thoughts in that area with you on the next couple of slides.

If you really take the three key attributes that traditionally have been associated with the display which is size resolution and form factor and map that out versus time, we mapped where things are roughly today. The average TV size worldwide is around 40 inches. TVs are going to get larger as they get larger. Those of you that attended the display session this morning could tell the difference between on a 90 inch display or even a seven inch display, you can visibly see the pixel. It's the same HD number of pixels but now you have a larger display. Therefore, the pixel sizes increase. So as displays get larger, you are going to want to have smaller pixels. So that's where the 4K TV is going to come in.

On mobile phones, already iPhone 5 and Samsung phones have switched over well over 300 PPI and I'll talk about why that's significant and what's driving that. It really starts with the printed media. It starts with an (inaudible) match in terms of resolution on the device versus the human eye and a reading distance and from there we see a clear road towards 700 or higher pixels per inch, which then, we believe will continue to drive capital intensity.

So the topline is going to be number of fabs, the middle line is going to drive capital intensity and then form factor. Wearable devices, everyone talks about wearable devices. We got a few pictures over here. We think bendable, rollable, foldable displays will come in a not too distant future. That type of form factor will require new material, new material deposited using high precision material engineering and all of this increases capital intensity for us.

So I'm going to go between the next triplex and the next slide and talk to you a little bit about the technology on display. So first the transistor plane, then the display technology, the front plane itself. As displays have gone to higher resolution and I'll in fact show you a pretty remarkable picture in terms of where tablets are. The phones have already popped the rail and they have gone from 20-year-old amorphous silicon transistor technology to LTPS and metal oxide technology. LTPS technology doubles our available opportunity in any mobile fab. Metal oxide 1.2 to 1.4x opportunity. Most mobile devices have moved, most phones have moved to LTPS and that's a growth accelerator for us.

LCD and all HDTVs will start to kick in over the next three or four years. We think it's still far from being cost competitive, but form factor and resolution and picture quality will drive adoption to a relatively small segment of the market but meaningful segment of the market. All factories are worth even more to us than the standard LCD factories and I'll talk to you specifically on the number of tools for factory in terms of opportunity.

And then last but not least a switch to flexible OLED, that's critical for these flexible bendable, wearable devices and there again there's an opportunity multiplier for Applied in terms of number of tools. So you add all that up, if you look at metal oxide only adoption which is very few, mobility fabs, most mobility fabs are LTPS factories, 2X improvement in terms of opportunity apps with flexible OLED factories, about a 3X improvement and all of this is getting a lot harder and that it really plays to our strength and we expect another 5% gain in market share in the markets we play in.

So before I go on let me walk you through one more slide regarding the slate technology and then we will rip into TV market and then the mobility market. So I talked about the LCD technology being around for almost 20 years. Amorphous silicon was the transistor of choice back then and if you really look at it this leg we just highlighted that the four key areas that really matter to us, first is the backlighting and then it's the transistor layer, liquid crystal layer and the color filter layer. We play mostly on the transistor layer and some on the color filter layer.

Here devices that have roughly 100 to 150, maybe 200 PPI resolution, amorphous silicon would continue to be a useful technology. As I mentioned a few, go to the iPhone 5, the iPhone 5, if iPhone 5 stayed with the amorphous silicon technology would weigh twice as much for the same battery life and would be twice as thick for the same battery -- for the same display resolution because battery life, the battery would have to get larger.

So what changed there is the LTPS transistor layer and then alternatively people have been like Samsung have worked on mobile devices that employ all that. There again LTPS technology goes across the transistor plane. For OLED, there is no liquid crystal and what you see is the liquid crystal is encapsulated using the glass. So for us, A, 2X opportunity increase as global devices move, tablets start to move to LTPS technology and then Gary talked about precision material engineering, there's an opportunity for us where we have already a footprint for thin-film encapsulation of the OLED devices. Now just that layer itself makes the device much lighter, allows for progression towards flexible and bendable technology and that in itself is another growth multiplier for us.

So 300 PPI and above plus OLED will meet as much as 2X to 3X opportunity in the same fab process and I will break that down when we get to the mobility section.

So with that let me move to where we think the display business can go for us. We think that we can roughly reach about a $1 billion by 2016, you have two stack bar charts on the screen starting from the bottom. The baseline is what are cyclical performance would have been in our core markets by 2016.

Then we talk about share gain, mostly in the PVD market and I explain to you how we have been gaining share in this market and then SAM expansion and then new markets for this type of equipment.

Now ordinarily you see a stack bar chart like this and first question, you ask is, is that true or not? On the left side outlined what our revenue numbers are for -- roughly the revenue number break down as far as in 2013, what you see is we've already started to see the revenue benefits of share gain, we start to see the benefits of that thin-film encapsulation technology that I talked about.

Now if I was to plot the bookings number, which is roughly $800 million for the year, the share gains would be substantially larger on that bar and so will be SAM expansion. So revenue to revenue, these were the numbers if you were to look at bookings to bookings, you will see we have proof points that we can't in fact get there and in fact we are there.

So the three things I want you to remember today is that this is a growing forecast for us. Take the TV size increase, I talked about 1 inch size increase in TV is one Gen 8.5 factories multiply by that pretty healthy appetite for number of TVs all around us, add to it the demand that Mike showed in his presentation for mobility and that makes for a healthy forecast for the next few years and I will break that down by segment for you.

Also we expect a rapid growth in capital intensity the LTPS technology I talked about in mobile devices, adoption of [OLIN] over the next few years that really and then share gain that really play to our strength in terms of differentiated products and last but not least we are going to extend the use of this type of technology in order to enter new markets and we've got great traction in a number of friends and over the next few years decided to tell you about how that will kind of expand our horizons. So those are three key points for display today.

So TVs, those of you that went to CES, who went to CES, anyone? A whole bunch of you went to CES, so you would have seen larger, larger format TVs and so really a size inflection across the board and you would have seen a technology inflection as a second notable factor.

4K TVs were everywhere, every major company is introducing 4K TVs and multiple companies introduce OLED TVs. Besides side Gary talked about it's not uncommon to find 60 inch TVs today for roughly $900 and that's a price point below a $1000 where we see a heavy traction in terms of wanting to go to a larger and larger formats.

