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Executives

Michael Sullivan – VP, IR

Mike Splinter – Chairman, President and CEO

George Davis – EVP & CFO

Analysts

Stephen Chin – UBS

Jim Covello – Goldman Sachs

C.J. Muse – Barclays Capital

Atif Malik – Morgan Stanley

Satya Kumar – Credit Suisse

Wenge Yang – Oppenheimer

Chris Blansett – JPMorgan

Steve O'Rourke – Deutsche Bank

Mehdi Hosseini – Friedman, Billings, and Ramsey

Patrick Ho – Stifel Nicolaus

Edwin Mok – Needham & Company

Gus Richard – Piper Jaffray

Krish Sankar – Banc of America-Merrill Lynch

Mahesh Sanganeria – RBC Capital Markets

Jagadish Iyer – Arete Research

Applied Materials, Inc. (AMAT) F1Q10 (Qtr End 01/31/10) Earnings Call Transcript February 17, 2010 4:30 PM ET

Operator

Welcome to the Applied Materials fiscal 2010 first quarter conference call. During the presentation, all participants will be in listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. As a reminder, this conference is being recorded today, February 17th, 2010.

Please note that today’s call will contain forward-looking statements, which are all statements other than those of historical fact, including statements regarding Applied’s performance, growth opportunities, cost reduction activities, strategic positions, markets, and Q2 and fiscal year 2010 outlooks, as well as industry outlooks. All forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Information concerning these risk factors is contained in today’s earnings press release and in the company’s filings with the SEC. Forward-looking statements are based on information as of February 17th, 2010 and the company assumes no obligation to update such statements. Today’s call also contains non-GAAP financial measures. Reconciliations of the non-GAAP measures to GAAP measures are contained in today’s earnings release or in through financial highlights slides, which are on the Investor page of our website at www.appliedmaterials.com.

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

Michael Sullivan

Thank you, Marcello and good afternoon. Joining me today are Mike Splinter, our Chairman and CEO; George Davis, our Chief Financial Officer; and Joe Sweeney, our General Counsel and Corporate Secretary.

Today, we will discuss the results for our first quarter, which ended on January 31st. Our earnings release was issued at 1.05 Pacific Time and you could find a copy on Business Wire and on our website appliedmaterials.com. Mike Splinter will be off the call with comments on the business environment and our strategies. George will follow and discuss our financial performance for Q1 and our expectations for Q2 and the rest of the year. We will then open the call for your questions.

Before we begin, I have a quick calendar announcement. Applied will hold its 2010 Analyst Meeting in New York City on the afternoon of March 30th local time. We hope to see you at the meeting and we will have a live webcast and replay for anyone who won't be able to join us in person. We will be sure to provide you with further details about the event over the next few weeks.

And with that, I would like to hand the call over to Mike Splinter.

Mike Splinter

Thanks, Mike and welcome to today's call. Applied generated strong growth in our first quarter, led by our Silicon Systems Group, which grew net sales by nearly 50%. Our business momentum continues and we are raising our company-wide fiscal year sales outlook to growth of more than 50%.

We completed the acquisition of Semitool, giving us new growth opportunities in semiconductor equipment and leadership in advanced packaging. We also took actions to improve our efficiency and bring the core of our operations closer to more of our customers. The steep ramp in SSG challenged our manufacturing and field support operations. And I'd like to thank our teams and suppliers for working especially hard to meet our customers' needs.

I'll now comment on each of our businesses. We now expect SSG sales to more than double in fiscal 2010. We have raised our wafer fab equipment spending projection to a range of $21 billion to $23 billion for the calendar year and we view 2010 as just the first year of a strong investment cycle.

Memory prices remain high, encouraging customers to invest in the next generation of technology. In 2010, bit demand for memory is expected to outpace supply. Foundries are investing aggressively for their transition to 32-nanometers and for capacity additions at 45-nanometers. We believe the next phase of investment will be driven by DRAM technology transitions along with capacity expansions in both flash memory and foundry.

Customers are also discussing plans for new fabs, which should lead to increased equipment spending in 2011. We expect this year to be a – to have strong competitive gains with more than 2 points of share growth across SSG. We expect Applied's etch sales to more than double in the calendar year, reflecting market growth, share gains, and favorable memory customer exposure.

Increased memory spending is also the catalyst for our Brightfield system, giving us the opportunity to gain 5 points of share in the nearly $1 billion wafer defect inspection market. In radical inspection, we expanded our installed base with another strategic placement at a major foundry.

In CMP, our new Reflexion GT is gaining traction as it allows customers to greatly reduce the cost of consumables. And our new Astra laser anneal system is enabling advanced transistors at 32-nanometers and beyond. In PVD and CVD, we are on track to gain share leading edge where steps are being added in metal gate, silicides, gap fill, and packaging.

