Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Applied Materials, Inc. (NASDAQ:AMAT)

F1Q 2014 Earnings Conference Call

February 12, 2014 04:30 PM ET

Executives

Michael Sullivan - VP, IR

Gary Dickerson - President and CEO

Bob Halliday - CFO

Analysts

Harlan Sur - JPMorgan

John Pitzer - Credit Suisse

Jim Covello - Goldman Sachs

Timothy Arcuri - Cowen and Company

Patrick Ho - Stifel Nicolaus

Terence Whalen - Citigroup

Stephen Chin - UBS

Tom Diffely - DA Davidson

Krish Sankar - Bank of America Merrill Lynch

Mahesh Sanganeria - RBC Capital Markets

Edwin Mok - Needham & Company

Chad Dillon - Deutsche Bank

Mehdi Hosseini - Susquehanna

Ben Pang - Northland Capital

Operator

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

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

Michael Sullivan

Thank you, Brent. Today, we will discuss the results for our first quarter which ended on January 25. Joining me are Gary Dickerson, our President and CEO and Bob Halliday, our Chief Financial Officer.

Before we begin, let me remind you that today’s call contains forward-looking statements including our current view of the company’s industries, our performance, products, share positions, profitability, announced business combination with Tokyo Electron and business outlook. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied and they should be interpreted in that light.

Information concerning the risk factors is contained in our most recent Form 10-K and other SEC filings. Forward looking statements speak as of February 12, 2014 and we assume no obligation to update them.

Today’s call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in today’s earnings press release and in our reconciliation slides which are available on the investor page of our website at appliedmaterials.com.

Now I’d like to turn the call over to Gary Dickerson. Gary.

Gary Dickerson

Thanks Mike and good afternoon. In our first fiscal quarter of 2014 Applied Materials delivered earnings near the high-end of our guidance range, while demonstrating momentum in revenue, orders and market share. This performance reflects healthy investments by our semiconductor and display customers and major technology trends that are playing to our strengths in precision materials engineering.

For Applied 2013 was a transformative year, we changed our spending profile and shifted more investment to product development. We strengthened our organization and business processes in key areas. And we started to prove the growth potential of our etch, inspection and display businesses. In 2014 every employee across the organization is focused on building our momentum for profitable growth. We are driving performance improvements in our financial model, improving product time to market and cost, driving higher quality and getting the organization ready for our merger with Tokyo Electron.

In recent months we have taken significant steps forward with our preparations for the merger. A joint Applied Tokyo Electron integration team is developing the detailed plan to being the two companies together. We’re delighted with the level of engagement, enthusiasm and the strong working relationships that are already forming. The progress this team is making gives us increased confidence that we will be ready to execute as soon as the merger closes.

Each company is meeting regularly with customers to ensure that we are aligned with their priorities. Our discussions have centered on the value inherent in our combined ability to accelerate solutions for the industry’s major materials innovation challenges.

The new company will be able to deliver more innovative products faster and at lower cost. We will have broader and deeper R&D capabilities to address roadmaps more effectively and with greater speed. By combining our field technical capabilities and best practices, we can collaborate more closely with our customers to support the rapid development of new device performance and yields solutions. And through operating synergies in many areas, we can focus our R&D investments to deliver the cost of ownership and materials engineering innovations that really move the industry forward.

We remained confident that we will receive approval for the merger in the mid to second half of this year and we expect to submit our S4 securities registration statement after we have filed Applied’s Form-Q for this past quarter.

Turning to our market outlook, we believe 2013 wafer fab equipment spending ended the year towards the midpoint of our range of $27 billion to $30 billion. We expect investment levels to be stronger in 2014, up 10% to 20% driven by higher spending in foundry and memory. The foundries remained the biggest component of wafer fab equipment, as they ramp new factories to fulfill demand for advanced mobile chips and race to introduce new technology to enable devices with higher performance and longer battery life. We expect foundry investment to grow 10% to 20% this year, which is very positive for Applied as we have our strongest share positions as these customers and continue to make gains.

Approximately half of total foundry spending this year will be focused on ramping 20 nanometer technology amended full for our products that enable transistor performance. And in our first quarter we have generated record orders in Taiwan. In addition, we recorded our highest ever quarterly net sales in FE, second highest shipments of medium implant tools and our highest quarterly PVD orders in a decade. Leading customers are also making significant investments in their pilot lines for FinFET. This technology has enabled biomaterials innovation and Applied has a broad and unique portfolio of products to enable flexion. We are collaborating early and deeply with our customers to ensure that they can quickly transition FinFET into volume production with the right performance, yield and cost.

We also expect a stronger year of spending by NAND customers, as mobility supports bit growth demand in the 40% to 50% range and 3D technology is introduced. We anticipate that total NAND investment will be around $7 billion with incremental spending in advanced planar NAND and initial investments in 3D NAND. The transition from planar to 3D NAND has enabled biomaterials innovation in thermal, deposition and etch processes. This plays directly to Applied’s strengths in precision materials engineering and expands our total available market by about 25% for first generation devices. Overall, we are making significant gains in planar and 3D NAND. In our first quarter, we generated our highest NAND net sales in the past seven years.

Consumption of mobile DRAM is also growing, providing a good foundation for increased investments in 2014. We expect DRAM customers to focus their spending on upgrading capacity to advanced nodes. In logic, we anticipate investment levels to be flat to down relative to 2013 with a high level of focus on advanced technology.

Moving to the display market, we expect the TV unit growth rate to be low single-digit for the year ahead. However average TV sizes are growing at 1.2 to 2 inches annually which is significantly higher than historic norms. This is driving area growth in the 15% range which we believe is sufficient to support investment in three new Gen 8.5 factories.