On the 2k, 4k, and 8k technology that's a significant transition and I will show you in the next couple of slides why that's winning us business and why that so critical and how we are gaining share on the PVD segment, because of that need to go to higher resolution and to go to higher size and then obviously OLED.

So first how many people have seen a Gen 8.5 glass? Okay only Mike Splinters seen a Gen 8.5 glass. So let me tell you how big a Gen 8.5 glass is, almost the area is almost the size of the two car garage door, huge and is about 0.7 millimeters thick. So about 80 times the area of a 300 millimeter wafer and our job if we do it right is to put down with high precision low defectivity films on increasingly more and more difficult layers on these types of substrates.

So what on this is let me just walk you through a couple of bills here. Thinking of Gen 8.5 glass, a few years ago someone would have printed 18.33 inch panels on there. If there were four defects on the panel, be it uniformity, be it particle, and one of them was the killer defect, you would end up with about 93% yield, the other three would be marginal and you pass those panels. Now switch to a 55 inch panel, now the equation changes and here the most educational factor on this activity is just something that I am not use to seeing is the semi side, so that's really performance on defectivity and uniformity is so crucial here.

And so 83% and 10% drop in yield, now take that same 55 inch TV on Gen 8.5 glass, make the pixels 4X smaller and now the small defects start to come in and you end up potentially with 33% yield. Now some if you have seen the 9 inch displays outside, now how many 9 inch display seen going through Gen 8.5 glass, two of them. So those four defects that had only 7% yield impact have the massive impact on yield obviously on larger formats.

So either requirement is 2X got a uniformity on these larger formats and high resolution and about 10X improvement on particle density distribution. Now the equation is even tougher for OLED TV's and the OLED application because the active area on OLED is about four times small.

All right, so we talked about share gain in PVD, so let me show you how this plays to our strength as this high resolution and larger formats come out. So we are going to put a picture me next to this unit, but we saw them not to, but this is a huge piece of equipment. Over 3.5 meters high and those types that you see are PVD targets and they are unique technology and have a very unique architecture to vertical, have a glass case fade vertically as opposed to horizontally, these cathodes rotate, we talked about some detail this morning in the technical session.

Our targets remain pristine with use. The alternate technology ends up having articulation issues and defectivity issues. Roughly we are about 20 or 100 times better in defectivity and about 3X better in uniformity when we caught this last. Now here is a data from a benchmark you did using a Gen 8.5 glass, 20-40 inch TVs roughly about a 10% yield advantage.

That is huge difference between us and the competing technology, that is why the last two Gen 8.5 factories, we want the 100% of the PVD layers as well as the 100% of the CVD layers that's the equation that we saw. So in terms of opportunity, I promise you I will get into the numbers. So amorphous silicon factory for 2K, 4K and 8K maybe and then lock side could be LTPS and all other factor.

And tools for the state of the art today as things change that opportunity could increase to over 20 tools, so this multiplies in terms of our available market and capital intensity. So our forecast right now in terms of area of demand over the next four years is roughly 11% to 14% area increase in TV's on the strength of the slate size increase and then roughly 10 to 14 new factories and we decide to continue to gain share as people print larger and larger displays at higher and higher resolutions.

So let's get to mobility. There is a quote from [Dr. Kim] Samsung display and this is literally two weeks ago at a displays symposium and this is speaking on behalf of Samsung and their input is display is a dominating component for smart devices and let me show you why it's a dominating components for select devices and I am going to go through a couple of builds here.

So everything starts with the resolution and in the next slide I will show you, how people are trying to improve that mismatch in terms of resolution in human eye at a reading distance on mobile devices. Start to the resolution, then people ask to optimize power, then people ask to optimize form factor.

If you go to anyone's website, so this is a Samsung website, the first thing they would show be it an iPhone 5 or be it a Samsung Galaxy phone, the first or HTC for that matter, first thing they will show is the size of the display and then talk about the pixels per inch on that display. That's a first thing they will show. That's what sells the mobile devices today.

Second thing they will show is how thin the device is and the two of them are intermittently related. We talked about smart devices and phones moving to LTPS technology in order to reduce the power consumption. That's the key reason why LTPS is taken off for smartphone and smartphone application. And I'll talk just in moment about tablets and how this is going to also play into tablets and that market for us.

In the future we would lead flexible OLEDs, will lead the way to display more or less will define the device. And as these flexible displays become available, we think people will dream of better devices that are foldable, rollable and bendable.

So I talked about the mismatch within the eye and the display. So we mapped out here the physical domain, the printed media versus the human eye. So starting on the left, you start with newspaper. Typical newspaper print is roughly 200 pixels per inch equivalent on a display, you go to magazine and books, something in order of 280 to 300. And then you go to some glossy pictures that's roughly 700 PPI. So in fact the human eye can once you start to pay attention to this, you will want high and high resolution devices.

Just to give you a point of reference, the iPhone 5 is 320 PPI roughly and the Galaxy phone is over 400 PPI roughly. So the mobile devices that the phones are racing as fast as they can to that to fix that mismatch and tablets are finding in a way in that direction. Now obviously it doesn't take a genius to realize that tablets recognize a much larger area and as they move in the LTPS direction, it brings a lot more business for us.

But let's start with the iPad, when were the 20 year old TV transistor technology I talked about, just a backlight power for the iPad we estimate for the amorphous silicon implementation is about 2.8 watts. Apple released a new iPad and they did, again released a brilliant product. But for the first time, it was thicker, heavier and it was a more of a power, why because they continuously use the amorphous silicon. Now it's getting closer to magazine and book quality, but over a 100% increase in power just from the backlighting requirement for the iPad.

So that everything we can see there is a strong push and a strong intent by most manufacturers now to move closer or better than magazine quality on tablets, we talked about books, we talked about people being used to seeing the resolution on iPhone 5 or a Galaxy phone, they're not going to expect something less under tablet. And so we as we believe it will be imminent over the next 12 months to 24 months multiple devices will get released using LTPS technology. What does that do in terms of power consumption, steps down to power consumption, we estimate roughly below what the original iPad power consumption for the backlighting was and to a half three times a resolution.