We are very pleased with the progress of our Semitool acquisition. We have been collaborating with Semitool in advanced packaging for years, allowing us to hit the ground running with a suite of products to serve a growing market, which is expected to reach nearly $800 million by 2012. For example, we expect to have at least 25 Charger PVD systems installed for packaging in 2010.

In AGS, the number of semiconductor tools under contract in Asia grew by 20% year-over-year and we are focusing on additional service and spares growth in the region, which is expected to drive 75% of all new wafer capacity.

The display industry sees strong demand in LCD TVs, particularly in China. High factory utilization of around 90% is leading customers to plan for new capacity. We expect display equipment spending to grow by more than 60% over approximately the next 12 months.

Looking ahead, we expect Applied's orders to increase, driven by higher investments in Gen 8.5 capacity over the cycle. We have ramped our manufacturing facility in Taiwan and maintain our system lead times despite this transition. Our Gen 10 CVD systems are now proven in production and we are ready to ramp this next generation of glass size.

In solar, worldwide PVD – PV installations are expected to be up 50% year-over-year with about half of this growth in European countries outside of Germany. Module prices have absorbed the polysilicon price drops and we see price declines moderating ahead of the German FiT adjustment.

In China, the government has made solar a national priority and crystalline silicon solar manufacturers are responding by boosting capacity. We expect 5 gigawatts to 7 gigawatts of incremental capacity additions in China this year, which represents a near doubling from '09. Globally, we see the possibility of up to 9 gigawatts of capacity additions.

Solar CapEx should exceed $4 billion this calendar year and factory utilization across the industry is reported to be around 50%. And today's aggressive capacity additions could lead to over-supply and a reduction in investment plans. The strong solar capacity expansion in China has been a positive for our crystalline silicon business. We achieved signoffs for our new Baccini Esatto technology in the quarter as double printing became established at multiple customers. And we expect our Baccini cell systems to gain 3 points of metallization share in 2010.

Turning to SunFab, we achieved signoff at two new lines during the quarter, bringing the total to nine. The price declines in crystalline silicon modules have exerted margin pressure at some of our thin film customers, in some cases lowering their demand and factory utilization to very low levels. We made further progress on driving SunFab module efficiency and cost reductions to help customers be more competitive. Two customers announced large development projects this quarter and our customers now have 30 megawatts of modules installed, providing field performance data to demonstrate the capabilities of our technology.

I'd like to comment briefly on the recent events in Korea. As you know, several of our employees were charged with improperly using customer-confidential information. We are working with the Korean prosecutor and also conducting our own investigation in order to better understand the facts and the situation.

Applied has strict policies and procedures designed to protect our customers' confidential information. We are also committed to upholding high ethical standards in all of our business dealings. And for more than 40 years, we have developed a history of outstanding intellectual property protection, which is at the heart of our company's values.

The conduct described by the charges is not consistent with either our policies or the great work performed by Applied's talented and dedicated employees. It is important to note that Applied Materials has not been charged in this case. Our focus at this time is on being close to our customers, helping them to meet a steep ramp and ensuring that the strategic relationships and trust that we've built over many years remain strong.

In closing, our goal is to lead the industry in our core semiconductor market, expand our opportunities in display and services, and drive new growth in energy and environmental solutions. We are also significantly improving our efficiency and effectiveness to deliver outstanding profitability for the long term.

I'll now hand the call over to George for more details on our financial results and targets. George?

George Davis

Thank you, Mike and good afternoon to everyone joining us today. Applied's financial performance improved in a strengthening business environment with results in the upper end of our target range, led by strong operating performance in our Silicon Systems Group.

Applied's orders were up 33% sequentially, driven almost entirely by SSG. Net sales increased 21% to $1.85 billion with growth in all segments, except Display. We reported non-GAAP net income of $179 million or $0.13 per share. Our GAAP results included restructuring and acquisition charges, along with investment impairments that together reduced earnings by $0.07 per share. As a reminder, our non-GAAP results and guidance now include stock-based compensation.

Our backlog increased by $200 million to $2.9 billion, in line with order growth. The net positive backlog adjustment of $79 million was driven primarily by the Semitool acquisition. Please note that except for ending balances, the Semitool acquisition will be included in our results, beginning in Q2, reported on a one-month lag through the end of this fiscal year.

The company generated operating cash flow of $367 million or 20% of sales. We ended the quarter with cash and investments of $3.2 billion, a reduction from Q4 of just under $70 million despite spending $323 million for Semitool and $80 million for dividends.