In mobile, screen resolution is becoming an important differentiator and we see significant growth in higher definition screens that require low temperature polysilicon backplanes. Consequently, we expect multiple Gen 6 LTPS factories to be built in the next 12 to 18 months to support this demand. Overall, we believe we have the potential to book $500 million of display orders over the next two quarters, although revenue patterns for the year maybe uneven as this equipment is delivered.

In both semiconductor and display, materials innovation is the key to enabling performance gains and lower costs for customers. FinFET, 3D NAND, cost effective device scaling and next generation displays are all enabled by precision materials engineering. Applied differentiated technologies in precision film deposition, materials removal, materials modification and interface engineering are enabling these key inflections. To support our customers’ roadmaps, we accelerated R&D in fiscal 2013 by increasing our annual investment run rate in 300 millimeter semiconductor product development by $200 million, adding more than 500 R&D engineers. We are also investing over $150 million of capital and new lab capabilities. These investments have driven market share gains in our served market as well as increased our overall wafer fab equipment share in calendar 2013.

We are showing momentum in our traditional leadership areas and over the past year we have started to demonstrate excellent progress in markets that are large growth opportunities for us.

In conductor etch; we have focused our strategy in the areas where we can deliver differentiated technology to address our customers’ most pressing challenges. We believe we gained around 5 points of overall etch share in 2013 and continue to build momentum at leading memory and foundry customers. In wafer inspection and defect review, we believe we gained between 4 and 6 points of share last year. We have made investments in R&D and field technical support enabling us to increase our layer qualification in logic and foundry. Our UVision brightfield inspection product line delivered record net sales for the calendar year and our new UVision6 tool has recently being qualified by a leading customer for their most advanced node. In addition, we are strengthening our leadership in the e-beam review market.

In display, our pivot PiVot PVD tool continues to gain traction, complementing our clear leadership position in CVD. In the past quarter we secured 100% of the PVD and CVD business at the industry’s largest metal oxide factory. Through increased R&D investment and focused portfolio management, we are creating a strong pipeline of new highly differentiated products to enable future infections in logic, memory and display.

Over the past quarter we have seen a number of customers accelerating their qualification of some of our most advanced products. This underlines the fundamental role of new materials engineering solutions in realizing next generation devices.

As we look to 2014 and beyond, we are incredibly excited about the future. We are uniquely positioned to apply our differentiated capabilities in precision materials engineering to enable major customer inflections and cost effective device scaling. This provides us with a great platform to build momentum for profitable growth. We remain highly focused on execution to ensure we take full advantage of these opportunities and to demonstrate progress against our financial performance goals.

We are preparing the organization for our merger with Tokyo Electron, a combination that will enable us to accelerate our ability to address the major materials innovation challenges facing the industry and increase the value we provide customers and shareholders.

I will now hand the call over to Bob, who will provide additional details about our performance and outlook.

Bob Halliday

Thanks Gary. Over the last year we have discussed our commitment to accelerating momentum for profitable growth. This entails a commitment to grow profitably and accelerate our growth momentum. To grow we are aggressively rebalancing our spending towards semi and display products and tactical field resources focused on disruptive high value products. This quarter we increased R&D to 64.3% of R&D plus SG&A, which was up from 57% a year ago. We also increased our technical field resources by almost 20% in the same period. To grow profitably while making these investments, we are also driving improvements to our operating margins to achieve the profitability targets we have set out for the company.

We are driving for return on these investments in the short, intermediate and long-term. In the short-term Gary indicated some investments that are already giving us momentum. In inspection we leverage our investment in the technical applications organization to increase our layer qualifications and market share. In etch we rapidly iterated new products to win market share in both planar and 3D NAND. In the intermediate term, we see returns on our investments including more EPI steps utilizing new materials. Our new CVD tool which improves critical film control and the new CMP tool which enables higher cross [way for deployment].

In the longer-term our investments are targeting highly differentiated products in disruptive applications, some of which such as selected materials removal are $1 billion opportunities. Even while investing for future growth, we are striving to improve our operating margins, which increased in each of the past five quarters, benefiting both from revenue growth and our actions to improve them all.

This level of operating margin included R&D investment that is approximately four points above our history at the similar revenue levels. We are driving improvements in gross margins by delivering a greater mix of high value products in semiconductor and display and achieving materials cost reductions.

Our Q1 gross margins exceeded our original expectations and based on current business projections we now expect Q2 gross margins to be better than previously communicated. Our current projections are that Q3 and Q4 gross margins will further increase, resulting in over 100 basis point of improvement for the year. To further improve our model, we also reduced EES spending to below $25 million in Q1, down 40% from the same quarter last year. Our goal is for EES to breakeven for the year.

To accelerate our growth momentum we are revving up our product development engine. As Gary mentioned we are increasing our capital investment in R&D development tools by $150 million. Moreover we never stopped critical development projects, including during holiday shutdowns. We are also excited about our pilot manufacturing line which has already reduced product development cycle times while improving our initial product costs.

Next I’ll summarize some of the changes in our Q1 results versus the prior quarter. Orders of $2.3 billion were up 9% as growth in SSG and AGS was partially offset by a push out at display orders, net sales of $2.2 billion were at the high end of our expectations. Non-GAAP gross margin of 42.5% was up by about 0.5 due to higher silicon mix, non-GAAP operating expenses were $550 million, our non-GAAP effective tax rate was 23%, non-GAAP EPS of $0.23 was in the upper end of our guidance range.

Cash from operations of $372 million was up substantially reflecting good collections and higher net income; we paid $120 million in dividends and ended the quarter with cash and investments up $226 million to $3.1 billion.