So, we think this will continue and as this continues, obviously we talked about it being really a multiplier, growth multiplier for us in the display industry.

So let's get into the number of units, about eight tools is our serve available market in the all the amorphous silicon, mobility fabs, that number steps up to about 15 tools once you go pass 300 PPI, once you go to flexible OLED or OLED, somewhere 50 to over 20 tools per fab would be the number of tools that our customers would buy. So that's a huge jump in terms of growth multipliers for display.

Our forecast for the next few years, for the next four years is seven to 10 (inaudible) fab as the Gen 6 fabs, even larger fabs and we are introducing a new PVD tool. We have in play before. Remember we talked about mapping out the roadmap and figuring out what the critical wants from our customers are. Well in our discussions with customers, we realize how critical PVD uniformity and defectivity was and as they implemented our Gen 8.5 PVD tools, it's a strong pool for us to release a new product and we're going to be doing that later this year. So we're going to go from roughly four units of play or six units of play to 15 units in play for the fabs next year.

And then in terms of SAM expansion, we talked about as OLED technology comes in, we developed an encapsulation technology to replace at least one of the glass pieces on an OLED device which is a big damn dealer, makes them lighter, cheaper and better and so we will expect that also to come in to play for us over the next few years.

So I am going to end this again with our estimate roughly for the display business just to reach conservatively, about a $1 billion, probably 2016. All the roadmap that we put in place in line with our customer, high value problems for this market says that these numbers are achievable and I want you to again remember the three points regarding display. It's a growing forecast. All the changes are playing to our strength and it's going to create multipliers in terms of revenue for us and that last but not least, we've already demonstrated how you can enter new markets with the encapsulation application over the next few years. We will be excited to tell you about new applications for large area, precision material engineering. So that's what I had today on this slide. Thank you.

Bob Halliday

What did I tell you, I love all this, so you didn't say anything nice to me. All right, so you guys have had a long day. So I have the simple task of telling you how (inaudible) everything you heard today about technology and the money. So just begin your attention to give you some insight, break up the day for you a little bit, I will tell you one of the dilemmas I had in preparing for this. Right, so a lot of you came to the investor relations analyst day up event and so (inaudible) questions. At the end of the today, whoever got the (inaudible) questions, right, the ten things, how bearing was going to grow, gain market share, we give a lot there because we're up in (inaudible). We would send two [lobsters on] long for 12 months and that it was very successful because you guys are all competitive, right. It wasn't not the lobsters beating all you guys in a room, right? So I joked, we use to call a better investor relations through gestations. So it said, that really worked, okay? We're going to bring in here. So like the California. We're talking about accelerating momentum for profitable growth, California, I said I got it. It's got to be accelerating momentum for profitable growth with avocado.

All it came up was (inaudible), it didn't work. So now I will tell you what we're really going to do. So I have to tell you how we're going to translate everything we did today into money. So I could excite you, (inaudible) inform you that it's credible and how it's going to work. So if you look at this schedule, there is three big bullets, right? And those three big bullets, you can translate two other ways. The first one you can say is our markets. How is the market opportunity very good for us?

The second big bullet, you can say is how was our profits, our products going to help drive gains for us in our markets and the third is about execution. There is another way you can do it is even closer to home for you folks. The top one is about revenue. It's about the revenue opportunity. The second one is about revenue and gross margins and third one is about gross margins and operating expenses, operating leverage.

So if you look at the top one, that one is a little bit to the industry, but particularly pleased for Applied Materials. I think the industry is actually kind of an interesting time. Sometimes you have people say, well, it's not a growth cyclical industry, it's more of a cyclical. I actually kind of like the business right now because if you look at the business model and our industry for a number of years, it was three years explosive growth then you lay off people, close buildings, write off inventory and cash take the hit right. And then you go up again. If you look at this industry think about it, 2010 was a good year. '11, '12, '13, most people say '14 is a pretty good year. '15, 16 might be pretty good years and it could be $37 billion years in '15 and '16. So the industry is kind of interesting.

So when I think about that industry, I think about pretty good cash in the industry and I like the aftermarket business a lot in this business. Large install base, good cash flow, so think of this industry in terms of the profit opportunity and the cash flow opportunity for this business because that sort of way I think about optimized business models, optimized after markets, optimize the margins, optimize the cash flow and in an industry that has some sustained periods of spending you can make a lot of money and a lot of cash flow.

The second one we talked about a lot today what's driving the semiconductor industry and the display industry is mobile. You all have tablets and phones and the big deal we told you 10 times today is power consumption. Planar shrinks are running out of steam, how to do it, expensive, they are going vertical, finFET, DNAND, changing materials, that plays really well to our strength in terms of materials, all different materials we can deposit and (inaudible) is a great product for us, very strong share, more growth in applications.

So if you look at the top two we have growing temps and growing opportunities in those spaces in place for us. The second one is the share gain opportunity. Say where are you going to gain share in selling. Randhir you can look at shares a couple of different ways. You can look at the applications companies our customers use, we talked about them today it's around the transistor, it's around the interconnect, it's around places like patterning, those are all places where we told you where the products are going to do well. We think we can do will in inspection. We think we can do increasingly well in Etch. We think we have disruptive technology and selective removal which could be a big market and we have a lead on and then in some of the other spaces where we play we think the steps are going up. When I look at materials that's increasing layers, increasing number of steps.

So TAM for us in the industry looks pretty good at number one. Number two I think our share looks good. I think just did a great job of telling you we've been gaining share and growing the TAM in display. So that business we think we can gain 5 points a share and the business is getting pretty interesting. I like that business a lot. The third one how we are going to make money is the efficiency opportunity. Those help us on the gross margin line and the operating expenses line.

And when I drill into the P&L I will show you where they are. This one looks like what the heck he's saying. This is an important slide. I use this slide. We use this slide all the time internally. This is a big deal especially the possible size. Customers are giving us a great opportunity. If you looked at the number of valuations and demo tools we have out, the number of new applications we are doing, I think it's probably more than it's been a year okay. Customers see some of our technology is very disruptive number one and they are investing money to work with us. They are running large scale demonstrations which cost them a lot of money because they see potentially disruptive technology and they see us as spending more and more to get into the production and they are spending more to get into production.