Turning to spending, operating expenses grew as expected and included $24 million in acquisition and legal costs that were not in our November outlook. Our non-GAAP operating expenses grew during the quarter by approximately $90 million, primarily due to the elimination of certain temporary savings impacting base and variable compensation and the absence of approximately $20 million in favorable adjustments in our Q4 numbers.

During the quarter, we took restructuring charges of $104 million and realized $12 million in net savings from our longer-term cost initiatives. In the balance of the year, we expect our operating expenses to be between $520 million and $540 million per quarter. This run rate includes $25 million in quarterly spending for Semitool, the elimination of shutdowns, and incremental spending to support the steep business ramp, partially offset by ongoing cost initiatives.

We remain focused on our longer-term initiatives to enhance the company's Pan-Asia supply chain, to integrate our sales teams into the business units, and to improve our back-office and IT infrastructure for more efficient transaction processing. These programs are still expected to deliver $450 million of annualized cost savings by the end of our fiscal quarter – second fiscal quarter of 2011. We expect these benefits to be back-end loaded due to the intensity of the ramp.

Beginning in Q1, we move certain costs associated with sales and marketing and variable compensation adjustments into the operating segments. This treatment provides a clear picture of each segment's performance and the change reduced each segment's operating margin by 1 point to 3 points in Q1. Of course, these changes have no impact on the company's overall results; a reconciliation is provided on our website.

Turning to the segments, Silicon Systems Group orders increased by 80% over Q4 with four customers accounting for over 65% of the total. Net sales in the quarter grew 48%, well above our expectations of greater than 20%. This is a very steep ramp from 2009 levels and our supply chain was challenged during the quarter to meet demand. Our customers continue to expect short lead times and just over 70% of our sales were from orders received in the quarter.

SSG operating profit of $306 million was up nearly 6 points from Q4, reflecting strong flow-through and some offset due to higher compensation accruals and above-normal logistics and expediting costs. We see room for further margin improvement as net sales increase.

In Applied Global Services, orders increased 41% off a low Q4 level and net sales were up 9% on higher fab utilization and increased wafer starts. Operating margin declined 2 points to 15%, primarily due to low-margin refurbished systems.

Display orders decreased slightly in Q1, but we expect momentum later in the year as customers remain on track for new-gen 8.5 investments. Net sales of $132 million were lower as anticipated and operating margin was down modestly to 18.9%.

In EES, orders decreased 36%, primarily due to declines in thin film solar. Orders for crystalline silicon solar equipment more than tripled versus Q4 on strong demand for our wafering and cell products, particularly from China. Net sales increased to $321 million, driven by two SunFab signoffs. Growth of 15% was close to our expectation of 20%.

While EES reported a modest loss this quarter, we are still targeting EES to be breakeven on a non-GAAP basis for the year, based on crystalline silicon profitability and SunFab signoffs in the latter part of our fiscal year. Non-GAAP breakeven represents a $160 million improvement over 2009 and is one of the most important profit enhancement efforts for the company in 2010.

Now, let me talk about our expectations for the balance of the fiscal year and for Q2. While second half visibility remains limited, we are encouraged by strong demand across most of our customers' end markets. As a result, we expect sales to be up by more than 50% in fiscal 2010 or by more than $2.5 billion over 2009.

We expect SSG sales to be up more than 100% in fiscal 2010, reflecting growth in capital spending, improved market share, and the addition of Semitool. We expect AGS sales to be up in the range of 30% this fiscal year, in line with higher utilization rates and wafer starts. We expect Display sales to be up 30% year-over-year, in line with the industry ramp. We also expect EES sales to be in the range of flat to plus or minus 10% for the fiscal year with upside potential if crystalline silicon solar equipment demand remains strong in the second half. Our tax rate for the full year is expected to be in the range of 31% to 33%.

Now, I'll discuss our second quarter business environment. We remain cautious with respect to forecasting orders, particularly due to limited visibility as a result of the high turns business in SSG. Currently, our best estimate is that total company orders will be up by more than 10% quarter-over-quarter. SSG should continue to benefit from strong foundry and memory demand and sales are expected to be up by more than 25% in the quarter.

AGS sales are expected to grow by more than 10%, reflecting a return to more normalized spending per wafer pass. In Display, the second quarter is shaping up to be one of the strongest – to be the strongest of the fiscal year with sales projected to more than double Q1 levels. EES sales are expected to decrease by more than 25% as growth in crystalline silicon solar equipment is more than offset by a near-term decline in thin film solar sales.

We expect the company's overall net sales to be up by 15% to 25% in Q2. We also expect our non-GAAP quarterly earnings to be between $0.17 and $0.22 per share, which equates to profits growing at more than twice the rate of sales.

Now, Mike, let's open the call for questions.

Michael Sullivan

Thanks, George. To help us reach as many of you as we can, please ask just one question and no more than one brief follow-up. Marcello, let's please begin.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Stephen Chin with UBS. Please go ahead with your question.