Next I’ll comment on our segment results as compared to the prior quarter. SSG orders of $1.6 billion were up 13%, with increases in foundry and NAND offset by decline in logic and DRAM. SSG net sales of $1.5 billion were at the high end of our expectation as increases in NAND and foundry offset decreases in Logic and DRAM. SSG’s non-GAAP operating margin increased three points to 24.1% on higher volume and favorable product mix.

AGS orders of $597 million were up 9% due mainly to an increase in 200-millimeter equipment owners. AGS net sales of $507 million were in line with expectations. AGS’ non-GAAP operating margin increased over three points 24.9%, driven by favorable mix in the higher spares margins.

In display orders of $79 million were below our expectation reflecting the customer push out. However we expect a solid year for both TV and mobile investments. Display net sales of $159 million were flat which was above our expectations, due in part to grow the pivot PVD revenue which achieved a new record driven by share gains. Display non-GAAP offering margin increased by five points, 17% reflecting operational improvements. EES orders of $40 million were flat and net sales of $40 million were down 9%, the EES non-GAAP operating loss climbed to $10 million.

Now I will provide our Q2 business outlook. We expect our overall net sales to be up by 3-10% sequentially. Within this outlook we expect SSG net sales to be up by 6-10%. AGS net sales should be approximately flat; we expect display net sales to be down, flat to down 15%, consistent with the uneven revenue patterns of this business. And EES net sales should more than double. We expect our quarterly non-GAAP operating expenses to be in the range of $550 million plus or minus $10 million. We expect non-GAAP earnings per share to be in the range of $0.25-$0.29.

In summary we are investing for growth while improving our model and accelerate our new product pipeline. We are very excited about our planned merger with Tokyo Electron, which will provide us with more strong products and technologies, to enable our customers' roadmap, a larger installed base of systems to service, substantial economies of scale and a unique opportunity to return more value to our shareholders.

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

Mike Sullivan

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Harlan Sur with JPMorgan; please go ahead with your question.

Harlan Sur - JPMorgan

Good afternoon and great job on the quarterly execution, as you look at your pipeline for the next few quarters, beyond fiscal Q2 I know there’s been some concern about the potential for a pause in your SSG business just given the strong order trends, especially within foundry and NAND, obviously there will be some digestion, qualification and ramps, but obviously you’ve not yet seen some of your DRAM customers transitioning to different nodes, we haven’t seen the tier 2 foundries and your logic customer has been relatively muted, so I guess the question is, how are you thinking directionally about sort of the near term trajectory within SSG.

Unidentified company representative

Hi Harlan, obviously we only guided for the next quarter, we think the year’s pretty good as we said, the year is up 10-20%, as we do have very large customers sometimes there’s bumps along the road in any given quarter but right now we see the second half pretty good actually, we think the year is pretty good and the balance between the years is pretty good and I think our position within these inflexions is really good.

Gary Dickerson

Yes on the foundry customers 20-nanometer ramp is going to be major factor in terms of CapEx spending this year. We also see all of the customers really focused on FinFET, the FinFET transition, that’s a huge strategic battle for all of the different foundry customers so we see more technology buys this year as all of those customers raised to be the first to have a cost effective FinFET device with high yield. And we also see as you mentioned a broadening relative to the foundry investments that is positive for the year. NAND is also up both in planar and in 3D NAND, 3D NAND really mostly focused on technology buys for those customers.

Harlan Sur - JPMorgan

Great. Thank you for that answer. And then good job on the OpEx to syncline here in Q1 and on the guide for Q2. Bob, how should we think about you OpEx trajectory either on an absolute basis or relative to your sales growth as we think about the second half?

Bob Halliday

I think as we said, we’re basically flat in the second quarter. I think we had some R&D projects, a few one which we continue to pursue as well as aggressively managing the balance between pushing products out faster and spending, so we have those dials, we're always monitoring. My guess is next quarter is the 550 number, after that could be up a little bit but not big time pretty close.

Operator

Your next question comes from the line of John Pitzer with Credit Suisse. Please go ahead with your question.

John Pitzer - Credit Suisse

Good afternoon, guys. Thanks to let me ask the questions, congratulations on good results. Gary I wondering if you can just give us some of your insights relative to your 10% to 20% year-over-year growth range for ’14, what are the variables in your mind that drive that to the low end versus the high end of the range, is it simply how end demand for 20-nanometer plays out as they ramp that capacity or there are other variable that you’re thinking about within that range?

Gary Dickerson

Well, again, any one customer shifting at the end of the year can change that number a fair amount, if a project which is out one quarter that makes a big difference in terms of the end result. But if you look overall again on the foundry customers, certainly 20-nonometer ramping is a big factor in foundry and that one it looks like that is pretty much on tract. FinFET is a big, really strategic battle for our customers and we see a lot of focus there from a technology development perspective not so much significant capacity buying in 2014, but definitely that’s a factor in the overall CapEx. And then we do see incremental buying if you go below the first three customers in a broadening of CapEx spending in 2014.

NAND flash, we see certainly good demand in that market and so planar NAND investment is definitely picking up. And on 3D NAND I think it’s well known, one customer is ramping capacity there. But this is really another important strategic battle in the NAND business and we see incremental spending from a technology standpoint really across the Board for all of those different customers. That transition from planar to 3D is a tough transition. We’ve talked about that being really leveraging a lot of the technologies we have we then applied on the materials innovation, but it is a tough technology transition. So I would say one factor is really relating to how fast that yield ramps and the cost comes down and also the adoption of those new devices with the end-customers is another factor.

John Pitzer - Credit Suisse

And then Gary as my follow-up just focusing on memory overall, clearly DRAM orders were down pretty healthy in the quarter for you, but if you look at both DRAM and NAND and you combine that for you and you look at where you are today versus sort of some of the peak levels you saw in April 2010 or even April 2007, you seemed to be down further from peaks and some of your peers and I guess I’m just trying to figure out what’s driving that, is it really based upon the fact that a lot of your share gains come at 3D and you’re seeing more strength at planar capacity or can you help me understand, you seem to be lower off of your peak than some of your peers in memory overall?