So customers are giving us a great opportunity and we are going to realize that, you can see we are putting our focus on the products and the technical people in the field. I think the one on the right is a big deal, investors are giving us opportunity. New folks own the company. I think companies always perform better when they realize TSMC isn't their customer, signing [Tang] is their customer. We always are signing TSMC to make the equipment work from. And I think it's an important thing that we know everyone in the room and everyone you invest for, you own the company and we owe it to you to perform. So I think that is a big deal. This isn't for you. This is we pitch it internally everyday and is really taking, everybody believes in us. So it's a big deal.

I really am focused on the right side on this one. If you look at our strategy we told you all day and if I want to make it really simple we are going to focus on the semiconductor display market. We are going to focus on products and technical market and we are going to focus on moving really fast. If you want to do that best product wins. How do you get the best product? You've got a number know the high value problem and easy way to say that is you got another market card, you've got to know better than anyone else what the customer needs to make finFETs. What they need to make (inaudible) that's why we've invested in the tactical marketing people in the field. The second leg and people here joke with me the three legs on the stool. The second leg on the stool is staying up with differentiable products, just say with big deal that's obvious, that's whole process we have talked about, so product development engine, investing in product development, investing and join discipline around architectural entitlement, getting a higher hit rate on successful products.

The third one I am going to transition to where is the money, okay, why locked in that we are making great progress on developing products, increasing probably success rate, where is the money, I think you guys will be interested now especially, the first thing we did at the end of last year, we freed up $200 million. As you know, we reduced headcount. we had a voluntary retirement plan and wrap and we've done synergies our of the Varian, we also have a detail process out for moving money from one product to another, it's a very structural program, that's we have invested that in the technical engineering capability and in the field capability I talked about and we are driving for share gains and growth for TAM and SAM, that's the $200 million we came up with last year.

Where is the rest of the money? Well I think there is an opportunity about $400 million in revenue with a significant drop during the service business and I talk to you I like that after-market business particularly in this stage of the business and particularly where we have the largest install based in the industry.

Second thing, materials cost reduction, I am going to talk about more detail, but we spend at least $2.5 billion in material, the best majority of our product cost is materials and you say one to three points is about exciting, it's my estimate 2% incremental a year, it's an annuity, if it's 2% one year, you've get 4% next year 6%, (inaudible) alright.

I am going to talk about that, productivity overhead I will say how we can get $200 million in that and I think the tax rate is going to opportunity two to three points. Spare and services again we have 26, over 25,000 install based your average tool can use $200,000 a year in spares and services.

So in an average year the net tools we shipped could be 1300 tools net, okay. So if you think about the numbers if you keep the share on that you can grow the red line, did you think about developing upgrade products when you ship no equipment, those are very high margin opportunities and if you think about the customers getting tighter process when there is on fab, particularly on the foundries then the high value services, this is a very attractive business for us particularly in this stage of the life cycle of the product and it's a very good cash flow business for us too.

I talked about materials quickly, there are two source ways you get material cost down initial design, design for cost reduction when you do the design, put more and more focus on that and secondly on release parts, some of these are sourcing strategy, where you go into the lower cost region, you have to go through push it, you say why don't you do more than that, this is an incremental opportunity, we're really focused on now, working between the operating groups whether it's between AGS operations which is manufacture and supply chain in SSG. This looks like a real opportunity for us particularly at this point.

And a lot of the stuff you say, if you look at them and apply there are great things that each company did putting the best of each world together while leverage here.

Overhead functions across the organization I think it's about $200 million there, it's simplifying processes and when I go to the P&L, you say ghee think the math works actually, streamline functions then you line on the concert, you have talked about our strap plan was really easy today right.

We are going to gain share, we are going to try and grow our TAM and we are going to execute, that's it, best product wins okay. So when you simplify the strategy and align all the strategy within the function areas and then you align all the comp plans around those strategies and moving fast because we plug velocity 10 times today to start to free up. If you think our industries, when I talked to you about financial statement, it's too late, those are leading indicators, leading indicator, simple indicators of the financial statements are true numbers. If you can tell me where my headcount is going, my market share is going, I will tell you my revenues and expenses are gone. You tell me where if I got (inaudible) positions and if I high level qualification customers, I will tell you where my market share is going, and if you tell me whether on get discipline around the product development function and the architectural entitlement and putting money in products versus overhead, those are pretty good leading indicators.

In our industry the two enemies of the state frankly are fixed cost and time. Those are leading indicators of financials. We got to take time on everything around us, if we move faster and eliminate fixed cost, we will win. This silly again, but the first two blues I got it, DVS product we're working, the high value products, where I came in as where is the money from more profits in investors and the drive the part for investors and for the customers.

This is a financial model, so we are, we've did four scenarios for wafer fab equipment. If you go and look at data quest, I think it's in the ballpark 2015 and '16, it's what $37 billion, those all pretty good numbers. What is driving spending like that build orders smartphones for customers and for consumers and secondly is it someone more capital intensive process to make things and some things like that. So spending could be pretty damn good, I think it's incredible, so $37 billion but we also model 33.5 and 30 and I think the 30 will be interesting for you also.

Randhir talked today about two to four points of share gain, lot of details about where was what products, where it was going to come from and then the others things that are applied to all the models, we had a tax rate of 22 about 24.5, 25 now and we have been through that and I think that is the good opportunity.

And today our weighted average share count today is 12.03, if you go back to a last peak 2011 was significantly higher, so we actually get leverage on APS from share count tax rate and the efficiencies stuff I will talk about.

Here is some P&Ls for you. So if you look at the top there is a scenario the wafer fab equipment, 33, 33.5, 37 the share translates to is we said gained two points, we are like 81 last year, if you gain two points that get to the 91 and 200 millimeters and I said that will shrink a little bit, two cents of points.