Stephen Chin – UBS

Hey, thank you. Hi Mike, hi George. Question on the Silicon guidance for the April quarter. Now, it would suggest that Applied is still about 30% below the quarterly peak of Silicon sales that you saw in the 2007 cycle. Now, what's your view on the possibility to surpass the peak sales level during this current up-cycle, especially if it's driven by these foundry customers?

And my follow-up question to that is similar on the Silicon segment operating margin. Do you think Applied can surpass those operating margins in 2007 and can you give us a comparable operating margin in 2007 that allocates some of these corporate overhead costs that we have in the measure of Applied on? Thanks.

Mike Splinter

Thanks, Stephen. That was a complex question, but okay, I'll try to take the first part and George can take the second part. On the – I think we are at least on orders be closer to 80% than 70%. But it's really hard to tell where the peak is going to be. I think the peak would have to get to something approaching $30 billion kind of run rate and – in WFE and we really haven't thought that that's possible at this point to surpass the kind of Q2 levels of 2007.

So that's kind of where we are and we – it's just tough to have a visibility into what's going to happen in the second half as more investment broadens out from the small number of companies who are investing in semiconductor capacity today.

George Davis

Stephen, hi. With respect to operating profit, we kind of peaked out in Q3 '07 at a 39 – just over 39%. So if you took 2 points off of that at about 37%, that would have been the peak operating margin, but generally we were operating closer to the low-to-mid 30s and I don't see any reason why we won't achieve those operating margins in this environment.

Michael Sullivan

Great. Thanks, Stephen, for your questions. Marcello, may we please have the next?

Operator

Our next question is from the line of Jim Covello with Goldman Sachs. Please go ahead with your question.

Jim Covello – Goldman Sachs

Great, guys. Good afternoon, thanks so much for taking the question. I guess I'll start with flash. Flash 13% of SSG orders, what – what's the kind of timing and trajectory that we would expect for recovery in flash orders?

Mike Splinter

Yes, Jim. Flash, as you know, at 13% is well below where a run rate would be to sustain kind of a big growth of what we think could be close to 100% or so. So we are expecting that flash is going to come back in the second half of the year as the major flash producers start to invest. And so that first half, second half, we expect that when you look at it at the end of the year, flash will be close to 20% of the overall CapEx spending and wafer fab equipment spending.

Jim Covello – Goldman Sachs

Terrific. For my follow-up, maybe for George, relative to the significant cost cuts that you guys made, are we seeing the full impact of those in the P&L kind of in the April quarter or is there still more impact in the back – in the calendar second quarter and the back half of the year as the cost cuts flow through? Thanks.

George Davis

Yes, thanks, Jim. I think April quarter is really where you will see the full flow-through of any temporary cost reductions coming back and we still have some shutdown days, normal holiday shutdown days in the first quarter. Those all go out and then obviously with the ramp of the business being stronger than we had anticipated, there is some variable comp that comes along with. But that should be pretty much reflected in Q2.

Michael Sullivan

Thanks, Jim. (inaudible) take the next one?

Operator

Yes, sir. Our next question is from the line of C.J. Muse with Barclays Capital. Please go ahead with your question.

C.J. Muse – Barclays Capital

Yes, good afternoon. Thank you for taking my question. First question on the cost cutting side, I guess. Could you guide to gross margin and OpEx and then digging a little bit deeper, part of the major restructuring you talked about, can you tell us what percentage is in COGS, what percentage is in OpEx and cognizant of that $520 million to $540 million OpEx that you are targeting in the next couple of quarters, where would that number look like when all is done around that Q2 fiscal '11 time frame that you discussed earlier?

George Davis

Great. Let me just start with what we said. We expect cost savings to be about $450 million. About $250 million of that will be OpEx. I would expect, again, the cost to be back-end loaded. So at $250 million, that’s roughly $60 million a quarter. We said there was about $12 million a quarter already reflected in the – in our first quarter, so – with that adjustment.

Our focus, as you know, in the near term is really managing to the ramp, but many of the programs that we have are longer term and we are continuing work on those including things like our Pan-Asia supply chain, making the organizational adjustments we've had such as moving sales into the business units. All these things are continuing, but some of the impacts will be pushed out as we've got kind of all hands of deck to manage the ramp.

C.J. Muse – Barclays Capital

Great. And as a follow-up, on the crystalline silicon side, can you talk about that business a little bit on the standalone basis? What percentage of the EES revenues could that be in fiscal 2010 and what kind of margin trajectory do you see through the fiscal year?