Gary Dickerson

Well I think and as we mentioned, NAND this last quarter for us was really the highest it’s been in seven years. So we have a lot of momentum there both in planar and 3D and that one we also think will be very strong for us going forward. A lot of tough technology inflections we have really great products around a lot of these critical processes, we talked about some of that in the July 8th Investor Meeting and that we are still very much on track with what we discussed.

In the DRAM market, one of the changes that are happening there is really in the periphery where that’s becoming more logic like, that’s another one that really periphery hasn’t been there in the past because the periphery is behind of course where logic is but that is also helping us going forward in the DRAM business.

And we do some momentum there in other products but overall memory for us has been better than it’s been in a long time and we have good opportunities to grow going forward.

Operator

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

Jim Covello - Goldman Sachs

Great guys, thanks so much for taking the question I appreciate it. Gary on 3D NAND your comments there are appreciated. We've heard some companies say this week at their conference that there could be two customers actually running 3D NAND wafer starts by the end of 2014, not just the one significant one. Is that consistent with your view and if it is, we seem to have come a long way from six months ago when people doubted the 3D NAND was even going to work to some customers actually accelerating adoption?

Gary Dickerson

Well, thanks for the question. Just with a customer, another customer yesterday and they are planning to convert one of their factories from planner to 3D NAND. But what I would also -- so -- and all of the customers are very focused on this technology, the opportunity for bit scaling, it's pretty compelling but what I would also -- so that’s absolutely correct. What I would also say is that this is a difficult transition. Customers are making good progress in the transition but I think it’s somewhat too early to call in terms of actually how big this will be in 2014. Certainly 2015 there is a lot of customers that are ramping or planning to ramp 3D NAND technology. We're in calendar ’14 and a lot of things have to line up really for significant capacity expansions in this calendar year. Again, it is very compelling but you have also a tough technology transition and then also adoption from an end user perspective that still has to play out this year.

Jim Covello - Goldman Sachs

It’s helpful. Thanks. For the follow up on the foundry side again foundries and other topics has gotten pretty contentious slightly with some people very concerned about foundry spending for the year after TSMC guided to being down a little bit. You’re suggesting foundry CapEx is going to be up comfortably. Do you think that’s more of a function of some of the other foundries beyond TSMC being more aggressive and I know global foundries made some high profile announcements. Where do you think there is some spending happening that might be slightly different from publicly stated budgets? Thanks a lot.

Gary Dickerson

Well thanks. Yes, I think we’re not going to comment on anything our customers are saying. But we certainly see a broadening of the CapEx spending in 2014 in foundry. And as I talked about earlier certainly we see very healthy spending on 20 nanometer in 2014, FinFET is a very critical strategic battle in the war for mobility leadership. All of our customers are very focused in that area and technology buys in FinFET are also going to be a factor in 2014.

Bob Halliday

Yes, this is Bob, [indiscernible] Jim but going to back to what you said and John, every year you try and characterize and get a feel for the year. Mine 2014s characterized by two things. One is, there is a lot of technology inflections coming whether it’s VNAND or its [indiscernible] and tough challenge one. They are compelling ones when they provide great value but there is a number of real challenging technology inflections issue number one.

Number two, the spending were a little broader than it's been in last couple of years. So some of the foundries are spending money you haven’t seen this much in the past so it’s spreading out more. And what does that mean for Applied Materials? I think the technology inflections are a great opportunity for us and where you see us gain share particularly are on those inflections and foundry and NAND. As those inflections come to bear in DRAM particularly in the periphery we would do well in inflections. So inflections are great opportunities for Applied particularly as those inflections are going more to materials innovation.

Gary Dickerson

And I guess one more thing I would say on this one is, I really believe that a really key theme is around the materials inflections. If you look at what’s happening in the foundry business, it’s about transistor interconnectors becoming more difficult. And that’s all new materials enabling these changes in device performance. The same thing is true certainly in NAND. And if you look at DRAM to keep scaling those devices from a cost effective standpoint, there are also going to be major changes in the future around materials and devices that are also playing into the sweet spot of Applied Materials.

Operator

Your next question comes from the line of Timothy Arcuri with Cowen and Company. Please go ahead with your question.

Timothy Arcuri - Cowen and Company

Thanks a lot. Couple of questions, first, Gary how do you think about the trajectory of this year? You just put out a billion dollars in foundry orders and you put up a billion dollars in orders out of Taiwan, phase one of a large 3D NAND project is basically done now and we’re sort of waiting on FinFET to ramp. So do you at all worry that there is this pause sort of in the middle of the year or do you think that there is enough other stuff happening?

Bob Halliday

Hey Tim, Gary just waved to me to take this one first. We got to get one of those video conferencing systems. So here is what [indiscernible] help a little bit. If you look at the last couple of years, there has been little bit of seasonality where the big foundry customers in particular buy more heavily -- give you orders more heavily in the [frontend of the year] get ready sort of just to be back to school, now it's more Christmas and Chinese New Year.

So, you are probably going to get a little bit of that waiting this year. It does look like it’s not going to be a big drop-off in the middle as people predict because we have more spread among different customers, so it’s more spread out as I said earlier.

The second one is that we have these technology inflections. Now those are the ones that you guys are poking at that are harder to lead. How big is 20 nanometer and how soon are FinFETs ready. What we see is customers aggressively pursuing those and frankly aggressively pursuing them with some of our tools and our solutions.