So that is two points and 300 and two-tenths reduction of the size of the mark in 200 and out years, so you get 99 and 219 which brackets all the detail they win early, but let me start from a bottom and go up to those numbers, right. So if you look at what I have told you in the previous stage 11 for is the share counts and (inaudible) like 1300 so we get leverage on the share counts.

Tax rate is 22%, if you think about low cost and high cost, high tax regions most of our sales are going to end up in low tax regions, so we can optimize the structure I say getting down few points of tax rate is a very good objective. Then you go to OpEx and you see (inaudible) 21% go look at Applied Materials in last number of years early 2000 it's 21%, so these type of numbers we should be about 21%, I think that is the answer, okay.

And even with our spending, I think the R&D spending, when you get those revenue levels, I think it is pretty reasonable levels, so 21% is the answer. If you think of ourselves equipment company, equipment companies with the $8 billion of revenue, some strong products and good aftermarket business come to 20% operating margin business is $8 billion that's the math, we got to make it work, all right.

So I think 21% is right number and if you give me those big revenues of 11.7, 12.4, 20% should be doable even with significant investment in the products. Gross margin, how your gross margin is going to go up, so I will give you couple of data points and go back and look we were 46%, there is four things going on there, mix, mix, cost, price, okay.

First the mix between segments, you guys see that data, our mix in our semi segment is – our gross margin on semi segment is higher than our gross margin in other and we believe we are going to gain share segment next will help us. Number two, we look at solar is down as the percentage of sales, that the lower gross margin business for us. And within segment we see with the differentiation in display we are going to gain gross margin and I think we have the gross margin opportunity in AGS also, So if you look at a mix helps us between segment and that within segment, if you look at in the SSG business for instance, inspections are strong in gross margin business, we have strong share businesses which are good gross margin and you gain some share that economic leverage is moving somebody from the lower share to high share number is very good at gross margin and operating margin.

I think you guys know that you can look out at the public companies. So the gross margins and if you go back and look we were 46% and with that mix, mix and then the cost remember I put through 2% cost reduction a year and I think we are in, the other thing I put through is overhead reduction, some of that is in cost of goods sold, so some of the supply chain we actually had overhead cost reduction.

I think the gross margins are reasonable. The other thing as I actually hedged pricing a little bit, so I think the credible go back and look at history and think about mix, mix cost, and price right. So then you go up to share, can we get to the 99, 219, so I took out two times in the 200 millimeter, I put in the high and low range, we talk to all day about is the market good for us in terms of materials and are we investing in that market, can we gain in inspection, can we gain (inaudible), EPI is a good business for us, the selective removable stuff looks good, it's a $1 billion opportunity. So, we spend a long time, we even brought it on the product guys this morning for some of them to talk to the transistor stuff and the (inaudible) stuff. So that's our goal, we're putting our money wherever multiplies in terms of focusing on the products and I think it's a very incredible goal.

So, we have two opportunities, the customer opportunity was the differentiated products we talked about and the investor opportunity, two things that are going to drive the P&L, I told you early the revenue which is the wafer fab equipment is pretty good and the share. The second one is the operating leverage on the wall which I talked about the gross cost of goods sold in the operating expense line and then we got leverage down below on the tax rate and the share count. So I think that's my last official slide and I welcome Mike up see with velocity, we are ahead of schedule today we're pleased to say. I think we're all coming up right. Mike, you are the Q&A mentor or moderator.

Question-and-Answer Session

Mike Splinter

Okay. We have two runners in audience with microphones, since this is a webcast, could you please use the microphone and then just state your name and who you want to direct the question to and then we'll see if we can get the answer.

Bob Halliday

Okay. And we'll do just one question today.

Unidentified Analyst

Okay. One question for Mike and Gary. Nice presentation and slides, a lot of emphasis on gaining share, transistor. But there is no mention of 450 especially [when you targeted] [ph] in 2016. So how does 450 is going to play into your plans?

Mike Splinter

Gary, do you want to take that one?

Gary Dickerson

Yeah, I think relative to investment on 450, what we've said is that we're really going to stay pretty flat in investment in the next several quarters, timing is still somewhat uncertain. I think probably the earliest ramp is somewhere in 2018 from a revenue perspective. So I would say there is still some degree of uncertainty on the timing of when that ramp is going to happen, especially when you look beyond one company, which you really need if you're going to drive 450 from an industry perspective. So I would still say there is some degree of uncertainty and right now we're keeping our 450 spending flat.

Bob Halliday


Stephen Chin - UBS

It's Stephen Chin from UBS. So my question is either for Randhir or Mike. Just on the wafer fab equipment spending number of 37 billion do you see that as kind of a normalized level of spend going forward? You showed the slide Mike that WFE was growing over the past couple of years. And then if you could share some color on how you see the 37 billion building across memory, foundry and logic. Thanks.

Mike Splinter

Sure. Maybe I can start and Bob and Randhir can give their comments as well. I kind of gave a range out in time in the '13 to '16 timeframe 32 to 35 obviously 2013 is quite a bit below that. So, we think there is strength in wafer fab equipment and we think that the strength comes from several areas.

One is that the mobility build out, this is going to continue to grow, the capital intensity is going to increase node to node. That's a very, very important one. The third one is the 3D NAND build out is going to be Greenfield, which I think we're going to see a pretty strong starting next year. But playing in the '15 and '16 new factories for 3D NAND and we also think there has to be incremental spending above where DRAM guys are spending today, I think their order capacity and we see pretty substantial growth in mobile DRAM. Bob gave a couple of scenarios around 37 billion. So we think that's very feasible number here in the future. Bob?

Randhir Thakur

I think that again, this is a scenario, Mike listed all the points, I think the key will be 20 nanometer then in this timeframe also the 14 nanometer investments will be there in addition to the NAND greenfield fab. So potentially the scenario can work out for 37.

Bob Halliday

Yeah, also, two quick comments. Who the heck knows, I hope that helps. I think 37 is the most consensus number. I kind of think it's possible actually. The other thing that I will say is we model the 30 and what I was pleased, my, I think our mantra internally is, even at $30 billion, we got to make a bunch of money. So $1.50 or $30 billion, I like that number. So if it is 37 I'll take (Inaudible) but, if it is not 37, we're shooting for $1.15.