George Davis

So it – I mean, it has been – it was – it has been about half of the order – or excuse me, the revenue and order profile for EES for the last couple of years. In terms of – in – it's probably a reasonable assumption for 2010 as well. It could be a little bit higher if we get a significant ramp in the second – the ramp continues in the second half in China for crystalline silicon and from a – from an operating margin standpoint, it's well into the double digits now and it's been a solid business for us.

C.J. Muse – Barclays Capital

Very helpful. Thank you.

Operator

Our next question is from the line of Atif Malik with Morgan Stanley. Please go ahead with your question.

Atif Malik – Morgan Stanley

Hi, thanks for taking my questions. I asked this question last time as well. On the foundry intensity, I mean, we are seeing pretty high levels of foundry intensity this – last year, the foundry intensity was about 45%. So just your thoughts on foundry spending sustainability in second half. I understand the memory can pick up in second half.

Mike Splinter

Yes. I think that right now the foundry spending has really localized primarily to one company. So what we are expecting to see in the second half is broader investment from the rest of the members of the foundry community, but I think the leading foundries already announced how much they are going to spend for the year. So we are going to see that – it's front-half loaded.

Atif Malik – Morgan Stanley

Okay. And then a quick follow-up. What are the lead times on your wire saws HCT Wafering business right now?

Mike Splinter

It's inside two quarters.

Atif Malik – Morgan Stanley

Okay, thanks.

Michael Sullivan

Thanks, Atif.

Operator

Our next question is from the line of Satya Kumar with Credit Suisse. Please go ahead with your question.

Satya Kumar – Credit Suisse

Yes, hi. Thanks. Firstly on Silicon guidance, if I take the 25% revenue growth you gave in the April quarter and the 100% year-on-year growth, I think you are actually talking about a 50% revenue decline from the April quarter level into July and October. Is that how you are seeing the year play out in Silicon?

Mike Splinter

Satya, I think the way we describe the second half of the year and the semiconductor business is – and you realize there is pretty limited visibility here in the second half at this point. But what we are thinking is it's flat to plus or minus 10% in the second half. If we have strong flash memory investment and we see the rest of the foundry guys coming into the game, we could see plus 10%. If we don't see that, we can kind of get minus 10% and I think that's probably what we are thinking right now.

Satya Kumar – Credit Suisse

Okay. In terms of the solar, a quick follow-up. You mentioned that there is currently a stabilization in crystalline silicon pricing ahead of the German FiT cuts, but still margins are being pressured for your SunFab customers. Supposing we get further pricing pressure for crystalline silicon after the German cuts, would that not cause even more margin pressure on SunFab customers in a quarter or two? When will the SunFab customers become more competitive with crystalline silicon?

Mike Splinter

Well, we've been – certainly, if you look at variable costs, they are already competitive and they are getting more competitive as we work with them to enhance the performance of the factories, which – the factories are really running quite well. So I think – but the bigger point on crystalline silicon, if the capacity comes on the way we think it is, this is going to – there is going to be a lot of pressure on pricing in the second half until more demand is created. We are still looking for demand to be created at a higher level in the U.S. and China and in India maybe in the second half and into 2011.

Michael Sullivan

Thanks, Satya.

Operator

Our next question is from the line of Gary Hsueh with Oppenheimer. Please go ahead with your question.

Wenge Yang – Oppenheimer

Hi, this is Wenge for Gary. You commented on supply chain constraints and combined with your recent hiring of executive supply chain management. I want to get your opinion on what kind of impact of the supply chain constrained on your costs and operating expenses in terms of overtimes, a higher cost of goods, and also the lead time strategy.

George Davis

Sure. The major impact that we had from the supply chain difficulty this quarter was seen in higher expediting costs and really the costs of logistics in general were above normal and we are seeing improvements in the supply chain in the second quarter. I think we still have a little bit or work – workout to do, but the – there is no connection really between our decision to hire an external party and the challenges we are having here. As you know, we are going to be building up our capability in Singapore to strengthen our Pan-Asia supply chain and really the recent hire is in connection with that activity.

Mike Splinter

And you guys will get a chance to meet Joe at the Analyst Meeting at the end of the March. I think you will like him, he has got a great background and a great hire for us.

Wenge Yang – Oppenheimer

Great.

Michael Sullivan

Wenge, did we fully answer your question?

Operator

Our next – our next question is from the line of Chris Blansett with JPMorgan. Please go ahead with your question.

Chris Blansett – JPMorgan

Thanks, gentlemen. Question is related to the share gain you indicated earlier and I wanted to understand how much the – maybe mix of demographics of your Silicon System customers is playing into this at this time.

Mike Splinter

Yes, generally we try to shake that out of the share gain before we talk about the share gain itself, because if you just look at the last few years, there has been a huge change in overall revenue and buying patterns in the Silicon segment. So when we talk about share gain, we are really talking about innate gain at customers with winning applications in the various areas. That's kind of general. Do you have a specific question, Chris, about a – one of the product lines?