The cutover from one node to another, not exactly sure of the smoothness of that cutover, the two things that make us feel better are one is, some more customers buying for different nodes right now and two, they are really aggressively pursuing these technologies because they are very compelling. And three, they are aggressively pursuing it with us. So is there a little bit of a bubble in here somewhere maybe, but it's hard to read because of the inflections.

Timothy Arcuri - Cowen and Company

Got it, okay, thanks. And then maybe just Gary, relative to the proposed merger, and I don’t know if you can imagine this question, but are you seeing any customer blowback not from their tone or anything like that but from them maybe trying to shift share to other vendors in an attempt to sort of like prepare for, when this merger closes, are you seeing any of that?

Gary Dickerson

Well, Tim, the key thing for our customers, they are all in really strategic inflections for their business, if you look at the foundry customers ramping 20 nanometer successfully is critically important, transitioning the FinFET technology is critically important, this transition from planar to 3D NAND, all of those things are involving really in the sweet spot for Applied Materials. And I am travelling to Asia probably every other week now, meeting with a lot of customers. We still see tremendous pull from customers as these are the strategic issues, strategic inflections that are facing our customers and we see very strong pull and still confident in our ability to grow the company. And certainly we also see a great opportunity in the combination with Tokyo Electron to accelerate our products and the combination again we believe will help us address these key material innovation challenges for customers that are the key strategic issue for this industry.

Bob Halliday

Yes, Tim, maybe I can jump in this one a little bit. I mean there is, the theory put forth that customers might be concerned about that but if you look at the track record, Gary and I have together for 10 years and Gary for 18 years before at KLA. We believe the win-win for customers and ourselves is to aggressively invest into new products which really help them get to the next device and help yield nice performance, and that’s the win-win. So, if you look at [vary] where we went from 30% margin to 75%, it was because we got better solutions. If you look at Applied, what we are doing are aggressively putting money in to products, technical resources in the field and that’s to help the customer. So, there is a long body of evidence that’s our track that help customers do better job with their devices.

Operator

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

Patrick Ho - Stifel Nicolaus

Thank you very much and also congrats on the quarter and the outlook. Maybe a first question on, in terms of the EUV story out there, with further delays that are likely to come on that front, have you revised your etch and deposition market outlooks given that you are going to see increased double and multiple patterning techniques?

Gary Dickerson

Well, I think definitely that provides a growth opportunity and as I talked about earlier, we are gaining share in etch especially in foundry and in the NAND business. So, we have really good momentum there. We are seeing strong pull from customers also in the deposition area. Hardmask is an area where we have a pretty strong position and then we have new technologies some that we talked about around selective material removal and some other areas that are coming out of the technology pipeline that also create opportunities for us. So, absolutely we look at this as a good opportunity for Applied.

Patrick Ho - Stifel Nicolaus

Okay, great. And maybe just a question on the memory side, on the NAND side, customers have to make that difficult choice between migrating on the planar side or transitioning to 3D NAND, how are you guys helping them along in that transition and what are customers doing in terms of making that challenging decision of expanding the current technology versus going full tilt into 3D NAND?

Gary Dickerson

Yes, all of the customers are very focused on trying to make this transition from planar to 3D because it is compelling. If you look at the big growth opportunity in the transition from planar to 3D NAND, that is a big focus for all of our customers. As we talk about first generation, so you have a certain number of layers that you are building up when you go to 3D NAND. That first generation for us, we see about 25% increase in our total available market and we’re also gaining share in the initial customers that are transitioning into 3D NAND. One of the things we talked about at the July 8th Investor Meeting is where are the critical deposition steps, as you are making this transition and we talked about our position in that inflection and that -- we're still pretty much on track Patrick with what we talked about last summer. Certainly the inflection is around thermal deposition and etch, we have some very strong products. That’s where a lot of this investment is going for our customers, very strong pull. The first generation for us is going well and we believe there are more opportunities going forward.

Operator

Your next question comes from the line of Terence Whalen with Citi. Please go ahead with your question.

Terence Whalen - Citi

This question relates to the timing of completion of the merger. Can you update us on what your expectation is for that time, how that’s changed and what milestones we can look for in the coming couple of quarters. Thanks.

Gary Dickerson

So nothing has really changed relative to what we’ve talked about previously on the economics or the timing of the merger. We’re moving through the regulatory process. We mentioned that we’ll be filing the S4 after we file our 10-Q later this month. So I would say we’re still on track with what we had discussed before mid to late 2014 relative to the approval and the close.

Terence Whalen - Citi

And the switching gears a little bit, I think you mentioned had record revenue levels and current implant and also PVD. Maybe just focusing on EPI and PVD, now that you’ve seen sort of initial installations of 3D NAND and also of FinFET for foundry, what are your expectations for growth of the EPI segment in 2014 and perhaps of PVD as well? Thank you.

Gary Dickerson

Yes, I think if you look at where the industry is going, the performance gains are really being driven by new material. So if you look at the focus in foundry, it’s how do I add more features, better performance but I also have to have low power and battery life. So what we’re seeing - and the same thing is true again. As you make the change from Planar to 3D NAND, as we talked about is very focused on materials innovation.

If you look at future memory devices like MRAM, very PVD intensive type of a process, many new materials. And I really think that these are major changes for the customers, major changes in device architecture, many new materials and we really see that continuing. If you look at where do people go beyond first generation FinFET devices, we really see more EPI steps, more PVD, many new materials, and when I’m talking to the customers, this is the key challenge for them, how do they keep driving Moore’s law and make that cost effective. And materials, if you look at what’s happened with Planar to 3D NAND change, it’s less litho intensive and really focused on materials. We see that trend continuing forward.

Operator

Your next question comes from the line of Stephen Chin with UBS. Please go ahead with your question.