Unidentified Analyst

Hi, good afternoon. Thanks for taking the question. Obviously, some very aggressive and very focused goals over the next several years. That's going to require a very significant change in culture here in the organization. I wanted to understand how you're driving that shift in culture. Any change in compensation plans to help catalyze that. Thanks.

Mike Splinter

Gary, you want to start on that one?

Gary Dickerson

Sure. Yeah, I think as I talked about earlier, there is tremendous passion around solving the high value problems for customers. We're the precision materials engineering company. It puts us in a great position and I can tell you that seven days a week, you will see people here driving to bring products to market for these new inflections.

Now I think in culture, I really believe you want to drive things in to your operating rhythm. How you run your business, how we do our monthly product reviews, the level of depth that we drive in those. You heard this morning from the people that were here about the product development engine. Teaching people to fish, teaching people how to develop winning architectures. So we're building those into the operating rhythm. In growth, we all have compensation tied to the growth pipeline.

So, again we're focused on monthly growth reviews. The operating rhythm is focused on executing our top priorities for the company. I can tell you there is tremendous passion as Bob and I talk about it. I think many people talked about. We're focused on velocity, and speed of execution. So I think there is a change in the culture. You have to build it into the operating rhythm, teaching people to fish, giving them the tools that they need to be successful to win.

Randhir Thakur

I want to add also. I think what is also changing is that as a result of focus, for example, in investments focus, going in to SSG, there is tremendous shift in how people are looking at the difficulties in product, responsiveness to their customers and as Gary said, we're really thoroughly focused on looking at our products and delivering the differentiation that culture change is happening.

Patrick Ho - Stifel Nicolaus & Co.

Thank you, Patrick Ho, Stifel Nicolaus. Maybe for either Mike or Gary. In terms of the numbers that you provide in terms of the outlook, how do you account for EUV in terms of the market growth and how that impacts the various process segments that you believe you're going to grow over the next few years?

Mike Splinter

Yeah. Maybe I can start and Gary you can add some comments. Right now, EUV is still in pre-pilot stage. So kind of in this three-year time horizon, it seems unlikely that's going to be a major part of, maybe it gets to one layer in the outer years but there's still a lot of development to do there and the other factor is, and I'm trying to point this out, it has to reduce costs because today you can make small lines. Everybody knows how to make [self] [ph] a line, double, quadruple patterns, they can make small lines. Will EUV be cheaper at making those small lines than doing it the way people are headed on the path today?

Gary Dickerson

Yeah, I would agree that in this timeframe it has minimal impact on what we're talking about today.

Mike Splinter

Now, where's the microphone? Are you going to, Mark? Tim?

Tim Arcuri - Cowen and Company

Hi, it's Tim Arcuri at Cowen. I had a question for Bob. What did you account for solar in that model because you have adjacent or other at $1.4 billion today growing to $1.7 billion or in those different outcomes. So you know, $1 billion of that's Displays so you are assuming $700 million of other stuff.

Bob Halliday

There's $1 billion for display, $400 million is the model for solar, $300 million for other stuff.

Tim Arcuri - Cowen and Company

And are you assuming that solar is breakeven.

Bob Halliday

Makes some money. I mean the solar thing we keep scratching at and poking at but in the model we put $400 and 37 in profit.

Mike Sullivan

Thanks, Tim.

Unidentified Analyst

Hi Mike, I just wanted to better understand the competitive impact. I know you've mentioned margin expansion goals. What are you seeing from the weakening yen and some impact from your Japanese competitors. Have you seen anything at all in the near term and how do you think some of your larger U.S. competitors are going to you know handle the changing landscape and are you seeing any changes at all from their behaviors, the new products that they have introduced as they approach these inflections as well?

Mike Splinter

Well, one of the great things about our business is you really got to win on the merits of your product and that's really where we are focused. I don't think anybody knows where the yen is going to be six months or a year from now. So most of our customers are making investments in fabs that are going to last for a significant amount of time so I don't think we see - are we worried about it? Sure. Is it an advantage for Japanese exports? Sure. But I think we win and lose our products primarily on technical merit and I don't, Bob I don't know what would you say about impact of yen at this point.

Bob Halliday

Yeah, there's a couple of places. One is if you have differentiated products you are usually in pretty good shape. A lot of these decisions across multiple nodes you have to reuse things like that. So the practical thing is a lot of the products it doesn't impact and certain ones it can have some impact.

Gary Dickerson

And I would say also a lot of what's driving our business I showed that earlier. The materials innovation and foundry, it's about the transistor, Samsung, TSMC, Global Foundries, they are all focused on 20 nanometer and thin fab as fast as possible. That is the big battleground. If you look in 3D NAND again new materials, areas where we have a lot of strength.

In logic, more materials complexity from a very large logic customer. Our focus is winning in those in materials inflexions and our leadership in precision materials engineering really puts us in a great position. Maybe Randhir can talk about this but I don't know that we've ever been in a better position to ride the wave of materials innovation at Applied Materials where it's really in the sweet spot of our technology.

Mike Splinter


Mike Sullivan


Jagadish Iyer - Piper Jaffray

Questions here, first, I mean, two part questions. First it looks like you've turned a corner around in Etch, and just wanted to understand that is 3D NAND going to be the comeback application for the wins? Are there any other segments being targeted for the momentum that you are seeing in Etch, and second part is that how should we think about the profitability of the Etch business. Thank you.

Mike Splinter

Randhir, you want to start on talking about how the Etch business is doing and where the momentum is?

Randhir Thakur

Yeah, thank you. On the Etch we basically, the strategy that is most exciting is about change the rules. The point that you raised about 3D NAND is really about changing the rules and in that space I showed you the position that we have gained is very strong in staircase etch and this will continue. So this has given us a big advantage. We are also going -- combating head to head battles. And those are the areas, opportunities that we are seeing in our area of strength for conductor etch and these are some of the [mass] [ph] type applications which are growing and we are gaining strength.

So a combination of these new applications that are coming our way which are very material intensive, new chemistries that are required and they are defining new architecture in the 3D NAND type spaces it's really providing the push for the Etch business.