Chris Blansett – JPMorgan

Well, I was just trying to dig a little more deeper, specifically into the etch business. There is different types of etch, which some investors are aware of and where you think you are doing better versus where you've been in the past and given the shift that's occurring in the etch market with the metal etch product continuing to earmark, continuing to strengthen and dielectric growing, just maybe some color commentary around that?

Mike Splinter

Sure. So we have significantly more exposure in the memory area. That's I think well chronicled. But we've been increasing our applications as well in the memory area, both in flash and in DRAM, in particular, strength in those – in the flash areas of double patterning where we've done an awful lot of work with customers and have been able to gain applications there, as well as in high aspect contacts and those kind of applications and DRAMs, which are becoming increasingly more prevalent. So those are more dielectric – both are dielectric oriented. And we are even starting to see some traction now at some of the foundries, which in the past logic has been our weak point in that.

Chris Blansett – JPMorgan

All right. That's good. Thank you, I appreciate it.

Operator

Our next question is from the line of Steve O'Rourke with Deutsche Bank. Please go ahead with your question.

Steve O'Rourke – Deutsche Bank

Thank you. Good afternoon. Couple of questions. First, there has been some – reportedly some substantial share loss in PVD at one of your significant customers. One, could you just comment on your positioning with PVD and how you feel that is? And second question, turns business and the silicon business very high in Q1. Is this kind of the new normal with respect to orders and turns in the quarter?

Mike Splinter

Yes. On PVD, I'd just say the following. First of all, I think primarily what you are aiming at here is copper barrier/seed, which is kind of in the memory area, which is about 30% of the market and 30% of that market. So it's kind of a less than 10%.

I don't think there has been any real share shifts. There are shared positions there were – we kind of go back and forth, but when you look at the new applications where the market is growing beyond memory, we are quite strong already in the conversion to copper and in memory. That's one aspect. But in metal gate silicides, that’s a new application, multiple steps in logic. And then as well as in packaging where I mentioned that we have a significant buying pattern for our Charger PVD system and we think that we will end up gaining share on that space in the end of the year.

George Davis

And Steve, on the turns business and the new normal, what I would say is that we have seen certainly a push from all of our customers to shorten our cycle times and that’s – it's one of the reasons why we've gone to a much more modular manufacturing approach and worked very hard to strengthen our supply chain.

I would also say that foundry customers, just by the nature of their end markets and the windows that they have to hit those markets, are probably the shortest-cycle customers that we have and so I think you have a little bit of the foundry effect. So I do think short cycle is certainly new normal and I would say we are at – given the mix of foundry right now, we are at the shorter end of that short cycle; and that's probably too many cycles.

Steve O'Rourke – Deutsche Bank

Thank you. That's helpful.

George Davis

Yes, thanks.

Operator

Our next question is from the line of Mehdi Hosseini with Friedman, Billings, and Ramsey. Please go ahead with your question.

Mehdi Hosseini – Friedman, Billings, and Ramsey

Yes. Thanks for taking my question. And Mike, going back to earlier commentary about the overall size of the wafer fab equipment market, can you please clarify, did you say that in order for you to exceed the prior peak of SSG revenue, the market has to be $30 billion or $33 billion? And are you also assuming that your market share is not going to be a factor in exceeding the prior peak? Could you please provide some clarification on how to follow up?

Mike Splinter

Sure, Mehdi. What I said was it would have to approach $30 billion, which assumes we are going to be able to grow faster than WFE, because obviously last peak was quite a bit above that number. So I don't want to go down into all the details, but you can assume that we have made those assumptions. But for right now, our projection for this year is $21 billion to $23 billion for wafer fab equipment spending.

Mehdi Hosseini – Friedman, Billings, and Ramsey

Okay. And when do you expect the microprocessor segment of the market to come back and has there – there is a lot of talk about share gain and share loss, etch and PVD. Can you update us on what's going on with the microprocessor segment and when would you expect that segment of the market to come back?

Mike Splinter

Well, I think – as you know, microprocessors are on a note of technology that's generally ahead of the rest of the industry and they invest big in the odd years and order late in the even years. So that's kind of what I'm expecting to continue. We are very encouraged by the growth in the PC market. We thought that – we think overall, the PC market is going to grow 10% to 15% this year. If you saw HP's results earlier today, they said they had 26% increase in PC shipments. That's gigantic. So I would think that if that continues, capacity additions have to follow pretty quickly.

Michael Sullivan

Thank you, Mehdi.

Operator

Our next question is from the line of Patrick Ho with Stifel Nicolaus. Please go ahead with your question.