Stephen Chin - UBS

Great, thanks hi Gary and Bob. Nice results off there. My first question was just a follow up on the reported foundry orders in the quarter. It looks like Applied’s orders and foundries was significantly stronger than Tokyo Electron’s reported foundry orders. I was just wondering is that because Applied has this extra month of January in it, in the month of January, it was a very strong foundry order month, or is there something more complex to that?

Gary Dickerson

Yes. We think we’re doing very well as a company with foundries particularly in Taiwan because if you look at what they’re doing Steve, it’s 20 nanometer devices, big spending early part of the year and then later in the year its FinFET. 20 nanometer devices use PVD tools big time for things like Metal Gates, use FE tools big time.

So the inflections going on at the foundry play very well to our strains. If you look at PVD, very strong share there, very high share in FE, it’s a growing market. The question we just got asked about FE, everything we see empirically about the FE market is good and the directional element of the FE feels very good. So I think the products we offer and services for foundries are very compelling at this point and I think that helped Applied Materials more than other companies.

Stephen Chin - UBS

And maybe as my follow up question on 3D NAND, maybe you could share some more color on AMAT’s share of etch versus deposition in this 3D versus planar transition unit. It sounds like Applied is doing quite well in etch and 3D NAND. But just curious how -- I guess Applied’s deposition momentum is in 3D NAND. Is it just as many incremental wins as etch? I just couldn’t tell from the color.

Gary Dickerson

Yes, on the 3D NAND I think one thing, if you go back and look at what we discussed at the July 8th meeting. Basically what we did on the deposition side was lay out many of the critical steps across the largest customers and we talked about winning 75% of those steps. We are still very much on track with what we talked about July 8th. We have some very, very good products that provide customers with better device performance and yield and certainly that is a critical element for them as they make this transition. But we also have very good cost of ownership relative to other choices that they could make there. So deposition we looked this year will be very strong for us. PVD, we believe that V-NAND will be strong, additional share gains for us in foundry. So 2014 for the CDD business also will be very strong for us.

Operator

Your next question comes from the line of Tom Diffely with DA Davidson. Please go ahead with your question.

Tom Diffely - DA Davidson

Maybe another question on that topic. You talked about some nice share gains last year, I’m curious, do they come at the expense of Tokyo Electron.

Bob Halliday

There’s really very little overlap, if you look at the products that we have, you know TEL is track, batch furnaces, Webclean, there’s really, really very little product overlap between the two companies.

Gary Dickerson

I can’t think of anything because the only place we normally have similar products is etch and we’re focused on conductor etch, they're in dialectric etch.

Tom Diffely - DA Davidson

Okay, and I’m wondering if you just give maybe some broad strokes on how you think the TEL market share went last year.

Gary Dickerson

Oh, we’re two separate companies. We don’t have enough insight into them to comment for them.

Tom Diffely - DA Davidson

Okay, then finally, you gave us the kicker you got the 25% increase you get going into 3D NAND. Do you have a similar number for going to FinFET, 40-nanometer FinFET?

Gary Dickerson

It’s a similar number, it’s in the same range. If you look at the transition from 20-A to the FinFET device node, it’s a similar number and as Bob said, as you go beyond even first generation FinFET we’re seeing some really strong pull for more materials innovation, more staffs like FE increasing as you go beyond first generation FinFET.

Operator

Your next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please go ahead with your question.

Krish Sankar - Bank of America Merrill Lynch

Two quick questions. First, Gary you mentioned about a $7 billion in NAND WFE [ph] this year and overall WFE of $31 billion to $34 billion. I’m kind of curious, of that $7 billion how much do you think is 3D NAND, or of the overall $31 billion to $34 billion what percentage of spending is 3D NAND and FinFET, where you’re seeing this technology inflexion.

Gary Dickerson

What I would say on both of those, if you look at the FinFET investment, a lot of technology buys there, and then you have - certainly technology buys across the board, and the 3D NAND transition from planar. So it’s probably 25% - 30% if you look at both of those technology transitions. It could be higher, depending on the adoption, the rate of adoption, but it’s in that range somewhere.

Krish Sankar - Bank of America Merrill Lynch

And then as a follow up, I have a question on a -- a clarification on the numbers you guys gave in September post the merger. The 17% tax rate post the merger by reincorporating in Netherlands, is that as simple as reincorporating in Netherlands or do you need to ship a certain amount of revenue out of Netherlands or have some employee, a certain number of employees there?

Gary Dickerson

Mostly incorporating in the Netherlands.

Krish Sankar - Bank of America Merrill Lynch

So just reincorporating is good enough. You don’t need any revenue out of Netherlands.

Gary Dickerson

Our substantial operations will not [indiscernible].

Operator

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

Mahesh Sanganeria - RBC Capital Markets

Again going back to the foundry, definitely you reported pretty good numbers, much better than your peers. I’m just trying to understand the linearity of 20-nanometer and 40-nanometer. Since 20-nanometer is going to be a smaller node, is it fair to say that the capacity addition for 20-nanometer is almost complete and the next round of foundry orders will be more along the line of FinFET?

Gary Dickerson

We still see 20-nanometer being a significant amount of 2014 CapEx. The other thing is that a lot of the tools are similar for 20-nanometer and FinFETs including a lot of the backend lines stuff.

Mahesh Sanganeria - RBC Capital Markets

And do you see multiple customers doing 20-nanometer or most customers will focus on 16-14 or FinFET technology and there’s going to be just one customer on 20-nanometer.

Gary Dickerson

You know, as Bob said, typically what happens is that customers buy the tools for multiple technology nodes. So when they’re buying for 20-nanometer, some of those tools are also going to be used as they go forward in FinFET. Some will stay at the previous technology node. But we don’t really see significant production buys only for FinFET technologies in 2014.