As far as the profitability I think that we have a defined model for where we want to be and we can see as these market share gain happen the business will be profitable. So there's again the exciting part is that the transition, 3D transitions have levelled the playing field in Etch as a result provided us the opportunities where we are getting the wins.

Gary Dickerson

Yeah. I would also say in selective materials removal that's another area that is going to grow very fast, the technology leaders we are working with are pulling very hard on selective material removal; we have a very strong position there and that as Randhir talked about that could be a $1 billion opportunity and this is what customers are telling us relative to the size of the opportunity, so there is the huge focus a huge investment there from the technology that we've had in the past that Randhir talked about, we're in a very strong position and combined with the 3D NAND opportunity and foundry pull that we are seeing from customers, you put all that together and we have a great opportunity there to make that a very profitable business.

Edwin Mok - Needham & Co.

Hi, Edwin Mok from Needham, thanks for taking my questions. So on the 3% to 4% share gain you guys expected from now 2016 also in Display 5% share gain, how do we [then] break it down between your several market, the market that you guys let's just say participated in such as Epi which you are really strong, how do you separate that [TAM] expansion in those market versus share gain that you expect in other areas, how we're going to think about that anyway you quantify that?

Randhir Thakur

I think that overall share gain is shown as a total collection of how we are gaining a share in each area. So this is a sum total if we go in the individual level, which on the stronger pillars supporting, I laid it out it is really in these three areas transistor, because of Epi, Metal Gate and these growth areas we have seen the huge opportunities for share gains.

So portion is pretty large, we're very confident about it. Then we go into the interconnect these applications are already qualified lot of that as Bob said something, something to [DTOR] we can you know, we're going to gain that share. So that's what is going in the interconnect space, so in the interconnect is a combination of metal map as well as some of the expansion of existing [SAM] and then the new opportunities, the new opportunities are about selective material removal, these are huge for us. And so that total combination we took and we really also looked at what can be the down side we risk adjusted it, and came out with this is range 2 to 4 points supported by our different products.

Gary Dickerson

Yeah. One other thing I would say, we have a score card of all of the POR and DTOR positions that we need to win to drive the share gains that's part of our compensation package every board meeting we are talking about where we are at on those POR and DTOR positions. So we are laser focused on those opportunities that move the needle.

Mike Splinter

Ali any additional comments.

Ali Salehpour

Just to answer your question on Displays, mostly on PVD market share gain. And so [SAM] expansion we counted outside of that.

Unidentified Analyst

Yeah, thanks, a question for either Mike or Gary, there's already been a pretty healthy consolidation of a number of chip companies that can buy leading edge equipment, but when you look at 3D NAND and/or FinFET on logic class foundry there does seem to be an opportunity that's a competitive landscape with your customers as you become even more uneven do you feel like the consolidation of buying power has already troughed, or do you feel like that's going to continue into the future and if it does as a change in financial targets of the balance of power around pricing in the margins you can bring to the table?

Mike Splinter

I think maybe I can start, Gary you can hammer this home. First of all, I think there's a huge race going on right now in the technology area. In the logic and foundry area you've got to FinFET and whether you believe the leading logic guy is going to be successful in the foundry area it puts a huge amount of pressure on the other logic companies to move as fast as possible to FinFET. So this is a real arms race and having arms race it plays the arms suppliers where the arm suppliers in that.

I think we are going to see the same thing in 3D NAND hasn't quite started yet, but one company is going to be jump out into the lead in 3D NAND and I think we are going to see a very fast -- assuming they are successful, we are going to see a very fast-paced run towards that direction. And then it's about how successful are we going to be there.

Srini Nandury - Summit Research

All right, this is Srini from Summit Research. This question is for Randhir. Actually my question is in D3 NAND, two players are going to quarter 3D NAND maybe next year, at least they are planning to and two are going to go later. So which ones are the once where you have the (PTOR) position and which will…?

Randhir Thakur

I'm sure they talked -- their talks about ABCD those are four customers. They have a fairly healthy strong position, I think the key for us in the 3D NAND is just itself for the experience and lot other technologies of products that we are bringing in, we already have a lead for about year and half and that is what is transferring to the production. So in this I think that, you know the memory that also typically become very quickly on technology and transferred into the cost comparativeness.

So as this transition happens as go to the manufacturing, we are very strongly positioned here, so I think high confidence on 3D NAND architecture transition is very, very good for Applied because if we look at the planar NAND, a lot of other furnaces in other areas played in the position that all of that comes into now the single wafer to our sweet spot. So it's good for us.

Srini Nandury - Summit Research

Yeah, just one more, to you again, when you talk about 30% increase in the number of layers in inspection was it for memory and which case it's just one layers or is it for logic?

Randhir Thakur


Mike Splinter

There's a question over here.

Unidentified Analyst

Bob, looking at the numbers that you've laid out, mid-40s gross margin rise operating expenses not going up when you and I spoke for couple of minutes out in the lobby before, essentially not a terribly capital spend-intensive business going forward, would you like to comment a little bit on your capital allocation plan over the period that you are forecasting your P&L as investors would like to know how you're going to return capital to us?

Bob Halliday

Yeah, actually that's a two thoughts in there, one internal capital used which I think CapEx, I agree with you is pretty limited. In terms of capital allocation, we've following a mix plan of dividends and share repurchase, I think we'll still follow pretty aggressive mix plan that features both. I think you can generate fair amount of cash to return it to investors but it will be a combinations of the two. I think it depends on the environment frankly. So it depends on what the interest do, what stock price does, stuff like that. It's real hard to prejudge it.

Gary Dickerson

But I think that -- there's really no change in terms of the strategy, we got pretty aggressive in buying stock back, we're going to continue with the same dividend policy that we've had in the past.

Bob Halliday

Yeah, I don't see it changing much, I mean it's probably going to be a similar mix.

Mike Splinter

You've seen us get -- when the stock dropped, you saw us get quite aggressive on buy backs, there's a $1 billion, yeah, so. Yeah. Any other questions? There is a question over here, and then, Bob, Robert.