Patrick Ho – Stifel Nicolaus

Thanks a lot. Two questions. First, what do you see on maybe a qualitative or even on a quantitative basis in terms of the customer mix for your semi orders in 2Q? And related to that, can you describe what you could see in terms of the sustainability of DRAM orders at least over the next few quarters? What would drive DRAM orders to be more sustainable than some of the perceptions out there that it will be first-half loaded?

Mike Splinter

Thanks, Patrick. The word I think I would use to describe orders, not only in Q1 but Q2, is concentrated. They are quite concentrated – both revenue and orders are still quite concentrated at a very small number of companies.

On the sustainability of DRAM, I just think that depends in big part on how the cell phone and PC markets go. Right now, we don't see enough capacity to meet kind of 60% bit growth, if it gets that high. We've been updating our analysis there and our estimates from – I think earlier in the last call we said 35% to 40%. We are kind of now in the 55% to 60%, but DRAM is undersupplied right now and we don't see that getting ahead of demand for the next few quarters.

Michael Sullivan

Thanks, Patrick.

Operator

Our next question is from the line of Edwin Mok with Needham & Company. Please go ahead with your question.

Edwin Mok – Needham & Company

Hey, thanks a lot for taking my question. First question regarding the Silicon side of business, Mike, you mentioned that you started to see signs that some customer might add new fabs. Any color you can add to that or is that more for 2011 time frame and in which area in terms of memory versus foundry versus DRAM? Are you looking at – are you seeing customer looking to add new fabs?

Mike Splinter

Yes, we are looking at nine new fabs that customers are talking about and we think are coming close to announcements. So maybe they get announced in – over the next couple of quarters. Almost all of these are for 2011 capacity. There is one that could still be up in 2010 – late 2010. That one would be a flash fab. But a couple of these are DRAM fabs – several of them are foundry factories, I guess. Other than naming everyone, that's about as far as I'll go.

Edwin Mok – Needham & Company

That was great color. Thanks. And then just a follow-up question regarding the flat-panel display area. You mentioned that you expect capital – equipment spending to be up 60% this year, yet you only guide for revenue to be up 30%. How do you reconcile between that and I understand you have a new PVD product in that area too. Can you give some color on that?

George Davis

Sure, Edwin. Yes, it's a good question. The 60% is a calendar year forecast and as you know, we have a fiscal year that misses two of those months. We expect the shipment and revenue activity to be strong both in '09 – or excuse me, in 2010 and the first part of '11 and I think any difference between the market forecast and our revenue forecast is really just revenue timing.

Mike Splinter

Yes.

Michael Sullivan

Thanks, Edwin.

Operator

Our next question is from the line of Gus Richard with Piper Jaffray. Please go ahead with your question.

Gus Richard – Piper Jaffray

Yes. Just in terms of the broadening out of spend. A lot of people have difficulty below 40-nanometers, lot of people won't have cleanroom space, lot of people don't have money. Sort of in those constraints, how do you see those getting relieved over the next year or so?

Mike Splinter

Well, most people have technology partners today. So I think the places where there is real limitations or fundamental limitations on technology are very few. There can always be yield problems and product problems, those kinds of things, but I don't think that's fundamental. And I think the money issue is that had plagued a big part of the industry last year when no – when profits were low and in 2008, are solely being relieved as prices stay high, particularly in memory and more – we take – we look at this profitability very, very closely, because we do think ability to take on indebted customers is a very important factor. It'd have to give access to capital.

And then I do think – of course, there is the question of litho cell availability. I think that's a thing we also watch closely because of the cost of that element of the equipment supply.

Gus Richard – Piper Jaffray

Okay. And then just as my follow-on, given the tightness of advanced litho systems in the world today, does that present an opportunity for Applied in self-aligned double patterning? Are you seeing that gain traction with your customers or any thoughts there?

Mike Splinter

Yes. I think we are seeing pretty much everybody trying some level of double patterning, different levels in production and the flash guys clearly are – have mastered this technique in production these days and we are working very, very closely, our share in that space is quite good because of how much knowledge we gained early on in that technology.

Michael Sullivan

Thanks, Gus.

Operator

Our next question is from the line of Krish Sankar with Banc of America-Merrill Lynch. Please go ahead with your question.

Krish Sankar – Banc of America-Merrill Lynch

Yes, great. Thanks. Mike, I just wanted to follow up on the $21 billion to $23 billion wafer fab spending this year. How do you think wafer fab equipment spending can go before we hit a road block of new fabs or filling out empty shelves? And a follow-up on the cost reduction. George, if I remember right, the $450 million reduction goal is given prior to the Semitool acquisition. So post Semitool acquisition, could you update us on what the new goal would be for the cost reduction?

Mike Splinter

Hi, Krish. So we don't see any space issues to $23 billion. I don't think that there are space issues for some significant amount above that. So usually factory managers and companies are quite imaginative about how to create space if they need it for capacity and it's – I don't think we know how to do a calculation that says how – exactly how much space there is and how much money it would take to fill that space. But it's not at $23 billion.

George Davis

And Krish, on – in terms of the cost reduction, the $450 million program is really about long-term structural change for the company. It's not meant to capture all activities in the company. For Semitool, what we've said is that it will be cash accretive in year one and GAAP accretive in year two and we have synergy programs that support that, but we have not disclosed that.

Michael Sullivan

Thanks, Krish.

Operator

Our next question is from the line of Mahesh Sanganeria with RBC Capital Markets. Please go ahead with your question.

Mahesh Sanganeria – RBC Capital Markets

Thank you. First question on flat panel. You are looking for a strong shipment towards the end of the year, but your orders are pretty low at $130 million [ph]. So it's safe to assume that you should have a pretty significant order growth – 100% kind of order growth in FPD next quarter?

George Davis

Yes. We are expecting healthy order growth next quarter.

Mike Splinter

Yes, that's George Davis speak.

George Davis

No, as you know, we don't guide to orders in individual segments, but Display is certainly one of the areas along with the Silicon that we are expecting positive improvement.

Mahesh Sanganeria – RBC Capital Markets

And the second one on your yearly revenue guidance for Silicon System. Of the 100%, is that including the Semitool acquisition, because you said something in your prepared statements – something – a 100% increase and $2.5 billion also you said the revenue increase, I'm not (inaudible) clearly.

George Davis

Those are different things. The 100% does include the effect of Semitool. Remember, we will have three quarters of Semitool in the year and it includes really all of the factors, whether it be share gain, growth in the market, we – and we said more than 100%. So that's for the full year. The $2.5 billion is really – is just a simple math of saying we are going to be up more than 50% year-over-year. So that's 50% on top of the $5 billion last year; that's where the $2.5 billion came from.

Mahesh Sanganeria – RBC Capital Markets

Okay. All right, thank you.

Michael Sullivan

Thanks, Mahesh. And then I would like to see if we have time for one more question, please.

Operator

Our last question is from the line of Jagadish Iyer with Arete Research. Please go ahead with your question.

Jagadish Iyer – Arete Research

Thanks George, thanks Mike, for taking the question. Two questions. The first question, I don't know, Mike, whether you called out on your silicon market share. I just wanted to find out what is your market share; what will be your market share by the end of '10 in terms of your served available market for both '10 and what you think it will project out for '11, please?

Mike Splinter

Sure. We really don't usually give out the specific market share versus our SAM, Jagadish. This – I think I can suffice it to say that we think we are going to gain 2 points this year over last year and we pretty much agree with the third party's assessment from – of our position from last year.

Jagadish Iyer – Arete Research

Just one follow-up question. Mike, given the situation on the SunFab, I was just wondering whether – are you going to revisit your strategy in terms of thin film solar? Has there been some change in your customer outlook given the new entrance and particularly (inaudible), which have higher efficiencies? So I just wanted to find out whether you have any thoughts on that. Any commentary would be great. Thanks.

Mike Splinter

Sure. Obviously, as I said in prepared remarks, SunFab customers have been challenged in this current environment. The utilization of the SunFab factories is kind of at the same level of the entire industry, some fully loaded, some lowly loaded. But fundamentally, this – we believe in the technology and if we didn’t believe in the technology, we would make some big changes, but right now what we are focused on is meeting our commitments to customers. I think that that's a very important aspect of what we are doing with SunFab. And these products are really aimed at a market that's really just starting and that's utility scale solar.

When you look at the temperature coefficient, when you look at the incident light, when you look at ambient particles in the air versus the efficiency of these panels, installation costs are huge advantages over other technologies for – and plus of course, the size of the panels. There is big advantages in this field. Now, the field – the utility scale solar has to develop, it's still very nascent market, it's a very small percentage of the total. As you know, most of the market is rooftop and that's where we've been having a lot of success with our crystalline silicon products as well.

So we are still very excited about the overall market. We think it's good for long-term growth and we think we know how to make money in the equipment business and that's really fundamentally where we are.

Michael Sullivan

Great.

Jagadish Iyer – Arete Research

Thank you.

Michael Sullivan

Jagadish, thank you for your question. And we'd like to thank everyone for joining us this afternoon. A replay of this call and our earnings presentation will be available on our website today, beginning at 5 o'clock Pacific Time today and until March the 3rd. Thank you for your continued interest in Applied Materials.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Applied Materials, Inc. F1Q10 (Qtr End 01/31/10) Earnings Call Transcript
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