Operator

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

Edwin Mok - Needham & Company

So, on the WFE [ph] outlook for top 10 % to 20%, I felt that [indiscernible] high obviously with early on the year but Bob or Gary, what do you think will drive the upside, downside? Is it broadening all customer or is it specific if you pick a project that might not happen or happen this year? How do you kind think about potential upside or downside to that range?

Bob Halliday

Upside downside on the -- Gary can answer little bit. I think, I will give you the characteristics, then the potential upside downside. The characteristics of the headwind as I said earlier are, the spending is a little bit more diverse. So you’ve got more foundry customers spending, some more memory customers spending money. So that’s a good thing and some of those people not all have the same technology inflections. So that diversity gives a little bit incremental confidence. Second is the other big thing going on this year is the technology inflection between planar NAND and VNAND and between 20-nanometer and FinFET. That’s what I was debating.

We see a lot of push for those. What would make the year bigger, I don’t know. If there was a bigger production buys of 20-nanometer or earlier production with the FinFET. So that would be foundry issues. Now, I do think the spread out to multiple foundry customers gives you a little bit of cushion on the volatility. The second on VNAND, I think it’s going to be a pretty good NAND year. We see it in planar entry there. The rate of transition from one to the other, it’s little hard to predict. What I will say is common to both FinFET and VNAND. If you look at the device benefits of VNAND long term very, 3D VNAND very compelling, FinFET very compelling.

So there is a lot of incentive to customers to quickly push to those for the absolute device benefits and the competitive benefits. Those things would make you feel little bit more optimistic that spending will be good.

Edwin Mok - Needham & Company

And then I guess one question I have on Tokyo Electron merger. I think you guys talked about the benefit including some synergies, especially on the revenue side synergy. I was wondering how do we kind of think about that? Is this something that we should kind of think about or the technical synergy you can get and therefore those will start to drive incremental revenue that we should expect and obviously the merge is done immediately in 2015 or is there something the technical synergy will eventually lead to newer product or better product and as we know in semi space it takes one or two years just to get the product into the customer hand and get the qualifying ramp? How do you kind of think about the timing of those revenue synergies income?

Bob Halliday

That’s a good question. There is a limited amount that we can do right now relative to really understanding a lot of details around the technology synergies between the two companies. But I what I would say is that the big challenge facing the industry, as I’ve talked about before is material innovation. Materials innovation is really driving performance gains in logic and memory. And we really think that will increase in importance going forward. Really innovation is also connecting dots and to the extent that Powell has some very good complementary technologies that we can work together in providing new solutions -- we do think there is a real opportunity there and this is the strategic issue facing the industry is how fast do we make these technology transitions into the new devices. You see it today with FinFET and 3D NAND being really difficult challenges. So we’re pretty excited. As I talked about earlier, the interaction we’ve had with the TEL people so far has been very positive, very enthusiastic. We would love to get working on those technology synergies and so we’re looking forward to the close and we can start getting into more detail.

Operator

Your next question comes from the line of Vishal Shah with Deutsche Bank. Please go ahead with your question.

Chad Dillon - Deutsche Bank

This is Chad Dillon on the line for Vishal. You've been very focused on gaining share in the inspection market over the past year. So I was hoping you could discuss where you think your share is at 20 nanometer, and how it compares to 28 at this stage of a new node ramp?

Gary Dickerson

So we have very, very strong pull from customers. As we’ve talked about earlier we’re making investments both in terms of product development and also in terms of application support. We’ve had a lot of momentum in foundry and logic. As we talked about we had record inspection sales in the last calendar year. And we have a very strong position in e-beam review. And that business is pretty sizable and we’re really extending our leadership in e-beam review, pretty much across the board at all of the different customers.

In the foundry business, the momentum there has been very good. That is part of what’s contributing to our record in the foundry in the last quarter. The layer penetration for us is increasing as over the last year, really across the board we also talked about in logic having a customer adopting the UVision 6 for their most advanced technology node. So we’re pretty optimistic.

Chad Dillon - Deutsche Bank

Okay. And then as you progress through 2014, what’s your expectations for the first half, second half mix of WFE spending if you break it down between memory versus foundry/logic?

Gary Dickerson

So we have two questions then; wafer fab equipment spending first half, second half -- and the second is the breakdown between them. So if you look at I think the halves in total are pretty equal in terms of the mix -- pretty equal to -- you have inflections going on, that makes it a little harder to predict. So we think that the foundry could be pretty strong in the back until we get either 20-nanometer that have some legs or FinFET to come in. So we’re looking at both to be pretty even through the year. Maybe getting DRAM is a little bit heavy on the front end.

Operator

Your next question comes from the line of Mehdi Hosseini with Susquehanna. Please go ahead with your question.

Mehdi Hosseini - Susquehanna

Yes. I have two questions, one for Bob. Going back to slide that you have first announcement of for the Tokyo Electron merger, the 240 earning based on $37 billion WFE. How should I think about the stability of the model with different scenarios in case or worst case scenario we don’t hit the $37 billion of WFE?

Bob Halliday

That’s a good question Mehdi. If you go back to the Analyst Day at July 8th, we put a couple of different models up for 2016 for Applied Materials. We had a $37 billion model which was 25.6% of operating margins and a $30 billion model which I think is about 22%, 23% I don’t know, it was in the low 20s, a little less couple of points less. And then models weren’t as important to me as what the message was. The message was we are not running the company into a $37 billion wafer fab equipment number. We are managing Applied and we’re going to manage the combined company to a reasonable sort of mid-cycle number of around $28 billion to $30 billion. Our cost structures would be built around that, our investments would be built around that, our flexibility would be built around that. That’s how we will manage the company. We’ve had good alignment with Tokyo Electron that they agree that’s a good way to manage a company in this industry. And if we can do that and achieve low 20s and $30 billion and wafer fab equipment I think you’ll have great confidence that if $37 billion happens we’ll hit our model.