Unidentified Analyst

Hey, [Robert Mayer]. We're seeing a transition in Apple's business only from Samsung to TSMC, to what extend does that benefit to you in that and you historically have the better, I've known you have had a better relationship with the foundries and looking at your numbers, the larger percentage of foundry business going forward and if that transition is accelerated does that accelerate benefit to you and of the share gains you're talking about maybe you could give us some indication as to what do you expect out of that?

Mike Splinter

Randhir, you want to first talk about this, you've mapped out this shift in the supply chain?

Randhir Thakur

Yeah, I think because of the shift and which is very well known publically I think the for us the foundry historically as we have pointed out has been a strong market share position for us, so it does help us from the market standpoint but the whole dynamics will shift that the total, the bill of materials for Apple moves from processor the memory, the flash. So what we are seeing is overall to our market share especially for the on this side we are seeing positive impact.

Gary Dickerson

Yeah. Our highest share is in foundry space and the published data shows, I think year-to-date were something like 26% of the Taiwanese CapEx. So Mike showed also long term shift in terms of the overall CapEx more towards the foundry business that's extremely positive for us. As you said that's where we have the highest share and that is a very good opportunity as that business that mix moves more into our sweet spot.

Randhir Thakur

I think, I don't want to say specifically. But I think the numbers that we showed 2 to 4 points of share gain, good part comes from this transition, because it moves to the our foundry market share which is high.

Mike Splinter

It is, it's a good starting for us

Unidentified Company Representative


Unidentified Analyst

Thank you. I have a follow up. Shifting gears from 16 to 13 Mike you talked about forecast of flat to down 10% for WFE and we're more that 6 months into the year. Can you provide us with an update how you see WFE tracking?

Mike Splinter

Well, pretty much as we thought, when we made that forecast we updated it about in a middle of May about six weeks ago or so. And the thing that we see happening now we had pretty much understood at the time that we made that forecast. So we don't see a big change in the year forecast for WFE, I think really that we didn't anticipate. If you recall last year at Semicon time, we saw such a big drop off from Q2 to Q3, we had just guidance that's not the case in this particular at this particular time at all.

Unidentified Analyst


Mike Splinter

So, we're just giving the range of flat to down 10%. So, I think at our last call we said in the middle area of that.

Unidentified Analyst

I have a display question. I'm trying to get a handle on how important OLED is to your forecast and at where point to we get into and or TV cycle or it take obviously price to the consumer is that or it's too high right now. But as so we've been care, so just be more focused on mobility?

Ali Salehpour

So, a great question. And so first let's separate mobility versus TV, at least one major supplier in the world as you know has been shipping OLED displays an mobility for a long time and they continue to, it ratchet up the resolution and performance on those displays, and the size of those displays. We expect others will start to move in that market on the mobility side. I would say slowly, but surely over the next 3 to 4 years.

So on the mobility side, out of that tend to roughly 10 fabs that I outlined, expect two or three maybe four of those quick dealers (Inaudible). Now the question is will they be flexible OLED fabs or will that regular fabs. Flexible OLED fabs if you recall really they take it up a notch for us.

On TVs, it's a difficult call as you know there is two computing technologies on OLED as they wide OLED and the RGB OLED. We're roughly counting on a couple of factories for the next four years in our numbers. And but it could be metal oxide or it could be a LTTS factor. So again if you do the math, you can have different impacts.

Unidentified Analyst

Thanks. Dan (Inaudible) New Jersey. Focused a lot on mobility display materials. Is there an opportunity to capitalize on packaging given a couple of years ago, there was a semi-tool acquisition, that market seems packaging also seems to be something that I think will be quite profitable and whether some market share gains. Thank you.

Randhir Thakur

Yeah. That's a good question. I think on packaging, really the form factor part of the mobility will be largely driven by the packaging aspect. What our customers are doing, really the technology is in place. So whether it's for the TSV, some of it like in the bump and we see already the business but the growth will really come in with the adoption of TSV. And the technology that qualified, I think it updated last time, we have three fourth of the total opportunity events with the customers. So it's a matter of getting this in customers to go in the volume manufacturing and as they do, this will be an upside for us in terms of business, as a follow up.

Unidentified Analyst

And that would also, I mean, it runs parallel to the mobility focus too, correct?

Randhir Thakur

Absolutely. That's a good point on the packaging. We did not highlight it today and left it as an upside because we talked about in the past. It's a battle I think we feel pretty confident about.

Mike Splinter

Now, Randhir, is the packaging investments included wafer fab equipments or where does that get accounted?

Randhir Thakur

I think it is including.

Bob Halliday

(inaudible) does not include that in, right, that's ancillary and Gartner's. We can help you with that, if you want.

Mike Splinter

You have a question?

Unidentified Analyst

Hi, these are questions on display, this presentation was great.

Unidentified Company Representative

Is that your, cousin? You're lookalikes.

Unidentified Analyst

(Inaudible) but the questions that I am asking are how are you planning to increase the uniformity of oxide as well as how to reduce the cost of [LTPS]? I think that's where the most of the opportunities would lie within display.

Ali Salehpour

So, great question. Let me give you a brief answer, and can talk about it further offline. If you just attended the morning session this morning, we talked about our (Inaudible) technology on CVD. We continue to revolve that technology. There is a number of efficiency improvements that we're building today in to the CVD tool. And we're continue to invest on the PVD roadmap. I showed you that timeline on roadmap on the attributes of various display technologies.

Now, there is no ITRS for our technology, for our industry. Last six months, we've actually plotted and built an equivalent to an ITRS roadmap. One of the vectors on that roadmap is efficiency improvement and the factories. So it's something that we take seriously and we've got a number of things that we're doing on that. I'll share some of that with you offline.

Mike Splinter

If there are no further questions, I want to thank all of you for coming to Santa Clara and spending time with us, not only this afternoon but some of you've spent from early morning with us and we welcome your feedback and we'll make sure that we have methodology to get your feedback. Please send it in and we want to make these events better all the time. So, thank you. There will be a reception outside here, starting, pretty much immediately. Thank you.

Mike Sullivan

Thank you.

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