Mehdi Hosseini - Susquehanna

Okay. And then one clarification question for Gary. During your last conference call you told us that in the area of 3D NAND opportunities per wafer start would increase by 30%. And I’m assuming the TEL opportunity. And today you’re talking about 25% increase. What am I missing here?

Gary Dickerson

Well, so there is really a range in terms of how much the CapEx increases for us. There is first generation versus second generation 3D NAND. It’s in the range on a first generation in 25%-30%. These are -- it's difficult to call that closely in terms of what that exact number is on the first generation but it’s pretty significant. If you look at some areas, some areas are up more than 50%, some specific markets for us are up significant amount. But the first generation is in that range and of course as you know, they are going to keep going vertical to drive this scaling beyond the first generation. So the increase there is more. So it’s really the starting point and sometimes people will talk about 3D NAND overall. We’re trying to be specific around first generation, what that number will look like.

Mehdi Hosseini - Susquehanna

Can I ask you a follow up?

Gary Dickerson

Sure. Go ahead.

Mehdi Hosseini - Susquehanna

I’m little bit confused because I understand the number of statutory is up, the number of the steps goes up, obviously the capital intensity is going up. But we were in Phoenix this past Friday and one of the memory manufacturer with the goal of having 3D private line sometimes in the next 24 months is also talking about very proven CapEx, capital intensity actually going down in fiscal year ’15. So help me reconcile the two different messages from your customers and from equipment suppliers. What am I missing here? They’re talking about capital intensity on the management going down and after 2014 but equipment industry is seeing something different.

Bob Halliday

Let me take a shot and then Gary will give you better answer. I get asked this question in a reasonable amount. I get asked the questions well, it was one of the companies that talked about overall capital intensity going up, number one and number two, they’re doing their overall turn. So the first question I typically get asked is overall. Well you got to look at the mix. Now if you go look within foundry, within NAND, within DRAM and Logic and let’s pick foundry where we talk a lot about the biggest part of the share, I don’t think anyone doubts capital intensity is going up. If you go look at how much it costs to build a 50,000 wafer fab equipment, the cost is gone up. So within that segment it’s gone up. If you look at Logic it’s got more expensive and where you’d have to parse [indiscernible] is Greenfield versus reuse and reuse is a bigger issue than Logic.

If you look at VNAND, it’s going up for first generation in total but it’s very much going up where we play which is deposition, etch and thermal. If you look at lithography which has been really driving the cost bus for NAND in the last number of years is going down. The next generation VNAND is probably 50 nanometer target versus 10 nanometer. So it’s reuse through existing lithography. So they can be very prudent in NAND, in that total CapEx because the big cost of lithography has been eased. What they doing is it’s much more cost effective for them to use things like etch, deposition and thermal.

I think then when you go to DRAM which is the final market, the cost has been moderate but the cost has been somewhat obscured because you haven’t had lot of new Greenfield. So measurements were a little bit harder. As you look at next generation the capital intensive -- entry of a new DRAM fab is going up some, particularly because the periphery is becoming more logical, like it will fall to same capital intensity that foundry and logic have. So, I think you go look in the mix between -- next featuring Greenfield and reuse and then you will look at the mix within equipment type. And I think those things are consistent with what we’ve said, particularly the NAND question you asked.

Michael Sullivan

Okay, thanks, Mattie. And I know we are running a little bit over but if we have one more on the line we will go ahead and please try to help.

Operator

Yes sir, your final question comes from the line of Ben Pang with Northland Capital. Please go ahead with your question.

Ben Pang - Northland Capital

Thank you for squeezing me in. First on the etch share gain, you commented on 5% share gain and kind of concentration on conductor etch. Does that imply your conductor share gain is like 10%?

Bob Halliday

Yes, I think if you do the math that’s pretty close.

Ben Pang - Northland Capital

Okay. And then in terms of your wafer fab equipment outlook, a lot of technology transition et cetera and kind of broadening of the base. Does that imply that the spend is going to be I guess less tied to the utilization rates and kind of the end demand for semiconductor this year?

Gary Dickerson

I’m sorry Ben. I lost you on that one. The voice faded for on me a second. Could you just quickly repeat it?

Ben Pang - Northland Capital

I guess the base case for semiconductor growth in the high single-digit type situation and your utilization rates are kind of not great right now. Do you see a big impact to the pattern of wafer fab equipment spending this year on those type of dynamics. Since it’s mostly technology transition I would assume that it doesn’t matter whether the utilization rates move up and down a little bit or the semiconductor demand get cuddled but. That might not actually impact the spending on the technology transition. Is that the right way you guys are actually try think about this?

Gary Dickerson

Well, it was probably somewhere in the middle, I think there is a lot of majority in there to what you say because in foundry big technology inflections spreading out to multiple customers. So, I think there is going to be substitute spending driven by capacity but also technology. I think DRAM, when you see DRAM prices pretty good, it would imply, you might have a little upside because utilizations probably run pretty, if you remember they had that fire in China last year at Hynix too. So, DRAM might play for you actually. FLASH, you got to sort through how much capacity is there between planar and VNAND and how much will that might increase their sales because it’s got better endurance reliability, they may increase their addressable market for FLASH. So, the short answer to your question is I think you’re probably right and I think the trends are okay on that.

Michael Sullivan

Thank you, Ben for your question. And we’d like to thank everyone for joining us this afternoon. A replay of this call will be available on our website beginning at 5 PM Pacific Time today. Thank you for your continued interest in Applied Materials.

Operator

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

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

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

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

Source: Applied Materials' CEO Discusses F1Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts