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Applied Materials, Inc. (NASDAQ:AMAT)

2012 Investor and Analyst Meeting

March 28, 2012 9:00 am ET

Executives

Michael Sullivan - Vice President of Investor Relations

Michael R. Splinter - Chairman, Chief Executive Officer and President

George S. Davis - Chief Financial Officer and Executive Vice President

Randhir Thakur - Executive Vice President and General Manager of Silicon Systems Group

Charlie Pappis - Group Vice President and General Manager of Applied Global Services

Unknown Executive -

Mark R. Pinto - Executive Vice President and General Manager of Energy & Environmental Solutions

Thomas T. Edman - Group Vice President and General Manager Display Business Group

Joseph Gerard Flanagan - Senior Vice President of Worldwide Operations & Supply Chain

Analysts

Unknown Analyst

Krish Sankar - BofA Merrill Lynch, Research Division

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Satya Kumar - Crédit Suisse AG, Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Operator

Today's presentations contain forward-looking statements, which are all statements other than those of historical fact, including those regarding Applied's performance, market outlooks, opportunities, financial models and business 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. Risk factors are described in the accompanying slides and in our SEC filings, including the most recent form 10-Q. Forward-looking statements are based on information as of March 28, 2012, and Applied assumes no obligation to update such statements.

Today's presentations also contain non-GAAP financial measures. Reconciliations to GAAP measures are contained in the slide presentations, which are available on the Investor page of our website at www.appliedmaterials.com.

Ladies and gentlemen, please welcome Vice President of Investor Relations, Mike Sullivan.

Michael Sullivan

Good morning. It's my pleasure to be the first to welcome you to the Applied Materials 2012 Investor and Analyst Meeting. Thank you for joining us today, and I'd like to thank everyone both here from New York, from the financial community locally, and especially to everyone who's traveled in from around the country to share the day with us. Today's event is being webcast, and I'd also like to welcome everybody who's joining us via the Internet. It's always our pleasure to see so many familiar faces in one room, and we appreciate having the chance to give you an overview of Applied Materials' markets and business.

Now we did have a little bit of creative fun with the opening video, showing you how Applied finds itself at the center of the mobility trend that's driving so much of what's happening in the electronics industry today. 2012 is a landmark year, and that it's going to be the very first year in which shipments of smartphones, tablets and notebooks PCs will achieve 1 billion units in annual shipments. Inside each of these mobile devices are dozens of chips, virtually all of which are made using Applied Materials tools, tools that run more efficiently with the help of Applied Global Services. And most of these devices are controlled with the help of touch-enabled mobile displays that are made by our customers on Applied's equipment. Our engineers come to work each day with ideas for how to make these devices even faster, smaller and better. And looking around the room, we see you using products that our people and our products help our customers to make possible. That's very exciting for us personally, and it's also a very good business.

So my job for the next couple of minutes is to walk you through today's agenda. Mike Splinter will take the stage in just a moment to give you an overview of Applied Materials in 2012. George Davis will then set the financial context for the company in each of today segment presentations. Randhir Thakur will talk about our silicon equipment opportunity, and Charlie Pappis will give you an update on Applied's Global Services business. After our coffee break, Mark Pinto will discuss our solar market and equipment recovery, while Tom Edman will talk about our display business, serving both TVs and mobile devices. Joe Flanagan has traveled in from Singapore to give you an update on our global operations strategy, and we'll save plenty of time for Q&A. We'll conclude the webcast by 1:00, and we hope that those of you who are here in New York will join us for lunch and some informal one-on-one discussions with our speakers.

Now there is a huge amount of technological change happening in semiconductors and solar and display, and it's really far too much to squeeze into the 3 hours of presentations that we've developed this morning. So we're also offering technology breakout sessions from 2:15 to 4:45. Klaus Schuegraf is here, and he'll be talking about emerging 3D transistor technology. We're also very pleased to have Bob Halliday here to discuss Varian's implant technology and how that is advancing our transistor roadmap. Charlie Gay, the solar industry pioneer, is also here to discuss our solar roadmap. And Max McDaniel is here to discuss the display technologies that are revolutionizing mobile devices and also the emerging category of OLED TVs.

So finally, for me, one housekeeping item. We're planning to deliver a lot of information in a very short amount of time, and the good news is, you already have access to all of today's presentations and hopefully can relax knowing that you don't need to take any detailed notes. There's Wi-Fi in the room. The USB drive that you received on your way in has links to all of the presentations, which will be made live as each speaker takes the stage.

So with that welcome and introduction, I'd now like to invite on stage Applied's Chairman and CEO, Mike Splinter. Mike?

Michael R. Splinter

Thanks, Mike. Good morning, and thank you for your introduction. Good morning to all of you, and thank you for joining us this morning and supporting Applied Materials. What you're going to hear today is a lot about Applied Materials business, but hopefully, we're going to be able to communicate a few things more completely.

First of all, the growth in our business through share gain and introduction of new products across all of our businesses, but primarily, in our semiconductor business, you should be able to hear that. You're going to hear about our Varian integration. This is a merger that we're very focused on, integrating the company, integrating it quickly and achieving the synergies that we've already promised. You'll also hear about our business models and the adjustments we're making there to reflect the realities of our business, plus the Varian integration. You're going to hear about what we're doing in EES and display to lower the breakeven point and make sure that we're profitable throughout the cycles that we see in these industries. And finally, you're going to hear about our capital priorities and how we're allocating the great cash flow that we have in our company.

Before I get started, I'd just like to introduce your speakers today. Next after me is going to be George Davis, our CFO and Executive Vice President. George, why don't you just stay standing for a minute and then everybody will be recognized. After George, Randhir Thakur, General Manager of our Silicon Systems Group and Executive Vice President. After Randhir, Charlie Pappis, the General Manager of Applied Global Services and group Vice President. After Charlie, Mark Pinto will be speaking about our Energy and Environmental Solutions group. Mark is also an Executive Vice President of the company. After Mark, Tom Edman will be speaking. He's the General Manager of our display group and the group Vice President. After Tom, Joe Flanagan will be speaking. He's the General Manager of our worldwide operations based in Singapore, as Mike Sullivan has said. Also in attendance is our General Counsel and Corporate Secretary, Senior Vice President, Joe Sweeney. Hopefully, you'll enjoy what they have to say this morning and find it informative. Thank you, guys.

So today, I'm primarily going to be talking about the future of Applied Materials, but I thought we ought to start by looking back at 2011. 2011 was a record year for Applied Materials, in earnings per share, in revenue and in cash flow. Our earnings per share was $1.30, an all-time record, and our revenue was $10.5 billion. Inside of that $10.5 billion, we generated almost $2 billion in Energy and Environmental Solutions, a record year. But probably more importantly, in that business, we generated $450 million of operating profit. Certainly, that market has changed during the last 12 months, and we'll give you a lot of details on that in a few minutes.

But we also found it a challenging environment for us in share. There were headwinds in this market, in particular, because of record spending on lithography and record low spending in the DRAM area where our share is strong. We expect -- during last year, we lost 3 points of share in wafer fab equipment spending despite growing in our SAM in 6 of 8 of our divisions, growing our share in solar and growing our share in display.

During November, we got approval for our acquisition of Varian Semiconductor. I think this was extremely timely approval. Varian Semiconductor really plays into our suite of products on advanced transistors. Advanced transistors are a key inflection point that's happening today in the industry and very important that we get the organization integrated, not just to achieve the cost synergies, which we're committed to do and exceed, and George will talk a bit about that, but also to get the revenue synergies and creating new products for our customers and also having the impact of Varian executives joining the Applied team and affecting all of Applied Materials.

And finally, during 2011, we gave back $865 million of cash to shareholders, almost $400 million in dividends and $468 million in share buyback. So that really wraps up 2011. I thought as we start to talk about 2012 and beyond, it would be good to chat a little bit about our strategy. Of course, many of you know the company quite well, but I thought a brief review, a refresher would be good.

First of all, our strategy starts with our core competencies. Pretty much everything in Applied Materials is built on these fundamental capabilities that we've developed over our more than 40-year history. Thin-film engineering, we are arguably the best in the world at being able to deposit almost any film on any substrate at any dimension. Commercializing of very complex systems, the machines that we make, being able to deliver them, set them up, develop the applications with our customers, is an incredible strength. And finally, be able to do that in a global basis, and that scale respond to customers very, very quick ramps.

With those core capabilities, we want to address the inflection points in the industry. There are many inflection points going on today. Randhir likes to say that there are more inflection points in the next few years than there have been in the last 15. But just to give you an idea of areas that we're really focused on at this time in each of our business, and semiconductors, advanced transistors, new memory devices, 3D, NAND and the like, every base, these are the bases of these technologies. Advanced packaging. The type of packaging has to change in the next few years to enable more mobile capabilities, as well as re-architecture of the system to continue to advance performance. And Inspection, as the devices continue to get smaller and smaller, the dimensions shrink. Defects become more and more important. Finding those defects becomes more and more difficult. Randhir will talk a bit about that. In our display industry, we're seeing vast changes in the technology, particularly in mobile where touch is becoming ubiquitous and new kinds of technology like metal oxide and OLED are enhancing the visual experience of the user. And then in solar, we have to continue to drive not only the scale, we have to remember, this industry is still in its infancy, but also the efficiency of those solar cells and Applied Materials really at the center of that. In working at these inflection point, we're delivering products and services and solutions to our customers that really help them with their highest value problems. These problems are things that are going to enable them to move into new areas of business for themselves. And if we're really delivering those differentiated solutions, our financial results will be strong. With strong financial results, we'll be able to invest in our future, in new products, in new core competencies to keep the cycle going inside of Applied Materials but also to return cash to you, our shareholders.

But when you think about our strategy, we have to think about customers at the center. I know almost every company can say that, but when you look at the markets that we have today, we see consolidation of our customer base in every market that we participate in. It's been certainly well chronicled in semiconductors but also in display, and now we're seeing rationalization start to happen in solar as well.

Just a brief description of the markets and what's happening there today. If we start, that's supposed to be a wafer up in the left-hand corner. Hopefully, you could recognize that, but these are the symbols for our business: semiconductors, services, display, and the sun there, that means solar. But the mobility trend is clearly driving semiconductors today. The adoption of devices, smartphones, tablets, and I think we'll see more and better and new devices as we go into the future, is driving strong logic, foundry and NAND investment. We'll talk a lot more about that today. In the services, our growing installed base and the increasing wafer starts and our thrust into Asia to develop our service business, there is really what's driving that market and allowing us to grow in our services business. In display, we're clearly in a capacity downturn. The TV market, while it's growing, isn't growing fast enough to be able to encourage our customers to build new factories at the moment. We do think that this has been an all-time downturn, an extended downturn, and that investment will return in the future, certainly in China, by the end of the year and into 2013. But having said that, we're seeing growing demand for mobile displays. And as laptops and notebooks start to use touch, we think this is going to be a great benefit for Applied Materials equipment. And finally, in solar, we continue to see a robust end market after, remember, this market has grown by 50% the last 2 years, but also, we are in a huge capacity downturn. We'll talk about the details of that today.

There's a few trends that, mega trends I'd call them, that are driving Applied Materials business. First and foremost, this age of mobility, everybody wanting to do everything from anywhere. And at Applied Materials, we really find ourselves in a central position here to aid our customers to really attack this market. First of all, helping our customers create high-performance, low-power and high-efficiency chips. This is a tough problem, trying to create those chips that while they use less power to conserve battery life, have to enhance the performance, they also have to fit in a power and cost envelope. Creating new cells for flash memory and creating those -- the technology for those new displays that are going to enhance the visual experience of the consumer. Clean energy is moving forward in an even more rapid pace. Our role in that is to help our customers scale up, create their factories when they need them and to drive down the cost by improving the productivity of the technologies and improving the efficiency, the energy conversion efficiency. At the same time, the third global trend that we're seeing is the emergence of consumers in the emerging economies. We expect that there'll be over 1 billion new consumers that are going to be buying these devices of all types in the next 3 years. And over 800 million of those consumers will be in China and India alone, where people are truly willing to give much of their salary to have themselves available to these new capabilities, which really change their economic status and allow them to participate in the global economy and globally communicate.

Just to give you some details on what's happening on this mobility trend. I believe this is really the biggest trend that we've seen, the biggest game-changer since the commercialization of the Internet. This chart really, clearly shows what's happened since 2009. We've seen an inflection point in 2009, as smartphones and tablets started to come out in the scene. We're seeing smartphone growth rate of over 30% CAGR. We expect that to continue to grow at that rate for the next few years. Tablets had even higher growth rate as they start to penetrate the market and be over 100 million units next year. Even mobile PCs continue to grow despite some supply chain challenges this year. We expect that, that growth will resume in the second half of this year and be accelerated in the year to come.

So when you think about this, you'll see more than 1 billion units a year and next year being sold just in these categories. This volume growth, when you add it all up, is 20% CAGR on this total segment. This is a huge impact on growth -- on the need for growth and capacity. And it's accelerating the innovations in semiconductors, in software and of course, in equipment.

I'd just like to take you through a few of the -- what we're seeing as major consumer changes that are affecting our business, in particular, our business both in semiconductors and display. You might recognize these 2 devices, but from a familiar smartphone maker, the Apple 4 on your left and the 4S on the right. On the outside, they look pretty much the same. You can't really tell. But consumers really want the new device because it has dramatically increased features. But when you look inside these devices, there is quite a bit of difference. Because the features require more software and more control capability, the processor inside these devices has increased in size. So it's not just about the volume increase, it's about, for us, the size of the chip increase. And from this picture, you can easily see that the size of the chip has more than doubled, requiring twice as much capacity to address this market. But it's not only that. It's not just the volume and the die size increase that's affecting what our customers are asking of us. The third factor is, and this is a really fundamental change for foundries, for our foundry customers, and that is that this phone was introduced on October 15. And if you look back at the data for Q4, 90% of the sales were on the new model as opposed to the old model. It essentially says that after October 15, every phone was on iPhone 4S. That transition happened overnight. There was no real smooth transition, flow as you might expect in a consumer device. It was overnight. The impact on our customers, the impact on us is that capacity to build that chip has to be prepositioned ahead of the introduction. And it's an effect that we'll not only see -- that we saw last year, but that we'll see again this year. The third consumer behavior is that the demand for these features is so strong, people are anxious to refresh. A full 42% of buyers broke their existing contracts to get a hold of a new phone. We haven't seen that enhanced refresh rate, and I think we're going to continue to see those kind of behaviors as long as we need more features in this phone that people are excited to get their hands on the features that are being offered, enhanced visual experience, voice capability, video capability and cameras, more dense cameras and the like. And as long as people want to get these features, the die sizes are going to continue to increase or move faster to the next node of technology where the cost of capital per die is increasing at a significant rate that Randhir will talk about in a few minutes. And those die sizes will continue to increase as long as they fit into the power, this thing can't burn up, and the power and the cost envelope that's allowed by the footprint to this phone.

So what does this mean for us? The unit growth, plus faster technology ramps, plus increasing die size, and as you move to new technologies, we're seeing increased capital cost per die in double digits as high as 30% or 40% increased capital cost per die as you move from generation to generation. This will require sustained foundry investment, and that sustained foundry investment for Applied Materials is very favorable. Our exposure to foundries in 2011, we were able to capture about 20% of the foundries spending. We think in 2012, as they invest more in advanced transistors, we'll be able to capture about 24% of the foundry share this year and beyond. So those things add up to excellent growth for Applied Materials and also sustained foundry investment over the next few years.

What we've seen in the last 3 years is really unprecedented. We've seen wafer fab equipment spending exceed $30 billion, assuming that it will exceed $30 billion this year. We're pretty sure about that. Our estimate is between $30 billion and $35 billion of wafer fab equipment spending because the foundries need to spend this money to stay on a path of delivering the capabilities for smartphones and tablets and other consumer devices. What we're seeing also is that in 2011, it was a down year for DRAM, it was an up year for lithography, meant that it was a tough year for Applied Materials in share. This year, we're seeing a change to investments in advanced transistors, advanced structures, which is really a good thing for Applied Materials.

As we look to 2013, we think wafer fab equipment spending is going to continue at a high level, in the $30 billion to $40 billion range, with the base being pretty much the base that we're seeing this year, strong consumer buying in these mobile devices, resulting in strong foundry and NAND spending to keep up with that demand. On top of that, we believe you can move to the high end of this range if ultrabooks and Windows 8 are a success during the second half of this year and create increased demand in 2013. That would mean that DRAM spending actually gets above $5 billion, as well as DRAMs are able to be addressed at a wider range than they are in traditional PCs.

Closer to our business, it's been well chronicled that we're seeing consolidation among our customers. This has kind of put some numbers to the picture. During the last 12 years, we have basically seen the capital equipment spenders. The top 5 capital equipment spenders doubled their share from 36% to 75%. This creates certainly some concerns for us in that customers have more buying power, they're buying more, they're buying in bigger lots, of course. But it also means that we can focus more on these few customers with deeper and earlier engagements, focus our R&D and field resources where their R&D centers are. The spread-out among 20 or 30 customers is no longer necessary, but it also means that those closer coordination of our product line, of our roadmaps, how we're doing business together is changing as well.

Among us and our competitors, there's also consolidation of share. During the last 12 years, it's gone from 54% to 67%. Actually, it's gone up as much in the last 2 years as it has in the last 10 years. So we're seeing an acceleration of the consolidation. Certainly, it's been well chronicled through acquisition. Our acquisitions of Semitool and Varian were really aimed at focused areas and advanced packaging and advanced transistors and to enhance our product lines in those areas. There's also been share gain by the top 5 producers as well.

I want to shift gears away from semiconductors for a few minutes and talk a bit about solar. This is a business we started to get into more than 5 years ago and have had some ups and downs. 2011 was a very strong year. 2012 is a pretty tough year. But let me just talk about if I can back you up to where maybe at the analyst meeting last year. We had just come out of 2010. The deployment of solar end market was about 18 gigawatts. And at that time, we were thinking that there would be about a 20% growth or maybe a deployment of 22 gigawatts in 2011. At that time, capacity, as you can see on the chart here, was about 23 gigawatts. So the industry was pretty much in balance. Supply and demand was in balance. Actually, supply was much -- or demand was much stronger than 22 gigawatts, and people started to put on capacity. Boy, they put on a lot of capacity, all the way up to 40 gigawatts of capacity. We benefited from that explosion in capital buying and opening of factories. But then it -- that increase in capacity also drove cost reductions and really enhanced efficiency improvements.

So as we stand here today, last year's deployment was actually between 27 and 28 gigawatts of solar in the end market. So if we think this year that there can be a 20% increase, actually, we think it will be stronger than that for many, many reasons. But if we think that there's a modest increase of 20% up to 32 gigawatts of deployment, you can see that there's a substantial overcapacity here with 40 gigawatts of effective capacity. But one of the things that's happening here as the price of modules, the cost of those modules being produced and the efficiency gets enhanced is that a lot of capacity is coming off-line, becoming obsolete because certain producers cannot keep up with the efficiency threshold or they can't keep up with the cost treadmill.

So if now I can take you to a year from now, 12 months from now, and we assume that there's another 20% increase, modest by the growth rate that we've seen in this industry over the last previous 2 years certainly, where the end market expanded more than 50% a year. But we're just going to assume a 20% growth during this next year and assume that capacity stays roughly flat. If people don't add capacity this year, actually, the capacity will degrade. But for this analysis, I think it's fair to just take a small assumption under both demand growth and capacity growth. We can see that within this next 12 months, that capacity and demand will be in balance. You always have to have more capacity online than demand to take into account inventory build, seasonality, problems in the supply chain. So that would mean in the next 12 months, we're going to see this industry get back in the balance. But we're going to also continue to see prices and costs come down and come down aggressively. And in part, that's going to come down because of our drive in selective emitter, double patterning and now an implant to drive the -- help our customers drive up the overall efficiency, not just the average efficiency but as Mark will talk about later, the peak efficiency in this business.

So we're very focused on helping our customers in this light. We think that in the United States; in China, where a new feed-in-tariff was introduced last year; and Japan, where a new feed-in-tariff will be introduced shortly; and in India, there's going to be more than enough growth to satisfy the kind of equation that we put out -- put forward here.

So in our solar market, the end market is going to continue to grow. People want solar. Governments want to introduce clean energy. We're seeing the growth of this market, and we're seeing a fast growth in this market. We believe capacity will be balanced in the next 12 months, and that there's also an industry rationalization underway. There actually is a lot of capacity coming off-line, companies going out of business, idling their factories and the like. But as I said, we're not even taking that into consideration.

So for us, what do we have to do? We need to do 2 things simply and in a very focused manner. We need to continue to enable our customers' roadmap on efficiency and scale, and we need to reduce our EES breakeven point from $800 million down to $500 million so that we can be profitable in all phases of this cycle in this business. We've already reduced the breakeven point from $800 million to $700 million. We have a lot more work to do to be able to get it to $500 million. Mark will talk a bit about that today, as well as we'll give you many more details in our upcoming earnings call and continue to report on that as we go.

In our display business, TV demand has been growing but hasn't been growing very fast recently. We are in a 20-year, if you want to consider an all-time dip for TV capital investment. That means usually in this market it's followed by a pretty fast upturn. We'll see how that progresses in the year ahead. But we're seeing very strong investments and continue to see those as we develop and enhance our technology for touch panel, for new backplanes like metal oxide and low temperature polysilicon. We're really making disciplined investments in this area, but we expect to lead these technology transitions for our customers. We believe we're in the right spot here, and that our customers understand our technological capability to improve and help them with the mobility of their transistors so that they really can enhance the visual experience for their customers.

So to wrap it up, we're really focused on our shareholder value and how we're delivering that to all of you, our shareholders. There are 6 things that we're really focused on and you're going to hear a lot about today. First of all, gaining share and enhancing our product line, growing our SAM and TAM and investing at those inflections to gain that share.

Integrating Varian. We made a big investment. We took a lot of money to make that investment. We want to make this the best merger that we've ever seen in our industry. Varian is the largest and best company that -- and most synergistic with Applied, we think that this -- and it's going to be a great acquisition for us. We're going to accelerate our synergies in all aspects of the integration. We're going to drive down costs. We've made some major moves in our operations, moving our supply chain to Asia. We're going to continue to drive down costs. Joe Flanagan will talk to you about that in a few minutes. We need to lower our breakeven points in EES and display so that we can be profitable throughout the cycles. And as you heard in the last couple of weeks, we -- our board decided to increase our quarterly dividend to $0.09 or up by 13%. We expect to continue to increase our dividend going forward as our business increases, and you can see those as a proportionality. And we also approved a new $3 billion share repurchase program over a 3-year period. But also, this is our preferred way to return cash to you. So you can expect updates on that as we go.

And speaking of our financial performance and models, I'd like to now turn the stage over to George Davis, our CFO and Executive Vice President. So George, come on up and let's talk about our financial performance and business models.

George S. Davis

Thanks, Mike.

Michael R. Splinter

You bet.

George S. Davis

Thank you. Good morning, everyone. It's great to see so many people here. It's why we come to New York City. Actually, occasionally, people ask, "Well, let's have it on the West Coast." If we did come last week to the West Coast, you would have let 70-degree weather to come to a cold and rainy weather. In fact, you could almost -- I will say, though, today is absolutely a beautiful day. You could predict for the last 3 years what the peak hour of rainfall was in New York. It was always the hour leading up to the start of our meeting. So we basically only got the swimmers that made it to the meeting, so again, we're delighted to have you here.

As Mike said, we've got a lot to cover today. You're going to hear a lot about all the businesses from my compatriots, but I want to make sure we spend time on the models going forward, talk a little bit about the outlook for 2012, and of course, capital allocation and how we see that over the next few years.

I do want to look back. It's easy to say that 2011 was a record year, a lot of good things about it. Whenever you say record year, it just sounds like it was one of those years that everything just went smoothly. As you know, our markets, because of many of the dynamics that Mike talked about, are actually quite volatile even within the year. Semiconductor, for instance, everybody was anticipating strong foundry and NAND in the first half of the year, it rose very rapidly. And then we found ourselves in this position in the second half of the year where there was a big dropoff in those areas. We were all surprised by very strong announcement by the leading logic player, which provided a lift throughout the year, and quite frankly, I think it's part of the lift in the overall view of semiconductors going forward.

In AGS, very strong year, benefited from not only the rise in wafer starts, but utilization rates. We saw recovery in the 200-millimeter of equipment area. And so we saw about a 29% bounce off of an anemic 2010.

In display, it was only down 22%. So many people would say, "Well, that's sort of within the normal flowing cycle." It really hid a much deeper drop in our core display business and the rise of the mobility led display business, and you'll hear more about that from Tom when he talks. So a lot of movement within that.

And then within EES for -- really, for the third consecutive year, we underestimated the demand that we would see in the end market and also the significant demand that we would see for capacity additions. So a significant ramp impacting all of our solar businesses, followed by, of course, then the steep ramp-down at the very end of the year. So if you are in operations, and Joe will give you a little color, it's, again -- it's great progress on the year. But the operation side was constantly dealing with the movement up or down in almost every one of our areas. And part of that, too, is the customer concentration. If one customer decides to accelerate in the first half of the year and then pull back, you can see some pretty big swings. But all in all, when you get through all the noise, what we're seeing is a much firmer underpinning for demand within the businesses.

So Mike talked a little bit about the numbers. Let me just go one level deeper. We saw a 48% increase in earnings per share year-over-year. That was on about a 10% increase in revenue. Cash flow was up 41% to about $2.4 billion, so very strong underpinning for the business that came out of these results. OpEx was 19% of revenue. If you follow the industry closely, you know that's a very disciplined level. And what you saw was a movement of OpEx. We increased OpEx in the semiconductor area, and then as we -- as part of the exit of thin-film, you saw a reduction in our EES OpEx during the year.

One area that was clearly a red for us was performance against the published models. The model that we brought out last March really did not take into account the spending requirements that we would see to support the fundamental changes that are going on in the semiconductor markets, a much more concentrated set of customers, a -- the technology ramps that they are going through, the pace of technology change that they are going through requires a lot more partnership, a lot more joint development activities, more field resources so that the cycle time of innovation is shorter. I think Mike's example with the 4S just gives you a sense of the challenge that our customers are going through. And the expectation is, as one of their key partners, that we're going to work with them. So you'll see in the models that we're going to talk about today really a recognition of the spending requirements, but also the fact that we'll be building on the history of our spending or -- excuse me, the history of our performance for the last several years.

On the operational side, I know Joe is going to give you a lot more color on this. One of the things that we did see clearly in the year is a strong improvement in our tax rate. It was down 4.4 points over the year, reflecting really the continuing expansion of our activities in Asia and the impact that, that has on our tax rate.

So 2012, it's a pretty simple year for us when it comes to focus. Obviously, on the operation side, we're going to continue the roadmap that we have, particularly along the Asia supply chain. We're going to execute to the models that we're talking about in the semiconductor business. Clearly, in EES and display, operating this year is going to be more about getting the cost structure right as we deal with the very, very sharp downturn that both of those businesses are experiencing. If you look at EES and display breakeven points, I would say that display already has a pretty good breakeven point. We'll get it down to $400 million, but the real focus this year is on staying breakeven for the year. With EES, the movement from $800 million to $500 million is a big deal, and that will take us really into the middle of 2013 before we get there. We'll probably exit the year around $600 million.

On integration and value capture, as Mike said, our commitment is to really do the heavy lifting that always follows a major acquisition. And so everybody is keenly focused on that throughout the company. On allocation, we have always been very strong stewards of the balance sheet. We're going to continue with that, and I'll take you through in detail how we're going to be viewing our cash generation over the next 3 years.

Let me start with the models. And what this chart is meant to show you in very simple terms is how I'm going to describe each of the models so that we can take a look at how we built adding Varian to it. Because if you look at last year, our numbers did not include Varian at all. The November close really put Varian right into the start of our fiscal '12. In our -- last year, we talked about baseline models at $8 billion and $10 billion. And again -- so I'm going to give you what is our baseline model looking like without Varian, that way you can get a clear picture of how the legacy element of the model is changing. And then with Varian, essentially, the Varian add to the company is about $1 billion of revenue. Now, last year, it would have been $1.2 billion, and it would have been a little bit below that. So on average, it works out to about $1 billion. You'll see how we rolled into AGS and SSG as I go through it in detail. There's -- we're putting -- the revenue from Varian is only going to appear in SSG and AGS. Even though there is a solar product under development, until that product is really released, it is heavily driven by platform development in the semiconductor area, and so it will stay in that space for the time being. And then we'll end up with a consolidated model, and you can see we'll be talking about $9 billion and $11 billion, up from $8 million to $10 billion, showing the revenue add that comes with Varian. The model adjustments that we talk about will not include synergies. Those will come over time. I'll give you an update on the synergies as we go through today, but the base -- we're really adding Varian at the performance levels that it's been able to achieve over the last 2 years, which have been strong performance years with Varian. The synergies will be on top of that.

So let's take a look at the total company model pre-Varian. First, starting with a history, because I want to use historical performance as a context. If you look at our 5-year history of performance, it was revenue average, about $8.6 billion, operating margin at 18.8% or $0.83 of earnings per share. If you take the last 2 years, which were obviously stronger years relatively with the improvements in both SSG and in solar, you had revenue averaging $10 billion, $2.1 billion of operating margin and about $1.10 per share. So if we take a look at the new model, the baseline for the new model at $8 billion and $10 billion compared to the history that we had, you can see that the new model, as you move towards the upper end of performance, outperforms our historical performance, even as embedded in that really is a reduction from last year's models of about 4 points for semiconductor, 3 to 4 points for AGS. And I'll talk 2 reasons for those, pretty much the reasons that we've talked about all year. So it won't be new, news there. On display, really, pretty much no change there, a little bit softer on the -- a little bit on the low end, and I'll take you through each of those now.

So SSG. The baseline now at $4.5 billion and $5.5 billion, that was the levels that we talked about last year, 28% to 30% operating margin on the baseline before Varian. When you add in Varian, you can see the growth in operating margin, you add $1 billion and then the operating margin on top of that. The operating margin for the equipment side of Varian, the structure of their operating margin was a little bit lower than SSG's overall operating margin. And so it actually is a little bit dilutive on a percentage basis. It's obviously additive on operating margin dollars. And so you can see, when you put Varian in, and we've just again assumed $1 billion, $5.5 billion, you get a 27% to 29%, 31% to 33%. The primary reasons for the change in the model for SSG versus last year have been well documented. We've seen decreased spending in 450. We clearly have needed to add more field resources with the leading customers, and of course, we have the customer settlement that happened during the year that had about a 1- to 2-point impact on operating margins. The customer settlement impacted both SSG and AGS and has about a 3-year duration. So we're about 18 months into that already. Once that expires, then that should be a lift in the level of margin performance.

Again, if you look at the real impact of Varian over time, if you look at history, it would be somewhere between $850 million and $1 billion. Going forward, I think with the kind of markets that we're seeing, we think $1 billion is a good assumption, and we'll go from there.

So again, looking to AGS, you can see the new model relative to the historical average. Looking over the last 2 years, we'll be stronger. And actually, as you add Varian into the numbers, the margin structure for Varian is actually a little bit higher on the services side than it is at Applied. The reason for that is, we have a much larger services component within our services business, and that has a lower margin than more of a pure parts margin, which is more indicative of what you see at Varian. We expect both AGS and SSG to be close to or at their model in full year 2012, but certainly fully in the model by Q4.

In display, as difficult as last year was, this is truly the historic low for capital spending for televisions. Again, we're still seeing some spending for mobility. But at the end of the day, it is a extraordinary drop. And I think you get a sense for what -- how well display has structured their business to handle this kind of volatility. We've always had cyclicality. This is like the '09 test for display. And you can see that our expectations that will be breakeven or slightly better this year, there's a lot of work that goes with that, and we're continuing to lower the breakeven. But the real focus is get the cost structure down, continue to shift the supply chain to Asia and then quite frankly, maintain our ramp readiness because as many of you know, coming out of '09, one of the challenges was spending up at supply chain and getting it going again. And when you have 2 strong downturn years like display has seen, we have to be ready for what we believe will be a strong -- a much stronger 2013.

On EES, Mike's already covered the fact that we're going to get the breakeven down to 2013. We'll exit the year on a breakeven of about $600 million, so take about 2 quarters into 2013 given the kind of changes that we're going to have to make within that group. Plans are being worked in a number of areas, and we will keep you posted over time as we get closer to finalizing each of the incremental plans. We've already taken actions. We've reduced OpEx about 20%, again, just looking back over the last year. And there's been extraordinary reductions in the manufacturing side in terms of the cost structure supporting that activity.

There's no Varian, as I said, in the solar model. And as you can see, as you look at the model at $800 million, which was the old breakeven, we expect now to do better than 10% operating margins and then at $1 billion, 16% to 19%. And as we get into the -- into 2013, that's when we think you'll be back into the window for both display and EES, back into the revenue window where the models will come to effect. Neither EES or display will be at the low end of their revenue models in 2012.

So the total company model, when you add all of these together, you go from $8 billion to $9 billion on the low end, $10 billion to $11 billion, and then you see the operating margin at 16% to 19%, 21% to 24%, and again, $0.80 to $0.95 on the low end, $1.30 to $1.45 on the higher end.

So let's take a look at 2012 outlook in light of this. The market factors Mike has pretty much talked about, WFE, our base assumption is that they're going to be somewhere between flat and down 15%, so if you use kind of a midpoint of down 7.5%. AGS, a lot of moving parts in that. You're going to have 200-millimeter. Demand will be down. Utilization rates are down. Wafer starts are roughly flat. So there's downward pressure, but you also have the addition of Varian just as you do in SSG. So we see kind of flat plus or minus 5% for AGS, maybe up 7% to 13% for SSG in terms of revenue for the year. LCD, as we said, continues to be weak. That takes us down another 35% in the display area, with a focus on breakeven. EES is essentially -- a lot of the revenue that you're seeing today is effectively deferred revenue. If you look throughout the whole solar equipment industry, much of their revenue in the first half of the year has been deferred revenue from orders taken in 2011. So we'll be down 70% to 75% in EES and a loss of about $0.07 to $0.08 per share.

So when you look at that, taking the midpoint and building around the midpoint of down 7.5% in WFE, it gives us a revenue range of about $9.1 billion to $9.5 billion. Operating margin, again, in the range of 17% to 19%. The midpoint of that would be about $0.90. Now if you compare that to consensus today, consensus is at about $9.6 billion and $0.96. We think it's a little bit too early in the year to take the WFE forecast that would go with the $9.6 billion. But if you look at our flow-through and you look at the performance of the businesses underlying it, if we were at $9.6 billion of revenue, we would certainly meet or exceed the consensus number.

Okay. Next, I want to cover the capital allocation activities. Our philosophy has been pretty clear for the last several years. Our priority is, first, to invest in the business both organically and increasingly inorganically. And again, we have a strong, disciplined M&A process, and I'll show you a little bit of history of that in a moment. We have been committed to growing the dividend since we started it back in 2005 and then, again, have always felt that share repurchase was, particularly with the volatility that we see in our businesses, is the best means of returning excess cash to shareholders.

M&A, the inorganic side, has increasingly been important to the company. Obviously, if you look at the acquisitions that we've made back to 2006, we focused on market leaders in key markets that we have wanted to be positioned in. In Applied films, you saw the PVD capability that we lacked in display. You saw the leader in color filter. The technology that we see there is very much in play, also in the mobility cycle that we see today. If look at Brooks, it really built out our software capability in semi. And in PWS, that was the leadership position in wafering within solar and got us to a very strong position right out of the gate.

Baccini is the standard in all of solar, extremely well penetrated and really is considered the technology platform of choice in the solar industry. Semitool was a great opportunity to position ourselves not only in copper plating in general, but, really, in advanced packaging. And then, of course, Varian. You'll hear a lot more about Varian and the importance of it to the company. But again, I think that one of the things that stands out, these are obviously not to scale, Varian is, in order of magnitude, larger than the cumulative activity that we had done to this point. So before Varian, on this chart, it would be about $1.5 billion of acquisitions. Varian is obviously nearly 3x that amount. But again, as we've said for a long time, Varian was the largest and best opportunity that we've seen across all of our businesses.

So this year is going to be a year of integration. We really feel like when you make the commitment that goes with an acquisition the scale of Varian, you have to be prepared to commit the management time, the management resources to integration, and that is our focus for this year. So we really see this will be a year more of integration than it will be acquisition. And again, every member of the executive staff has an objective around delivering on the Varian integration. It's very important. It's top of mind for everybody. And it's not just the cost synergies, and you'll see the cost synergies are going to prove to be better than we thought, and we'll talk little bit about that. But it's really the strengths of both companies coming together and taking advantage of the best known methods of each. I can already see it. You already see the term. If you've followed Varian closely, they talked a lot about -- they use the acronym HVP, solving high-value problems. Now a lot of people are focused on solving high-value problems for customers, but it's so core to the way Varian talks about its business. It's already an accepted term within the company, and it's a regular part of the dialogue. So when I see that, I get more confident that the sharing is taking place.

If you look at where we think we'll be on synergies, we started off thinking maybe $50 million to $60 million at the end of year 2. We now think we'll exit the year one at $35 million in run rate at the end of the year. We now think we'll be at above $80 million at the end of year 2. We'll continue to keep post -- to keep you posted as we go through this process. But again, we've seen more and more opportunity as we come together.

If you look at the dividend growth since we started our dividend, let me just spend a quick moment on that. 26% compound growth. We had a little pause in '08 and '09 as did a number of companies. Never occurred to us, even for a moment, at the depth of the market, to cut the dividend. And again, as Mike said on -- earlier this month, we increased the dividend 13%.

Cash flow return to shareholders. If you look back 5 years, we've had about $5.4 billion returned to shareholders between dividends and share repurchase. Now if you'd look back over the last 3 years, it's a little bit different story, but we have always had in our DNA returning excess cash to shareholders. We don't like to sit on excess cash. When we built cash in '08 and '09, we acknowledged the fact that our concerns around the availability of capital in the capital markets and also the potential for more attractive acquisitions emerging after that period, that we were going to build cash. And we said if we didn't find an opportunity, we would return the cash. We found Varian, which we thought was the right opportunity and so made that acquisition. But we have always had a practice and a bias towards not carrying excess cash on the balance sheet.

But it's really been this last 3 years that I think has called -- some of you periodically in our conversations have called into question whether that is still in our DNA, and I can assure you, it is. This shows you the uses of cash over that period. Obviously, if you add it all up, it's actually higher than our cash from operations. Part of that is because we drew down some cash, but we also borrowed $1.75 billion over this time period. As part of the acquisition of Varian, we think that the debt -- it was an attractive time to add long-term debt to the balance sheet. But also, it increases our stockholders' leverage to the upside performance that we think will come out of this. The M&A number there also, as a reminder, includes Semitool within that 3-year period. Again, we spent about $1 billion over the last 3 years, about 24% of free cash flow in share repurchase and about 26% of free cash flow in dividends, which is about 35% of our non-GAAP EPS.

So what about the next 3 years? Again, this chart clearly shows a reduction in M&A. It's not to say that inorganic growth is not important to the company. It's very important to the company and will remain part of our strategy. It's just that when you look at the pipeline that we have, and we keep a very robust pipeline for all of our businesses, there's nothing on the order of magnitude of a Varian in the picture. And in terms of our focus over the next year, we really have to be focused on integration. So we're not going be going out and looking to take on more -- a new acquisition of any size that would really impair our ability to get the performance that we need to get out of Varian.

So over the next 3 years, I think naturally, you're going to see a reduction in M&A activity and, really, a surplus of operating cash flow that, again, in our DNA, we will not hold on to excess cash flow. So we would expect that to increase in share repurchase. And I think -- we look at a number of factors when we do the sizing of our share repurchase program. I think if the last 4 years have taught us anything, it's that, perhaps, being a little more targeted in your share repurchase as opposed to ratable, there may be some more -- some opportunities just based on the macro events and what happens in the markets. So we continue to look at the factors, but certainly, at these prices, we would expect to be an active buyer of the stock.

So 2012, again, it's an exciting year for the company. I think you'll see that we expect to gain share in SSG. We expect to operate at or near the new models for the -- particularly in the semiconductor businesses. We've got a little bit of work to do on our non-semi businesses just based on where they are. But again, it's going to be a year that we expect to generate excess cash, and we expect to return more cash this year in dividends and share repurchase and look forward to a continuing dialogue with you.

And with that, I'd like to invite Randir Thakur up the stage.

Randhir Thakur

Thank you, George. Good morning, everybody, and I would like to extend my warm welcome to all of you here, as well as those on the webcast. Semiconductor industry continues to evolve, and as Mike highlighted, mobility is one of the latest trend. Today, I will share with you how Applied Materials and Silicon Systems Group is well positioned to really help our customers in this age of mobility. And there are 3 key things I wanted to convey. One is that the macro environment, the overall business environment for silicon business continues to be strong. This is the third successive year of more than $30 billion in WFE spending.

The second is that as this mobility trend comes forward, our products are very well aligned with the trends, and we have further strengthened this with the acquisition of Semitool as well as Varian, a broader product portfolio that is well positioned to take advantage of this inflection competitively. And lastly, we have quickly moved to align the silicon business and our organization with this new trend so that we can serve our customers in a better way.

First, let's look at the inflections, and Mike highlighted about -- what we are seeing is more inflections in next 5 years than last 15. The last 15 years have been where semiconductor industry saw a lot of the memory trends. We saw mainly the focus around the PC and the DRAM era processor. Next 5 years are very interesting. Now interesting because a lot is changing. The materials are changing. The device and device architecture is changing. The three-dimensional, I call it rather the 3D transistor or 3D packaging, this third dimension is really the growth dimension for Applied Materials because it bodes very well to our core products, to our historic strength in the areas of thin film and so forth. So all of these trends that are happening in the next 5 years is an incredible opportunity for us. This is the trend towards the mobility. This is the age of mobility. This is going to provide the growth opportunity for Applied Materials.

I want to focus on customers and shareholder values. We look at very carefully on our customers' needs. We work very closely with them, and it starts with our customer technology roadmap. What you saw on the last page was really the inflection. Those are the challenges that our customers are facing and are partnering with us to make sure we address them. That requires a lot of innovation, and we believe that the current strength we have, and I will share with you the R&D as well as the talent in place, is going to drive our accelerated development and help our customers in their roadmap.

We are engaging with our customers in a different way. We are doing it early. We're doing it deeper, and we are doing it in a dedicated way. So we are avoiding -- between both parties, we are avoiding the R&D waste and getting to the solutions faster. Secondly, we have a strong product and field organization in place. We changed our product focus where synergistically, organize the business units. Their position is all under one umbrella. Wet processing is all under one umbrella. And some of the areas where we have most opportunities like etch and PDC inspection and Varian, the recently acquired, we have dedicated management focus. In the field, because of our reduced number of their customers, we have a regional structure put in place. We came up with this structure because the learning that we did with Varian, who has 14 consecutive years of customer satisfaction awards that they won -- we took those learnings, both the practices, best known methods as well as the executive talent, and put them in the key position to make sure that we are able to align quickly our field-facing organization and strengthen it for the future. These organizational changes -- and each one of the leaders who have been put in place have 20-plus years of experience and know our customers, know our business and are in the best position to competitively address the mobility challenge. That's the change.

The second is on the market share. Market share position, node over node, becomes very important as we go from 28- to 20-nanometer to 40-nanometer. Relative basis, our competitive position in each one of these areas is strengthening. That strength is coming because we decided to make sure that new products that we bring in, we work closely with our customers. These landmark node-over-node wins, as we go in the next 3 to 5 years and our customer implement these new processes and these new products into manufacturing, will, in return, generate market share for us, and that's the focus.

We also have made deliberate decision to make sure, as George highlighted and Mike previously mentioned, very close attention to the customers, therefore to improve our responsiveness, to make sure that we provide the right set of skills to our customer and enhance the overall customer experience. We are investing in our customers.

Lastly, the financial performance, growing the operating profit is focus. Growing the operating profit will come from execution, and later, Joe Flanagan, who works very closely with me on the manufacturing side and making sure that we are driving that cost down, we are getting the efficiency up -- and we are taking permanent measures to assure that the manufacturing overall delivery of our products over that net lower cost.

Performing to the financial model in terms of whether it is our investments, doing them prudently, having the proper processes, where we are constantly reviewing and looking at our portfolio and making the right investments in the right products at the right times.

These 3 elements of customer innovation, market share and the financial performance, these are really the focus we believe will in the end, prevail to give competitive solutions to our customers and deliver value to our shareholders.

I want to briefly cover the 2011 scorecard. Overall, the performance of the business was strong, $1.8 billion in cash flow in 2011. We had headwinds, as Mike highlighted. The landscape 2011 was kind of a year of adjustment, where there was more spending in the litho side. We saw the DRAM going below $5 billion in spending and never really returning. That caused some shifts into how the overall market picture looks like. We quickly adjusted to it, and I will share with you how, and I will also go in detail on how the market share looks.

We gained market share in 6 out of the 8 main product lines that we play in, and those market share gains have come, thanks to our customers and how they integrated our products on a quick basis and also contributed to our revenue and profitability. We continue the product launching cadence. That, really, is at the heart and soul of silicon business and Moore's Law, and it is critical for all customers. We have launched 15 new products. Just to give you an idea of last 18 to 24 months, the products that we have launched delivered last year, in 2011, more than 20% of our revenue from these products. That's how critical it is to make sure that we make the investments in products. Our growth, therefore, organically came from the new product introductions. Inorganically, it came from acquisition of Varian. And as Mike as well as George highlighted about the importance of Varian acquisition in overall framework of our business and success of the company, the key is also to extend the success of our customers because implant is fundamental. The doping technology is fundamental to defining the next generation of transistors, which are going to be used and which are going to enable the mobility era.

Investments, we made deliberate decision to make sure that we do not compromise the investments in our product and the competitiveness of our products. We'll continue to focus on that because that is, in the end, what earns us business on the longer-term basis, and that has been our strategy, to continue to drive that.

Lastly but most importantly, we, in the last 2 years, have gone to our customers, looked at their most advanced and challenging problems and decided to work with them in best way possible, and never before we have done, really, that rigor behind the customer support and services. Our customers are recognizing them. They think we are worthy partners, and they're giving us various awards to make sure that we continue in the spirit of support to them.

So that's kind of the nutshell on scorecard. I want to dig deep a little bit on the market share picture to give you total granularity. These are, to the left, are the 8 key markets where we play. Not all -- in 6 of these 8 markets, we gain share. In the CMP, there were headwinds, but this is very recoverable. If you recall, we go from 2009 -- 2008 to 2011, we really gained about 12 points of share in CMP. But in the last year, just in the last year, we had a drop of about 3 points, primarily some of the exchange rate, as well as some of the buying pattern mix effect. This year, we recover and come back to it.

In the area of Etch, because of the DRAM, where we had a strong presence, this caused challenges for our business. As a result, we have changed our focus. We have historically very strong presence in the conductor etch because we are able to take high aspect ratio etches and make sure that we are able to work those. Now we did this through the DRAM era. So conductor adds strength. We are leveraging it in the patterning space, which is new. And as you know, with the EUV and the push out of the EUV, customers are more going into the patterning space, and that becomes an important sweet spot for us. Our strategy is to focus on that.

Secondly, the high-k metal gate is the new transistor, critical path for the mobility devices, for the mobility processes. We are very well aligned with that. Combination of these 2 gives us very high confidence that in the etch space, we are going to make a recovery. If you look at the bottom boxes, so going from 2011, we lost -- from '10 to '11, the third available market share was down by 1.5 points. With Varian acquisition, we overall net, in 2011, gained share, and our served available market share, as a result, is 45%. But most importantly, with Varian acquisition, our served available market has expanded. So overall, as we go through 2012 now, in most of these products that are listed here, we have the upside and the strong potential to gain share in each one of these segments.

I want to talk about the mobility trend and how it translates into what it really means to silicon business. From the last 10 years, starting from 2000 to 2012, if we look at the last decade, the PC dominated pretty much what technology innovation happened in the electronics. Now that goes into mobility. That simply means that the performance of today is different from the performance of the past. In the past, we focused on the performance where there was power-based, the 2D scaling, and the scaling continued. But in the mobility side, the high-performance comes with low power. Standby power, the battery life, these become important ingredients. Here, to -- and also the form factor becomes very important. It has to be light. So the combination of all these changes and low power leads to our customers wanting to go to the 3D, whether it is the 3D devices, 3D NAND, 3D packaging. So that is a fundamental shift.

The other is that microprocessor and DRAM stayed key drivers in the PC era, and they will continue to be that. But in the new generation for the mobility, the application-specific, whether it's application processor, so the categories of processors have broadened. The new features, whether it is graphics or the new cores that you have to put in place, that is different, which is making, as Mike said, the die size larger. And DRAM -- from the memory side, NAND becomes another additional driver going forward.

These are fundamental changes which will stay with us in the next 10 years. Therefore, it was very important for us last year to make sure we take a look at our strategy and adjust whether it was the organization-based adjustment, it is a product-based adjustment, it is an investment-based adjustment.

Now with that as the understanding, looking at the growth drivers for mobility, what is shows to you on the left side is the unprecedented volume. Not everybody could afford a PC, but in the case of smartphone and tablet, this is more pervasive. It is more pervasive to economies that can -- such as India and China, where more people can buy these devices. As a result, 1 billion-plus devices going, in 2015, to 5 billion is lot of electronic content, and that electronic content is really at the heart of why the growth will happen. Second is that looking at the complexity, our customers are looking at adding the functionality in these portable devices. And the process complexity, because of 3D and other features, has increased. The combination of these, we believe, is responsible for the sustained wafer fabric equipment spending cycle.

On the right side, I also show the important difference. That is the CapEx per die is changing. So the die size, starting from 65-nanometer, olden days, onto the 32- and 28-nanometer days of today, the die size has changed tremendously. It has more than doubled. But also, the cost, the dollar-per-dye investment had increased as well. So these are the growth drivers in the new era.

Now with these growth drivers in place, if we look at the landscape of how the overall devices, DRAM and the NAND, foundry and logic, how the mix is changing, in 2007, at $30 billion WFE spending, the mix was shown on the top. On the bottom, you see that, pretty much, it is the logic and the foundry, foundry going from 12% in 2007 to 40-plus percent in 2012. It's a sea change. This is a big change. Secondly, as part of the mobile, just the mobile wafer starts, based on our evaluation on what is the total content needed for -- is driven by the mobility, it's about 1 million wafer starts per month from 2012 to 2014. That is the change. That is the growth opportunity. That is the landscape.

Based on this change, we look at our opportunity now. Why it is that mobility is going to play to the strength of Applied Materials? Some of the opportunities are listed here, where these inflections are very favorable to us. On the left, we show that planar logic transistor is changing to 3D finFET. As this change happens, a lot of the capabilities, whether it is in the thermal processing, it is in the epitaxy or deposition area, physical vapor deposition, chemical deposition, planarization, different thermal processing, all of these areas are really the stronghold of our product line. These are going to be deployed in more ways than one in different ways, increasing the number of steps. This complexity is good for Applied Materials because it plays to our strengths, and that's where you see that the number of steps is growing for us.

Same thing is happening in the memory for the NAND structure. The NAND, going from 2D- to 3D-type structures, is again, numerous steps that are really the deposition steps, the inspection steps, the annealing steps, the planarization steps. All of these play to the strengths of our products. So going forward, there are more than 30 or so steps added.

Other trend that is obvious here is that more and more, single-wafer processing will become important because the interface control, the integration of the different capabilities is now far more differentiated, much more required on a control basis than it used to be previously. So that is another reason why the SAM will grow. So the combination of all of these changes going into 3D bodes very well to our product strengths going forward.

Now how do we lead and how do we innovate in these changes? Here, I just wanted to show you, we look at all these inflections and the complexity. We have to improve on wafer performance for our customers or what we call as, and rightfully, we took it from Varian, as the high-value problems. These high-value problems are critical for our customers, but that translates into business for us. We know that. What are the basic engine, the foundation that we provide? Most important thing for our customers is, can you accelerate the cycles of learning? Can you shorten the adoption because of the higher die costs? Can you go to the next node faster? To do that, we have the basis, our technology. Second is a strong patent leadership with Semitool, Varian, as well as our in-house capability of intellectual property. We basically have a very strong footing into the intellectual property, which is critical going forward. The platforms are proven. They are strong. Our customers are used to it. And integration line. We are the only wafer fab equipment supplier company that has a full integration line capability. It becomes important. Our customers value it because we can get to solve their problems faster. This is becoming more important now than ever before. And lastly, the combination of all these capability combined with the winning product, this is how our leadership, we believe, is going to come to play very intimately with our customers and is going to improve our business, grow our business in the future.

Now I want to go through some of the inflections, how the foundry and logic -- what does it translate into overall growth and how the served available market is growing. So the served available market in the foundry and logic space, as you can see, going from 4x, 45-type nanometer, down to the 2x and below. Technologies is about 45% increase in the number of the steps. This is 45% increase in our served available market for our space. Previously, I showed you the 50 steps increase and 25 steps increase. This is how it translates into expansion of our served available market. It is driven by the device architecture, such as finFET, the transistor which is involving now high-k metal gate, epitaxy and new doping and implant techniques. It is on the new interconnect schemes, new wiring schemes that have to be integrated with new and different kind of materials. And lastly, with the patterning, which is, for us, a big opportunity going forward. So the combination of all of these steps is giving us about, in the served available market, over that 4 nodes, about 45% growth in served available market.

The same trend if we translate into the revenue. And what it really means going from 45- to 40-nanometer, our SAM growth is 45%. We are positioned at different nodes with our customers, which gives us about 7 points of share gains and incremental revenue. If we take 50,000 wafer starts per month, the incremental revenue is about $800 million, cumulative over the 3 nodes, about $1.5 billion. This grows as the number of wafer starts grows here. But that is how taking from the SAM, translating it into the wins that we have and market share gains and how it translates into revenue for us going forward.

Similarly, in the NAND case, we have the change where our SAM is going to grow by 30% as we go to the 3D NAND, about 4 points of share gain based on the positions that we have already earned at different qualifications with our NAND customers. And the combination of these leads us to also go about $400 million or so in the incremental revenue in these nodes and this time frame.

So all of these, if we were to put together, what does it really mean for our total overall market share momentum as a result of these fundamental changes in the mobility space? I really show here on all of our 8 main product lines, starting with the foundry and logic. I want to emphasize that in the foundry space, we already had, especially in the transistor and interconnect area, fairly strong position. What this does is -- where we have this dark green, where our share contribution is highest. And then similarly, in the NAND space, we are growing the momentum. We are gaining share. In the DRAM, we already had stronger position. The essence of all of these is in 2011 through '14, in each one of these areas, we will be gaining market share.

I particularly want to point out the area light inspection. In the inspection, we have huge opportunity because for our products, whether it is DUV laser-based, it's a SEMVision or it is the mask inspection product, this is one area where our customers are really pulling for this. Last year was a record year for our PDC inspection business, record revenue, record profitability, and they gained market share. This year, they are poised to gain market share as customers are going through the new node qualifications. Going forward, we believe that inspection area is at inflection, where known optical techniques will become important, where we are already positioned with some of our strong customers. So this is going to be continuing emphasis for us, and we see growth going forward in this area.

So all in all, in the area that we are playing in, in the doping and the implant that we just acquired, we have strong momentum this year. In the plating, we continue to gain market share, not only in the packaging houses, but for the first time this year, we are also seeing additional traction in the dual damascene area, which really makes us extremely competitive to proliferate the plating space as well.

So that's the scorecard if we were to look at how these inflections, these various opportunities are going to translate for us in market share and business in the future.

I want to talk about Varian because this is our company's priority, as Mike highlighted. This is the right acquisition at the right time. There are a number of reasons, from business standpoint, to do it. But most importantly, what does it mean to our customers? Looking at the star, which is 32-nanometer to 28-nanometer, this is a critical change because that's where high-k metal gate comes for the new mobility transistors. That is where the 3D really starts developing and evolves in the next 10 years. That's why it is very important. Because now, with doping capability or implant, with epitaxy, with the thermal processing, combination of all these really puts us at the heart and soul of the transistor development for the next decade. That's very exciting.

Today, you will see the breakout session, where both Klaus Schuegraf, our CTO; and Bob Halliday, General Manager for Varian will discuss with you in more in-depth detail what it really means for our transistor space and for our customers going forward.

Integration is ahead of schedule. We have very senior executive who is completely dedicated to assure that we do the integration properly and we are able to take advantage of the synergies that Joe showed you for year one as well as for year 2. So execution, focus around the integration. We also want to make sure that our business results, as well as our customer satisfaction, stays strong. And therefore, we are paying special attention toward the customer side. We are taking some of the executives who were involved, on the Varian, with the customers. We are putting them overall in the SSG product, representing the total product line. This is a change we want to make sure that we learn and we integrate this Varian organization effectively. And great people, by the way.

So this has really helped us. Varian has put Applied Materials where our position in the transistor space for next 10 years will be extremely strong.

I want to report to you on the progress so far on Semitool. As you know, I have been talking each year about Semitool. Here, the strength has really come -- it was a smaller company. But as it integrated extremely well with Applied Materials -- I'm so proud of the team, how they came together, and they love the company. They love to work with us, and they really are finding it more and more effective how they can use the larger Applied Materials and serve the customers better. As a result, the share grew the very year that we acquired them, and since then, it continues to get stronger. It's a profitable business. In addition to the packaging now, we have the #1 position in the 3D packaging. #1 position in 3D packaging is important, and previously, I have highlighted the role of it. But our customers are more and more pushing for especially the usage of 3D and the TSV. And this is where we have about 75% of the positions in the R&D areas that are secured already, thanks to the Semitool acquisition. It has meant a great deal to our customers. With this, we are able to bring in some of our other products, such as CMP, depositions, etching, into the packaging space and serve our customers.

The 450-millimeter, I just want to share with you where we stand currently. This kind of chart shows you the evolution of the wafer scaling. A lot is happening, one on the -- this is major inflection. As you know, in the case of wafer scaling, it can take decades to get it done. Therefore, one of the first thing that becomes very important for all of us and our customers is close collaboration, collaboration across the supply chain. We want to make sure that we serve our customers and meet their requirements for 450, but also make sure that the suppliers who are supporting the supply chain ecosystem, they also are healthy. And therefore, the whole timing has to move forward collectively. Our customers understand and appreciate that. There is a consortia in place. And the key thing here for 450 for us is that as we continue to make investments in this area, the transition to the 450 has to be synchronized very well with our customers. On top of that, we also have to keep in mind that there are 3 more nodes at 300-millimeter that also have to happen.

So collectively, industry, there is no option for us, no other option, and our customers understand that, but to work together closely, have the synchronized transition. And as a company, from our side, we're making sure that we make prudent investment in this new inflection.

So that's on the 450-millimeter. I briefly want to talk about model here for the SSG. We have decided to make investments in advanced nodes. These investments are already bearing fruit, and we are winning on the 450-millimeter. We have investment going, and in the field, on the customers, we are making investment. We are driving hard our operating profit growth and also working with Joe Flanagan and his team to make sure that these are sustainable benefits for us from the profit growth standpoint so that we can impact our operating model in a positive way. And lastly, the Varian synergies that are highlighted, making sure the team and all of us execute to assure those happen.

So this is on the change model, where we feel that in terms of the cash flow, that will be coming to our shareholders as a result of performance of silicon business is reasonably impressive, at the same time, satisfying our customers to meet their most advanced needs and grow the business for the future.

Lastly, our 2012 focus is, number one, really to invest in our customers as they go through the mobility change and as the landscape changes. It is opportunity for everybody, and we want to make sure that we are first to take advantage of it. We want to win at inflection. Some of them, we already have. Others, we are focused on node over node to assure that we win. Accelerating the Varian integration is such an important thing for us to do as a company, and as Mike said, to make it successful because everybody is looking at this, and this is the largest -- by far, the largest acquisition.

We are expanding our served market, as you saw, some of the opportunities coming as a result of transitions into 3D space. We're gaining share in our markets. In some of them where we lost, we have taken the necessary step to assure that we change the situation. We work with our customers and get it back on track. And in so doing, we are growing our bottom line, and we are committed to that.

With that, thank you very much. And now it's my privilege to introduce Charlie Pappis, who will talk to you about Applied Global Services.

Charlie Pappis

Thank you, Randir. Good morning, everyone. It is my pleasure now to give you an update on our Global Services business. So first, I'll do a quick look back to our fiscal year 2011 performance. As you can see from the chart, we were able to grow our revenue about $500 million year-on-year, about 29%, as well as expanding our operating margin from about 18.7% to 21.3%. We had some really good success in terms of service penetrations and, in particular, in the Asia geography. And in an upcoming chart, I'll show you some actual stats on that. As Randir mentioned, we also had a record number of customer recognitions in 2011, 28 in total, with some of the industry leaders on that list. And we're very proud of that. We have a number of initiatives running throughout the company to really improve on the overall customer sat [satisfaction] and overall customer experience. Once again, with the consolidating customer landscape, it's so important for us to make sure that we meet the needs, both from an installed base standpoint and from a technology roadmap standpoint, for all these leading customers.

And last, year-or-year, we did have some success in terms of expanding our margin performance, as you can see from the chart, up to about 21.3% last year.

Now just a look at the AGS business profile because it is a little bit different than our pure systems business segments. First off, AGS serves all of the end user markets of our customers. So we have a semiconductor group, display and solar. But as you can see from the chart, the primary source of revenue for our business comes from the semiconductor installed base. And that is, by far, our largest installed base. However, with the recent ramp in solar and the continued expansion of our installed base in display, we are definitely growing our services business in display and in solar.

Next, if you look at our product mix from 2011, you can see that maintenance and parts makes up about 75% or so of our revenue profile, but we had a very strong year last year with our 200-millimeter and legacy equipment business. And legacy equipment is upgrades for our display installed base, as well as our solar installed base. So we had very strong demands in that area in 2011. And to round it out is our factory automation software business, which is control systems for both at the factory level as well as at the equipment level. And at the equipment level, that also helps us differentiate many of our service offerings.

So next, I want to get into what the actual market drivers are for the AGS business because for us, it's more a factor of, number one, the size of the installed base and then secondly, how heavily customers are utilizing the installed base. And in 2011, we had tailwinds, really, across all of our business segments and all of our major business drivers. So our business is far less tied to CapEx investments by our customers, and it's more tied to how heavily they're utilizing their production capacity. So as I said, we had terrific headwinds in 2011, and that's really what fueled that $500 million year-over-year growth in revenue. So you can see in semiconductor, we had growth in both wafer starts, as well as terrific growth to the number of machines in the installed base. All told now, we have over 32,000 machines in our installed base when you include the 2,500 that came in with the Varian acquisition. As I said, we had terrific demand last year in 200-millimeter as well as the legacy upgrade business, and we also had a very good growth in our solar and display service businesses as those businesses in 2011 were quite strong.

However, as we entered 2012, we incur -- or we encountered some headwinds. So in particular, in the semi space, we saw wafer starts really flatten out and even suppress a little bit, but we do anticipate that in the second half of our fiscal '12, that, that will recover and will actually see growth in wafer starts year-on-year. And that will be primarily driven by 5% to 8% growth in 300-millimeter. 200-millimeter will actually be flat, even a little bit down when you look at it full year. But the good news is we do believe that second half of fiscal '12, we'll see a strengthening in wafer starts and therefore, a growth in revenue for our maintenance contract and parts business supporting our semi customers.

Next, we also think that this year will be a suppressed year in terms of capital investments in 200-millimeter as well as display and solar upgrades. As you heard from Mike, both display and solar are going through a bit of a capacity digestion and adjustment time period. So our customers' investment profile and added upgrades and what not to that installed base is really going to be suppressed this year compared to 2011. But once again, we do expect the back half of the year to be a little stronger than the front half of the year. But all in all, a little bit of a headwind this year in terms of our upgrade in 200-millimeter business relative to what we saw full year 2011. Solar and display starts, also going be a tough year for us. But we are going be adding equipment to the installed base, which really bodes well in terms of strong growth in 2013.

So really, what are our strategies for growth in AGS? And once again, a little bit different than our pure systems business. For us, really, the number one driver is the installed base. And as I mentioned, we now have 32,000 machines in the installed base, including solar and display and semi, as well as the 2,500 machines from the Varian installed base. So that really is the seed of opportunity for us. And remember, many of our customers will run these assets for 20 to 25 years. So with AGS, we have this 20- or 25-year opportunity with every machine that's out in the installed base. And customers typically do not stand still with how they purpose this equipment. In many cases, they need to do technology node changes. They need to do wafer size conversions. In some cases, equipment gets relocated from one geography or one fab to another. So we wrap services and products around all of those needs to really help our customers get the most they can out of that installed base. So that's really what fuels the growth for AGS.

Of course, being a services business, you have to be customer-focused. As I said earlier, there's a number of initiatives running across the company this year to really drive improvement in our customer experience. So on the one hand, we had a great number of customer recognition this year, but certainly, our work is not done there. And we need to really drive continuous improvement to be able to stay out in front of their needs and really be the leader in that space.

In our legacy equipment business, we do, do some selective investments to make sure that as customers re-purpose some of this installed base, that we're there to help them do that. In some cases, that can be things in 200-millimeter, where they're going to need better defect density performance or better on-wafer uniformity performance. Or maybe they're converting from an aluminum back-end to a copper back-end or even customers that might be at 0.25 micron that need to move to 0.18 or from 0.18 to 0.13. We continue to selectively invest in that area such that when customers do need to make that transition, we've got those upgrades available to them, whether it be for increasing capacity or better on-wafer performance or any combination thereof. And we do, really, the same thing with our legacy solar installed base, as well as our legacy display installed base.

Then on top of all that, we're adding in this terrific business with Varian this year that, right out of the shoot, gets us about a $200 million to $220 million revenue stream into ADS, as well as a number of best practices. So the 2 teams are really working together already to really drive the maximum number of synergies we can get.

But at the end of the day, we really win in our business by solving problems for customers. So customers absolutely have choices for parts and for support for this 32,000-machine installed base. So what we do is we really gear our activity and our strategies towards how do we assist our customers at really solving some of their most challenging production issues that they've got to overcome. So the graph you see on the left shows a typical example of one of our maintenance contracts. This particular customer had an installed base of about 300 machines of ours, and they came to us and said, look, we really need to drive down the unscheduled downtime, but in addition to that, we need to drive down the variability around unscheduled downtime. This particular factory was a memory factory, where they typically run it at 100% UTM rate all the time, and unscheduled downtime is a real killer. So we were able to go in and partner with their engineering team and really demonstrate that by using our maintenance contract, we could not only drive down the average unscheduled downtime, but really compress the variability around that. On top of that, we're able to also lower that customers' total cost of ownership by about 10%. So those 2 things combined really got us in position to be able to provide a long-term, multiyear maintenance contract with that particular customer.

Now not every customer has the same care-abouts. In some cases, it could be meantime between fail that's most important. In other cases, it could be increases in throughput are most important. It could be just average uptime. So we tailor the deliverable of the contract to what's most important to that particular customer.

In the middle, you see an example of what we're able to do with our parts business. And I will say that Varian also has an excellent program along these very same lines, and the 2 groups are actively learning from each other as we speak. So typically, when customers take delivery of a piece of equipment, it meets a given spec, but the customers need changes over time. So we have a program called the high-performance parts, where we will work with the customer, reengineer a part, maybe change material on the part, such that we can improve an on-wafer result. In this case, we're looking at process nonuniformity. Other cases, it can be particles or defect densities. In other cases, it can be used to increase throughput, but the bottom line is we're not keeping the installed base static. We're working with customers to solve some of the ongoing productivity challenges that they have, and that's how we're able to win high percentage of their parts business.

And then the third example shown on the right here is one we call a value spec part. This is kind of the opposite of the one I just described where, in some cases, our original design may be over-spec, so to speak. And what we can do is work with the customer, release -- soften or open up some of the specifications around that particular part and find a way to source that part at a much lower cost and share that savings with the customer and therefore, driving down their total cost of ownership. So as I said, customers have a lot of choices when it comes to how they support their installed base, both in terms of maintenance and in terms of parts. But these very active programs that we have really help solve some of their production challenges, and that's how we win their business.

Then on top of that, this year we've also added a fab consulting team. And this is a team of about 20 very senior people, most of them from our customer base with 20-plus years experience, whether it be in yields or automation or factory management. And what they're able to do is really work closely with customers and benchmark their performance on the Applied fleet and compare that to what we know to be best practice. And that can be around output, it can be around costs, can be around cycle time, it can be around defect densities, whatever the key issue is that, that particular customer at that particular time. And we've really been able to help customers drive their fleet to perform at best-known methods, best-known practices. So that capability is also adding to the overall portfolio of our service products to once again help customers solve their most challenging problems, and then they reward us with their services and parts business.

Here's some data on our actual traction on our maintenance contracts. So in 2011, we grew the number of machines covered by maintenance contracts by about 15%. In the Asia geography, we grew that number by about 21%. So it's just one of our key indicators in terms of are we really getting the traction with our maintenance contract business. And last year, we added about 900 machines to that list. So now we're up to about 6,800 machines in the installed base are covered by a multiyear maintenance contract.

Now here's a case where the Varian fleet is actually underserved in this space. So our team is quickly working with the Varian team. And when our fleet is up for renewal, we're folding in the Varian installed base. So that's one of these revenue synergies we expect to get because the same value proposition that we've been able to bring, we believe, we can also bring to the Varian fleet. So I say on the Applied side, we're definitely benefiting from some of the learnings we got from Varian around performance parts and value spec parts. They have a very aggressive program in both of those. And in the case of the maintenance contracts, we're getting revenue synergies the other way. But really, the combined entity of those 2 businesses is really accelerating for both groups.

So I hit on this already, a couple more words on creating value from the Varian integration. Before I get into any of the individual areas, though, probably the best thing is that what a great bunch of people. The management team has been outstanding. It's as if we've been working together for many years. There's many of their team now that's fully integrated into the AGS team. Actually one of their key executives is now running our spare parts operations for Applied globally. So a terrific and very capable management team that's integrated right in and hit the ground running. So areas in particular that I hit on earlier. Parts sourcing improvements, logistics and footprint efficiencies and broader maintenance contract coverage are all areas where we're already beginning to see terrific benefits from the Varian integration.

So as I mentioned before and Randhir hit on it as well, we, as a company, received 28 separate customer awards last year. Listed on the right of the chart are the ones where we've been given permission to actually show their name. And you can see it's a number of leaders in the industry. And we're very proud of this and our team really works hard at meeting the needs of our customers. And with this consolidating customer landscape, we can't afford to have one single miss. So the team is very focused on all the initiatives that we're driving this year to further improve our customer experience and overall customer satisfaction with our parts and services.

So kind of putting this all together, what does that mean for AGS in 2012? So you can -- we reviewed the '10 and the '11 performance. And really, with the headwinds that we're seeing in our business, in particular, in the first half of 2012, our net-net is that we think we're going to be about flat in terms of revenue looking at 2012 versus 2011. But we do expect we'll be able to expand the operating margin another point this year. And really, think with the strength that we're going to see in the second half of the year that it bodes very well for strong growth once again in 2013.

Next, a few words on the operating model and the key actions that we're taking. Really, we want to build on the momentum that we were able to develop in fiscal '11 by further expanding our profitability. Joe is going to talk about some of the initiatives specific to services that it is really helping to enable that, both in terms of parts fulfillment and service delivery. We've got to continue to work on our operational excellence to improve our services efficiencies. Throughout this talk, you've heard how we're very focused on continuing to improve the overall customer experience, and that's another area where Varian is very strong. So we're taking many of their best practices and making sure we adopt those across all of our service businesses. We're going to continue with optimizing our supply chain, and in particular with supply chain for services. It's so important when you're looking at parts repair, parts refurbishment, parts cleaning, that you do that in-country and really localize that. Because otherwise, the cost and the cycle time of having to do that by shipping to the U.S. is just very cost-prohibitive and very cycle time-prohibitive. So we're really driving supply chain localization when it comes to repair, refurbishment, cleaning and even now, sourcing of some of the key consumable parts right where our customers have their factories.

So in closing, I feel like our services team has terrific momentum as we enter the second half of our fiscal '12. We had record results in 2011 that we're very proud of, but certainly plenty more work to do as we go into '12. We're getting immediate as well as some very long-term value from integrating in the Varian services business. And it's been a real treat for us to begin to work with Bob's team there. And really, we're starting to see our key drivers strengthening for the second half of '12 that's really going to drive our revenue, really have us positioned extremely well as we go into fiscal '13. And to close, I'd just like to remind you that we really look at this as the way we win in the services business is by solving problems for our customers, that's our focus.

With that, I'm happy to announce that we have about a 10- to 15-minute break scheduled now. So please get some coffee, and we'll get back to you in about 10 minutes or so. Thank you.

[Break]

Unknown Executive

Ladies and gentlemen, please welcome back, Mike Sullivan.

Michael Sullivan

Okay. Hi, ladies and gentlemen. Thank you very much for coming back after a quick coffee break. I do realize we're running a little bit behind in the program, so we'll try to make up a few minutes in order to have plenty of time for Q&A. We know that's really the most important part of the meeting in many ways, so we'll get you there. What I'd like to do now is call to the stage the head of our Energy & Environmental Solutions Group, Dr. Mark Pinto. Mark?

Mark R. Pinto

Good morning, everyone. It's a pleasure to be here again and talk to you about the Energy & Environmental Solutions Group in Applied Materials. First, just quickly, our mission is around applying thin film technologies to the broad energy markets that will evolve, and as we see the next 10 to 20 years, great opportunities in this field. They include energy generation, things like solar energy efficiency, as well as eventually energy storage. Today, I'm going to focus on solar. That is the principal makeup of our revenue and products today.

So first, the scorecard from fiscal '11. As discussed before, we had record revenue. That was despite the fact that in 2010, over $500 million of our revenue was thin film. And that came out in 2011, no thin film revenue in our group in 2011. So our revenue actually doubled of our ongoing products year-over-year, yet we still remain #1 in solar. And I think that's a testament to the strong product fundamentals we have in both the wafering and the cell products. Second, it was a big goal of ours to show we could generate profits for the company. And last year, we generated around $450 million or over $0.20 a share from EES. So I think that was very important to our team, also I know to investors, but to the team to say we could really contribute to Applied's bottom line even as a business that has tremendous growth potential for the future.

As we committed last year, we gained share in both patterning and wire saws. And behind that also, Charlie mentioned before, customer awards. We won 13 major customer awards from solar customers that we have. That's very important. As Mike mentioned, this landscape is also consolidating quite substantially to some very, very key players. We delivered the next-generation platform in cell processing, also upgrades in both product lines, wafering and cell. This is critical to the future. Customers need lower costs and higher efficiency through both new products, as well as upgrades. The negative we had last year was around our emerging LED product, which has hit a lot of headwinds in the market timing in terms of that market also is very, very soft.

However, as we look forward, we got the benefit of a very, very good year last year in the solar capacity additions. But that just made a deeper cycle, a negative cycle. Those of you who have been coming for a few years know we've always been cautious about the next year in terms of capacity, knowing that this point was likely going to come. And because it was so high last year, it makes the cycle very deep this year, which leads us to our revised financial model that George introduced to you earlier.

I think 2 things. One, we want to make sure that we were better able to make it through cycles. This industry is still at an early stage. And secondly, when we're over $1 billion, we want to show stronger financial return. So this is the model that we will be operating towards into next year. As George mentioned, we will target to be at around $600 million and break even by the end of this fiscal year and $500 million sometime next year. We're going to do that by reducing costs. Joe Flanagan will talk to some extent about that, manufacturing costs. This has been part of our road map all along. It's kind of hard to execute something like that when your shipments went up over 10x in your businesses last year. And now with the capacity and additions and the slowdown, it's a great opportunity to accelerate plans we already had there. And then second is to prioritize our spending, get us much synergy as we can across our units, but then also focus on those areas that present us the best market opportunities.

So I want to go through the solar market. I think it's very important to understand where the market is and how we see the next few years. And behind that, first, is there are healthy economics behind the solar industry. There are an element of incentives, I'll discuss those, but there's really healthy economics. And it's been driven by cost reduction. Second, supply equilibrium will rebalance out as capacity rationalizes. Mike showed you a thought experiment along those lines. And manufacturers will invest to improve cost and efficiency. So I want to go through these one by one and show you where we think things are.

First, the end market. So this is actuals, by country, major country through 2011, and then forecast, a third forecast through 2015. As Mike noted before, we've seen over 50% growth the last 2 years. Actually, CAGR is over 75% in the past 3 years. You can see this is due to growth across-the-board. The European countries have stayed strong, but we've seen very, very strong growth in China, U.S., India, a number of other rest of world countries. But you'll remember that last year, maybe when I stood up here, everyone thought there was going to be a demand decline year-over-year because Europe wasn't going to hold up. And in fact, that didn't happen. The consensus forecast for the last 3 years have been 30% to 50% too low, 3 years in a row for the same reasons. "Oh, European FiTs are going to come down, demand is going to go down." But what happened in every year is costs came down faster than the FiTs came down, every single year. And also other factors, the rest of the world growth, China last year with its FiT. And so we've seen every year that the growth has outstripped projections by quite a substantial amount. And even a modest number like a 20% addition that Mike talked about, which you can easily get to this year. In fact, even today, this past 2 days, there's been much more optimism about Germany that the pushing out of a ground-mounted feed-in tariff reductions, that you can add to these numbers very simply and get to a higher number. And even 20% growth is rather modest from what we've been doing up until now.

So with that, why can we expect growth like that? Well, PV really hasn't even started. If you look at numbers around the world, even the biggest countries in the world, Italy and Germany, are still only around -- a little over 3% of their electricity comes from PV. That's very, very small. The grids can support numbers 10%, 20%, 30%, we believe. China and the U.S., the biggest energy consumers, electricity consumers are less than 0.2%. And just to give you a number. In China, of course, the electricity demand is growing dramatically year-over-year. If China got to where Germany is at 3%, that would take 190 gigawatts today, and let alone China's energy demand is growing forward. So this -- the total worldwide, we still are generating less than 0.5% of electricity by PV. So there's a huge, huge amount of upside that can take place here.

Second, economics. So again, you hear about all the FiTs are lowering, we put in this model -- actually it's more conservative than what it appears Germany is going to do. With low cost of capital, that's a key factor and with system cost reduction, you still see very strong IRRs. Now you can see throughout these different countries, going back to Germany. Also Germany is at grid parity today. Forget the FiT. If you look at the cost of solar electricity with that kind of cost of capital, you can generate solar electricity cheaper than you pay for it on the meter. So the economics are attractive and we are seeing still attractive IRRs. The key is to continue to see cost reduction. That's been the factor that's continued to make this work as the FiTs have come down.

So third, elasticity. So we've created a model with some students from the Cornell business school, where we've tried to aggregate the global data and come up with a model for installations versus total system price that's normalized. And what we found is a fairly good fit, the model is the dashed line, and you see this elasticity. You see as prices have gotten down, below $6 a watt, below $4 a watt, that's slope keeps increasing and you see stronger demand. In fact, where we are today, if we saw another 10% systems price, this model would suggest a 15% worldwide increase in installations.

Also one more point I would add, which I think is underestimated. Solar is not like a commodity that a consumer goes to Home Depot and checks it out and says -- does all these calculations and says, "It's too expensive." A lot of this is knowledge diffusion. You go to a place like Hawaii, Hawaii is at grid parity today without the investment tax credit. Solar electricity even without the investment tax credit is cheaper than retail electricity in Hawaii. Why doesn't everybody have it immediately? Well, diffusion. Installers are learning how to install it, neighbors are talking to neighbors, installers are talking to their customers. Same thing in Germany, there's a huge installer base that is going to try and create a market, no matter what. That's also playing into this growth. So with all those factors together, we think the economics continue to be healthy for PV growth.

But as Mike talked about, last year, a lot of capacity was put on. And I'd like to -- and that has led to overcapacity this year. So let's take a look at that in more detail. So if we take the installation demand from the previous analysis, what's the required capacity to serve that, there's delay factors, capacity has to come onboard to supply the demand the next year. There's certain utilization factors, certain seasonality. You factor that in, you get the yellow line. This is the nameplate capacity, so this is not effective but nameplate, everything that's been shipped. And you can see how that's grown above the required capacity. But not all of that capacity is competitive. We've categorized the capacity here in 3 different buckets, depending on its efficiency, its costs and scale. And we find that roughly 1/3 of the capacity is still is what I would call noncompetitive. It's going to be very difficult for those people to compete. They're not getting to high enough efficiency or low enough cost to be able to serve the market.

Some of that capacity will come offline. So if nothing happened, if no capacity were to be added from now going forward, this would be the picture. We include obsolescence. We also include a used equipment market in this model. And we see that the gap does open up and that gap needs to be filled starting in late 2012 to start filling to make the capacity available to build in 2013 and beyond. And again, you see these, this is in this case average efficiency, average module versus spot prices. You see the efficiency going up. A lot of this capacity cannot stay competitive, cannot keep track with the average, and it comes offline.

So taking that analysis, this is the served market we get in terms of gigawatts of factory capacity. The base is the third-party market analysis I showed you. The white upside is from the delta that I added back to get to that 20% annualized growth. And you can see this year, it is going to be a very, very down year. But we expect numbers 1/2 of what we had last year and going back up on a going forward basis.

The drivers. The end market demand clearly is one. Peak season demand as solar is seasonal. It's been exceptionally seasonal because it's been the seasons to install in Germany, in particular, have been combined with the feed-in tariff timing, and that's created a lot of "seasonality." Even without feed-in tariff abrupt changes, there still will be seasonal demand. The module efficiency road map, needing to improve efficiency to lower costs, as I said obsolescence. We do include assumptions around used equipment, but there are a lot of barriers to used equipment, obsolescence being one of the principle ones. There are a number of others that have made it difficult and will make it difficult for equipment to be recycled.

Let me turn to technology now. Charlie Gay will be doing this in depth in the breakout, if you're interested in that. But just briefly, what we're seeing in crystalline silicon technology is a move from the simple structure, simplest structure, just a wafer with a nitride layer and a metal, diffusion-doped and a metal line to slightly more complicated, potentially including some implant, including potentially selective emitters, as we call Gen 1.5 going to a full Gen 2 cell with back contacts, potentially wrap-through contacts. All of these, you gain efficiency and you eventually lower cost. What's interesting though is even before we get to the new technologies, just the basic technology, one of the things that's happened in this industry that hasn't been, I think, widely enough appreciated is the basic structure efficiency just through learning of the industry, through scale has improved dramatically. This is one of the reasons why capacity is becoming obsolete. If you're not keeping up with these improvements as cell provider or a module provider in China, you will not be able to sell your modules. And this is just the plain vanilla technology. To go further, we add new steps, new patterning steps, Applied Materials' Baccini printing systems, implanted dopings, the Varian tools. So we have a number of different opportunities here and including some new product segments to grow our share similar to what Randhir told you before about finFETs and 3D transistors, same effect here. More complicated structures provide value for the customer, lowers the cost of solar and provides an upside for Applied Materials.

I'm not going to go through the products again, Charlie will tell you about them in the breakout session. I just want -- it's across our portfolio. But I do want to just highlight some of the themes. The things that are important to customers this year is not capacity, but it's cost, production costs, they want the ultimate lowest in production costs. So for instance, in wafering. What they care about today in wafering is reducing their wire costs, reducing slurry cost and improving the yield of their machines. So not necessarily getting the most capacity out of a machine, they don't need the capacity but lowering costs. So things like structured wire help them reduce their costs, their ongoing running costs. Efficiency is another one. Raise the efficiency, you're raising the bar of the product, you're lowering the installation cost, lowering the cost of the panel itself. Anything that drives efficiency is interesting to the customer. And I think another one that's been undervalued that's going to be more and more important, and we've talked about this in the past, are products that can tighten the distribution of solar performance. Again, especially as you go to more complicated structures, they require more steps. If each step has the same distribution or yield that it has today, the distribution will widen and you'll get more poor product, underperforming product that you have to dispose off. If you can tighten the distributions, then you get higher yield for these more sophisticated products, that's going to be a very high value to the customer. And as you can see, all of our cell products have that attribute, and maybe one of the strongest attributes as it may turn out for implant, as an example.

So with the market growing but also these opportunities for new steps, we think we have a great opportunity going forward. If you look at our 2015, I've given 2 views of it. The base again, which is the base third-party end market forecast and what I called upside, which frankly is my own forecast I would say, you could see the differences in growth. We have both our underlying current market, as well as the new products that we're working on to increase our SAM.

So with that, let me finish up our imperatives. Number one, lowering our breakeven point to weather the industry cycles and be more profitable in the good years that are coming. Second, to deliver solutions to customers that improve their efficiency and lower their production costs. This is what they want, this is what they value, but it also drives the end market. And then third, to deepen the relationship with our customers. Again, we're seeing this consolidation. The customers who have the best technology and the lowest cost structure, best channel are the ones that are likely to succeed. It's incredibly important that we deepen our relationships with them, both technology product and support.

So with that, I thank you very much. And it's my pleasure to introduce my colleague Tom Edman, who will tell you about Display.

Thomas T. Edman

Good morning, everyone. It's great to be back to give you an update on the display industry and talk a little bit about 2012 and what we see going forward. To do that, I wanted to first cover fiscal year 2011. You can see that in fiscal year 2011, as our industry moved towards mobility, becoming much more of a mobility-driven market, we did see revenue come down to about $700 million. We still had a 22% operating margin. What really is key is this year in 2012, where we've seen television investment almost evaporate in the industry, we still, with the mobility market helping to pull us along, we've still been able to respond successfully in terms of maintaining profitability for the Display Group and responding to really an abrupt downturn in the industry.

Our customers -- just to give you a feeling for this, our customers are on their sixth consecutive quarter of losses, which is really unprecedented for them. It's forced our customers to start looking for avenues to differentiate. And they've been looking at new technologies in order to do that. We've been getting ahead of that curve, working with our customers as they shift technologies and particularly focusing on mobility. We've also been strengthening our Asia infrastructure with our operational structure in Taiwan and our support infrastructure in China as the installed base has increased there.

As we look at 2012, the Display Group will be focused on this mobility market, continuing to advance our leadership and equipment products for mobility, positioning for the next television wave. And I'll talk to you a little bit about why we believe that's coming and how and what form we think it will come back. And then on delivering financial performance. As we look at how we can maintain profitability through these cycles, deliver operating cash flow to the business, continue to move our operational structure and sourcing infrastructure into Asia.

So if you look at the magnitude of the change in the industry, I think this chart will give you a feeling for that. This is the total available market for display equipment. You can see coming off of 2010, which is a very strong television year, that we saw dramatic decline through 2012, held up by mobility and mobility investment. Now the total decline in the industry in terms of total available market was approximately 70% in between 2010 and 2012. Going forward, we do see the recovery of the television investment, as well as a strong mobility environment pulling our business along.

And as you look at our revenue picture, of course, the revenues reflect the cycles. But we have been able to minimize the effect of the television dropdown by performing very well in mobility and gaining overall share of our served available market. So if you step back to fiscal year '09, we were at about 54% of the served available market. Today, we're above 60% and we're pushing towards 64% as the industry recovers in '13 and '14.

I did want to give you a feeling for this, the magnitude of the change that's occurring in our technologies in display. This is an industry that traditionally worked on scaling up of amorphous silicon-based liquid crystal display solutions. So the changes that are going on are extreme in terms of technology shift. This is being driven in the television industry by the desire for the consumers, of course, for larger-sized displays, moving to 65-inch diagonal displays in the television industry in the U.S., for example. But really more importantly, by the desire for better resolution, higher contrast and improved 3D functionality incorporated into the display. So the consumers are driving that kind of performance requirement, all of that, without a reduction in ASP. So a very tough, stringent set of requirements from the consumers in the television business. In mobility, you have that same requirement for resolution and appearance, but coupled with the need for thin and light characteristics. Randhir talked a little bit about this and also low power consumption. And then the incorporation of an interactive element, the preferred interface being touch panel, but also we see voice-recognition increasingly as well.

So for an industry in terms of technology solutions required to meet these needs, we see an industry moving from amorphous silicon-based technology into high-resolution liquid crystal displays and then into organic LEDs. And as the industry has shifted, those overall display technologies, they also have had to work on shifting the transistor structures or the back planes for those technologies. So moving from base backplanes of amorphous silicon to metal oxide, and then to low-temperature polysilicon. Both metal oxide predominantly, by the way, for the television and potentially the tablet-type high-resolution requirements, and then low-temperature polysilicon for the high-resolution smartphone-type requirements above 300 PPI or the retina-type display there. The opportunity for Applied Materials here is substantial because as compared to amorphous silicon, you're looking at about the 1.3x opportunity for our equipment in metal oxide and a 2x opportunity for our equipment in low-temperature polysilicon. So these shifts are very positive for us and shifts that we certainly, with our technology solutions, are working to enable.

And we are modifying our product portfolio as this occurs. Our core product portfolio in display consists of CVD and PVD deposition equipment and our array tester, and as we work on the new solutions, we're working on modifying our equipment for the needs of the LTPS, the metal oxide requirements and then also touch panel. And so if you want to think about it from a big-picture standpoint, we're really taking what was an industry challenge for us of scaling up, constantly building larger equipment, very much a mechanical engineering challenge. And today, that challenge is all about what happens inside the process chamber of our equipment, so much more similar to the challenges that Randhir described in our semiconductor business. It's all about what is going on now in the process and delivering value to our customers there.

I did want to cover the 2 main industries that we service in terms of end products. Talking about television first. And to talk about television, you have to step back a little bit in time and look at the incredible growth that occurred between 2009 and 2010. That growth was approximately 32% year-on-year, and the growth was largely driven by stimulus programs that have been put in place in Japan and in China. As those stimulus programs expired in 2011, we saw a pullback. And the growth rate moved down to about 7% last year. If you look at the 2 years in combination, you still have above a 20% growth rate. So 2 years in combination, we did see substantial growth. But the industry built and invested in 2010, anticipating that very strong above 30% growth continuing. What we are looking at today is an industry and unit volume growth that we see growing at about 12% CAGR through 2015. That is going to be driven by several key factors. One, the emerging markets, particularly China and India, continuing to drive substantial television demand. Secondly, the replacement cycle. The CRT replacement cycle on average is about 10 years. With LCDs, you're looking at a replacement cycle on average of about 7 years. And we're now starting to see that materialize as the first generation of LCD televisions is retired.

Third element that we are starting to see this year is the emergence of the television, of the smart television as an ecosystem or sort of the operating center of the household. The means of doing that is to incorporate Internet functionality, so Internet capability, incorporate more interactivity into the television and, of course, the traditional television functions. So you take that together, the television becoming more of the operating center in the household, this certainly can be expected to drive a change in consumer behavior, leading to additional growth in unit volume.

So if you look at our forecast going through 2015, we see a 100 million incremental unit requirement. If you're looking at 100 million televisions or television units required incrementally, that translates to 13 Gen 8.5 fabs required, each of those fabs processing 60,000 sheets per month. And then that would translate into an annual served available market to Applied Materials of approximately $850 million. So for us, a substantial opportunity going forward as the television industry recovers. In addition, in terms of the investment picture, we will start seeing a shift this year towards organic LEDs. It's difficult at this point to see how the units or the percentage of penetration of organic LED is going forward. And in fact, in this unit forecast, it's relatively small. But certainly from an investment standpoint, organic LEDs will start becoming more and more important to the industry.

Moving into mobility. This has been touched on by Mike and Randhir, certainly a market that's driven by smartphone growth. And from an area perspective, tablet growth becoming extremely important. And of course, in our industry, we look much more at areas crucial for us and for our equipment requirements. So as we look at tablets and smartphones growth through 2015, we will also see a shift here towards high-resolution. As I've mentioned earlier, smartphones requiring low-temperature polysilicon and tablets increasingly moving towards metal oxide to deliver high-resolution. For us, the served available market annually for LTPS is approximately $300 million. And then on top of this, we have the touch panel interface, the touch panel sensor that is incorporated in these products, including smartphones and tablets, and then on top of that, the growing market going forward for Ultrabook-type applications and particularly with the rollout of Windows 8, an interface and operating system that will be structured to promote touch interactivity. So touch for us overall is about a $200 million served available market annually.

I did want to cover our operating model as well. We are looking at a $700 million operating model and a $1 billion operating model. This year, in 2012, our focus is going -- is on profitability and on generating profitability to the company that at the $450 million level today, and then pushing that level down as we go forward. So critical to us to generate profitability in 2012 and continue to contribute to the company's bottom line. The operating model is predicated on the return of television investment into our picture, the ongoing strength in mobility and leadership position in mobility that we've established, and then managing our cost structure successfully as we continue to move our operations into Asia, continue to source into Asia as well. And so we do feel very confident about the performance at these levels.

And to close, I just wanted to reemphasize the critical areas of focus for our Display Group, which are to build on the mobility leadership that we've established and our strong positioning there; to position ourselves for the return of the television wave, next wave of investment both in traditional LCD and also in organic LED; and then to deliver on our financial commitments as a business and to remain profitable throughout the cycles as we go forward.

And with that, I'd like to introduce Joe Flanagan, our Senior Vice President of Operations.

Joseph Gerard Flanagan

Good morning, and welcome. The objective of today's presentation is I'd like to provide an update on our operating framework, our strategic imperatives and also on the progress we've made on execution. I think it's important to note as we start the discussion, we really consolidated all of our operations globally exiting 2010 going into 2011. So I really want to spend a little bit of time baselining on the strategy and framework, given that it's a relatively new program for us. In addition, I want to provide some color around what our competitive advantage looks like for us and also talk about some of the key initiatives that we think will really drive that program going forward.

The first thing I'd highlight as our strategy is the same as I talked about a year ago. And we really think that's a good thing. Confidence is growing and conviction is growing that we have the right strategy and the right framework in place. It's basically based on the premise that to drive a continued competitive advantage for the company via operational capability, we have to perform at best-in-class levels in the areas of customer satisfaction, cost, cash and compliance. And we have to do that simultaneously and in a sustainable manner. Simultaneously and sustainable are very important attributes to creating that competitive advantage. The only way we think we can do this over the long run is that the tactics we drive in each of these areas have to be built upon a robust framework for continuous improvement, strong methodologies that give us the sense on how to drive year-over-year improvement on an ongoing basis. Those methodologies are founded on Lean and Six Sigma, and we're deploying them in a systematic way.

Operationally, we're facing 3 major trends today. And the actions that we're taking to address these trends, the first one, you've heard a lot about, our investments in Asia. I'll talk more about that as well. That's great from a cost standpoint. It's great from a cycle time standpoint. It also gives us a very diversified global footprint. Those investments in Asia complement our investments we've had in North America for some time. We think that diversified footprint gives us a good capability to deal with any economic dynamics we see at a macro level over the long-term.

The second thing is our commitment to continuous improvement really gives us a way to simultaneously drive best-in-class performance from a customer dimension, as well as take cycle time and waste out of our processes in parallel. And that's really the only way we can deal with the intensifying consolidation and intensifying cyclicality that we're facing in the markets going forward. So again, the strategy is staying intact. Our focus was really on tactics and execution going forward.

Let me talk a little bit about the strategic imperatives. And these are the same major categories of focus that I talked about last year. Starting with globalizing our footprint. We've made great strides in building our capability in Asia as was talked about in some of the prior presentations. As we think over the next 12 to 18 months, we really see our focus in 2 areas. The first one is optimizing these investments that we've made. There's a lot of opportunity for us with these new investments to still drive the performance to world-class levels. The second focus area that I will highlight is an acceleration of our plans to shift our solar supply chain into Asia. And that will evolve into a China-centric supply chain. It gives us a very nice footprint within the region, China, Taiwan, Singapore, all complementing each other very, very well.

Our material cost category is the highest component of our cost of goods sold, this is why we're so focused on building a world-class capability around sourcing. Our focus the past 12 months has really been on commercial acumen, commercial leverage in getting supply base to lower-cost regions. As we think to the future, it's very critical that we ramp up a strong design cost reduction program complementing those levers of commercial negotiation and lower-cost regions sourcing. It gives us the right breadth of initiatives to drive sustainable year-over-year cost reductions that our businesses need to compete. And then finally, continuous improvement truly fuels our future. Every one of our actions will be driven and improvements will be driven via these methodologies. We're being very smart and controlled as we deploy these capabilities. We started with the production processes the past 12 months. We will expand those methodologies into our spare parts fulfillment process and service delivery processes over the next 12 months. We're making sure that we instill the discipline early on in these programs, that we track the improvements and make sure they're positively impacting our business units on a going forward basis.

Let me just baseline where we are today, and where we expect to be in FY '14 against these major strategic imperatives. Starting with globalization. Exiting FY '08, we really had only about 5% of our manufacturing in Asia and roughly 20% of our supply base we were buying from in Asia. As we exited '11, we've got close to 50% of our manufacturing on a global basis now coming out of that region and more than 40% of our supply base has been sourced there. A significant amount of structural transformation over the past 2 years. Our Austin to Singapore shift in support of Randhir's business was completed 3 months ahead of schedule. That plant is now supporting 50% of the SSG revenue on a global basis. Productivity levels from that factory, exiting Q1 of '12, are above the historical best that we demonstrated for those same product lines in Austin. So we're very pleased with the capability that we built in Singapore. Equally important is our investments in Taiwan. 100% of our Display business is now operationally supported out of Asia with our Taiwan factory being the Centre of Excellence and is giving us very strong leverage. As we think again about 2014, a big focus is on the acceleration of the plans to shift our supply base on solar into Asia. We've been in Asia on solar and we've done a lot of work in FY '11 on moving the supply base. But the holistic manufacturing supply logistics infrastructure, we see the acceleration of those plans, as well as I mentioned before, a huge opportunity for us to optimize these new assets we've put in place. But equally important, we've got a lot of optimization opportunity that we can drive on our existing assets in North America. And Lean manufacturing, while it's nothing new, it works. And it really gives the teams a very clear roadmap to drive year-over-year productivity on a continued basis.

Let me talk about sourcing excellence. Historically, our material cost reduction on a year-over-year basis has run right around 2% year-over-year. In FY '11, we achieved in excess of 4%, so doubling of that material cost reduction in leverage. A lot of key things were driven. We brought all of our sourcing teams together globally to get the leverage of scale, and there are opportunities and commonalities on our sourcing leverage business unit to business unit. As I talked about last year, we put a big investment into should costing, improving the data-driven approach to our commercial negotiation. And then finally, we invested a lot in our capability, on our human capital, training on strategic commodity management and really investing in training on negotiation and commercial acumen. And clearly, we're very pleased with the results it's yielded. That being said, we really feel that we've got to deliver 4% material cost reduction year-over-year on a sustainable basis. To do that, we don't think it's really realistic to rely solely on the levers of commercial negotiation and lower-cost region sourcing. We're going to complement those levers with a robust commitment to design cost reduction. And we think the combination of those 3 things really gives us a sustained capability to create a competitive advantage on our material cost line.

And finally, as we talk about continuous improvement. And again, our continuous improvement program is founded on the basic methodologies of Lean and Six Sigma. We've systematically and we're well on our way to deploying our Applied Materials Production System across all of our factories. It's already yielding significant benefits for us operationally. As we go forward, we're expanding that program to cover 2 core customer-facing processes, our spare parts fulfillment process and our service delivery process. Now these are very important processes for us to serve customers better. They're equally very important processes for us to drive cost and working capital programs on to serve our shareholders better as well. We probably don't talk enough about our spare parts fulfillment process. We've got 50% of our raw and WIP inventory across the company is allocated to this process. So again, significant opportunities for us that we're looking to go after.

Let me just spend a little bit of time to discussing what we achieved the last year against what we said we would do, essentially, a say-do on FY 2011. In summary, total cost and cash actions exceeded our plans, primarily driven by material cost reduction programs, as well as a renewed focus on working capital and specifically on our payables balances. As we look at conversion costs, while it was on plan on a rate basis, somewhat impacted by volume. And our raw and WIP reductions really on an aggregate dollar basis, strong reductions. However, Q4 drop in demand had some slight impact on our turns for the balance of the year. So again, we're very pleased with the results. But probably more important for us on a going forward basis, this gives us confidence and conviction that the strategy we've laid out, the framework we've put in place is the right framework and the right set of actions. Our focus has to be on continued execution and discipline to the process.

Now let me shift gears a little bit and just start talking about our competitive advantage. And first, I want to talk about our cost. The first thing I would highlight is, clearly, the company wants to improve margin rates over the strategic planning period. While cost is not the only factor in that margin rate roadmap, we have to be a key contributor to those business units and to the financial performance of our company.

When we look at our cost structure, we can really drive 3 areas. Material cost, which is by far and away, the largest component of our cost structure; our conversion cost, which is essentially our direct factory labor plus the operational overhead we carry with producing a product and delivering that product to a customer; and finally, our logistics cost. As I talked about on the material cost side, we're very excited about the opportunity the design cost reduction gives us as we go forward. As we think about our conversion costs, again, lean manufacturing and the impact that will have across all of our manufacturing plants around the world, as well as the optimization and continued growth in our Asia manufacturing capacity.

Finally, logistics. Radical simplification of our logistics network, distribution point, processes, freight providers, is really the theme that I would highlight that the teams are going after. And that will take cost out of the equation. It will also take cycle time and working capital out as well.

Let me just go a little bit more into detail on design cost reduction. I mentioned it a couple of times in the past couple of slides. The first thing I would say is, we segmented our entire materials spend and looked at how much of that material spend is a candidate for design cost reduction actions. And you can see that we estimate that to be about 40%. Now that 40% of that opportunity is always gated to some extent by design control, where we're at in the product life cycle of a product, and we'll always look to improve that opportunity to make the pie bigger. But it's a pretty big opportunity as it sits today.

Conservatively, we think we can get 15% savings against that opportunity over the planned period. And if you just look at a specific proof point, just to put some color around what do we mean by design cost reduction, this is a component that's used in our SSG division across multiple product platforms. And essentially, what we've done is we've taken this from a machine or blank, if you will, to a near net casted part. So it's an aluminum component used to take a hunk of aluminum metal, machine it down to that component dimensions. We'll now moved that to a casting process, which we essentially cast to a near net shape, and then we'll just do some finishing machining steps on that part.

If you look at that simple change, what it drives in terms of material weight down by 70-plus percent, cycle time improvements in the supply base or probably most importantly, 50% cost reduction, we are attacking this in a comprehensive and systematic approach. What I mean by that is we're being very careful to use a disciplined methodology to segment the opportunity, categorize the opportunity, all casting opportunities, grouping those together and then taking advantage of Applied's global scale to execute on them. We've got a great engineering capability in India. We've got manufacturing and engineering in Xi'an, China and Austin, and so the scale of Applied Materials really allows us to go after this on a broad basis.

Let me talk a little bit about working capital. We're essentially looking to free up $500 million of cash over the next 3 years. We see $400 million of that coming from our raw and WIP inventory balances and $100 million of that coming from our payables balances. I think the most important thing and I can share with you that we've seen our operations team around the world go through over the past 12 months is a renewed confidence in understanding how to drive working capital improvement. Now this still has to flow through, and it will take us some time to get all of these structural changes through our system. But what I would see is our team historically has been very confident to forecast what the balances will be. But our confidence on how do we drive the balances down has not been there. And this is a direct result of our investment in lean manufacturing, a production system, and you can see there's 5 very clear global objectives that we can drive. They're applicable to all of our product-based business units. They're also very applicable to our spare parts fulfillment process. Again, of that $400 million of raw and WIP reduction, we expect $200 million of that to come from our spare parts fulfillment process. It's absolutely one of the reasons we're attacking that process with lean and Six Sigma.

And just to give you one concept that we're deploying, essentially, what we look at when we look at how do we drive improvement, we look at 2 things. How are we performing today to the target process capability of that manufacturing design? That's, in essence, our entitlement. The second thing is, how do we improve our entitlement? And also often in operations, there's a lot of actions on how to improve the entitlements, but there's not enough focus on the simple basic premise of how are we doing today against what we've designed our system to operate? And that's really what you see here on the left-hand side.

Essentially, we've got a 60% defect rate against our entitlement to date. We've deployed this concept across all of our manufacturing plants with the deployment of AMPS, our production system. We strengthened production rules. We are systematically deploying flow or demand-based material planning techniques. And you can see here on the left-hand side, you see our VHP Robot work center in Asia. Now this is a manufacturing line that we've only moved in the past 18 months, okay? So this is a brand new manufacturing line. And if you look over the past 6 months, essentially as we exited 2011, the change that was driven by a brand new manufacturing team, still learning our products, but when they have a roadmap and when they have a systematic methodology, the results that they can achieve are significant.

At end basis, cycle time down 50%, working capital on the line down 42%. How did they get this? Essentially, 21 new tooling fixture jigs material handling devices deployed, a complete conversion of a push-based material planning technique, essentially planning material based on a forecast, converting it completely to a demand-based planning technique, really working at the response of the customer. And then basic daily routine management, seeing the defect and having a good rigor to drive that down. So again, over the past 12 months, I'm very pleased with the capability developed, when we've done in the teams on how to drive working capital systematically.

Let me talk just a little bit about serving the customer better. As you've heard in many of the presentations this morning, it's a huge priority for us. We look at it in 3 categories. Again, we want to be faster and more responsive with our product. And really, the key component for us is our supply base and the part's lead time. We expect that to go down significantly by FY '14, primarily driven by lean. The second thing is the elimination of defects. We've made improvement in FY '11. We have a lot of opportunity to still go after. And really, DMAIC or Six Sigma gives us a structured way to improve the elimination of defects in our manufacturing processes or the design processes and our supply processes. And then finally, speed of response when we do have an issue. We launched an incident management system in 2011, and I'm very pleased with the progress we've made on responsiveness when we do have issues. So as we think about the future, our focus is really on elimination of defects and bringing on our supply base that is still relatively new in Asia up to world-class standards.

In summary, a couple of closing comments. The structure's in place. The operating framework, we're very confident, and it's delivering results. The strategy is not changing, and we think that's a good thing. What you will see is a constant evolution of our tactics. And as I talked about earlier, we really see the broad-based deployment of continuous improvement as a tremendous opportunity to drive customer performance. But equally important, drive the dimensions of cost and cash.

Thank you very much. And with that, I'll introduce Mike back up to the stage for some closing comments.

Michael R. Splinter

Thanks, Joe. I know we're just a few minutes away from Q&A, but I thought I'd just make a few closing comments about what you heard today. First of all, on our markets. I hope what you're taking away this morning is that certainly, in our semiconductor markets, we continue to think they're going to be strong, not only in 2012, but extending into 2013 as we not only see the continued move on mobility with the devices like smartphones and tablets, but also the resurgence of notebook PCs with touch capability, with ultrabooks and Windows 8. And in our markets in the TV space and in the solar space, these markets are in the bottom of their cycle, and that we do expect them to recover and get better by the end of the year and into 2013, giving Applied Materials a lot of opportunity for growth and expansion during the next 12 to 18 months.

And that everybody on our staff, and really everybody in our company is focused on these imperatives. Gaining share, not only in our semiconductor business, but in all of our businesses. But primarily, we have to do that in our semiconductor businesses and the trends that are going on in advance transistors, in 3D and advanced packaging, as well as inspection in favor of Applied Materials, we're going to be able to deliver on those promises this year; that everybody in our company is focused on getting the integration of Varian to be an outstanding achievement and make this the best merger that the industry has seen, but to do so in a way that delivers the cost synergies, cultural synergies, as well as revenue synergies; to drive our costs down and to deliver that $500 million of cash that Joe talked about and deliver a big part of that back to our shareholders; lower our breakeven in EES and in Display. We understand and know that we have to be profitable during all phases of these cycles. We're in the capital equipment business. We know that these businesses are inherently cyclical. We have to make sure our variability is consistent with the cycles we'll see in those businesses, as well as in our semiconductor business. And then increase the amount of our cash and cash flow that we return to shareholders back to our more traditional levels by increasing our dividend as we increase our business and returning cash to shareholders through share repurchase with our newly authorized agreement from our board.

So with that, I'd like to say we'll get on to our Q&A. We need to bring up a few chairs on to the stage. So while we're doing that, I'll just ask you to prepare your questions and thoughts, what you'd like to ask the Executive team, and then to invite the Executive team back up on the stage so that we can get all the questions that you might have answered in -- as effectively as we can.

Question-and-Answer Session

Michael R. Splinter

So while you ask your question, if you could just stand up and identify yourself, I think Mark has a microphone and -- hey, Jim. -- so if you could just stand up, identify yourself and ask your questions. Jim, you look like you're ready to go.

Unknown Analyst

Thank you. Thanks so much for the presentation and for the chance to ask a question. Couple of things. I mean I guess, first, on the share gain side, you gave us a great feel for where you've gained share over the last couple of years and then there was the slide about how you intend on gaining share in every segment in '11 through '14. Could you talk a little bit about what segments do you have the most confidence in being able to gain share? And then where do you think the share gain within those segments are going to be a little challenging, understanding you believe you're going to gain share in every segment. That's the first question, then I'll ask the second question one and give up the...

Michael R. Splinter

Okay, Randhir, you want to take that, where do have the most confidence that you're going to gain share, and where you do you think the biggest challenge is?

Randhir Thakur

Thank you, I think that the share gain that is shown over 2011 through 2014 in all of these areas, the confidence is high to gain share because we look at most of these transitions are at 20 and 40 nanometer where, at R&D level, we have positions, critical positions already established with our customers. Where we see a difference maybe, Jim, is in terms of timing. But in some customers, it might come earlier versus the others. And that's why I emphasize today that when we look at their share gain, we look at it node-over-node share gain because we then know that it's not as much function of buying patterns. It's more a function of the true wins. We have those true wins in the development area, which will proliferate in production and give us the share gain.

Unknown Analyst

That's helpful, thanks. And for the follow-up question, you showed the slide where CapExs per die has been going up pretty consistently from 65 nanometers to where we are today as we go down the node. But what's the other part of the equation that's not in there? Because overall, wafer fab equipment spending in that time has remained essentially flat if we look at it kind of from '07 peak to '11 peak or whatever. So even though we're seeing increasing CapEx per die, overall wafer fab equipment spending has remained flat. So what's the other part of the equation, and what's the prospect that, that could change for the better over the next couple of years?

Michael R. Splinter

Maybe I'll hit on a key point here. The other part of that is a big drop-off in DRAM spending, and not a very big increase in NAND spending. This chart -- Randhir's chart was primarily on foundry -- was foundry-focus. I don't know whether you'd add anything to that?

Randhir Thakur

No, I think that answers it.

Michael R. Splinter

Jim, one other thing on the share, I would say that it's hard for us to predict how much litho spending will go on during these next few years, in part, that's why we try to concentrate on SAM share gains during this period. And so that's one of those things, and the overall WIP could affect the picture.

Michael R. Splinter

Yes, Krish.

Krish Sankar - BofA Merrill Lynch, Research Division

Yes. Krish Shankar, BofA Merrill Lynch. When you look at long term. And whenever EUV comes into production, arguably, it will be negative for SSG group. But among the product lines that you have, where do you think incremental opportunity within review inspection? Would it be somewhere else for your SSD products? Then I have a follow-up.

Michael R. Splinter

Okay, Randhir, why don't you take this one, too. As EUV comes in, where do you think the opportunities will be? Maybe you could also comment on when do you think -- when EUV might come in and whether it will or won't be negative for you?

Randhir Thakur

Yes, as the EUV keeps pushing out for volume manufacturing because of some of the engineering technical as well as manufacturing issues. But I really believe that over time, our customers will resolve them and, that it will come at one step or 2 steps in sub 20-nanometer areas in volume manufacturing. But the -- with EUV comes the ecosystem for the EUV. For example, inspection area where we already are engaged and seeing opportunities, defect is one big issue as EUV comes in. Their defectivity becomes a big concern. Secondly, the EUV is actually -- some of their line edge roughness and other technical issues are not fully resolved, therefore, the ecosystem around the deposition patterning etch DEF activity inspection, CVD will continue to see strength even after the EUV comes in.

Krish Sankar - BofA Merrill Lynch, Research Division

And just a follow-up for Mark, can you give us an update on your MOCVD program? Are you still committed to it? And if so, what's your view on the LED industry? And when do you think the equipment orders are going to start recovering in that segment?

Michael R. Splinter

Mark?

Mark R. Pinto

Again, we don't want to talk a lot about unreleased products, so I don't want to say very much about the product at this point. I will say, with respect to the market, it has been soft. You can make a case that the capacity situation area is potentially worse than solar, stimulated by direct Chinese capital subsidies. And we're seeing a little bit of an upturn, I think, mainly at this point, still being driven by the backlights of LCD and Samsung's announcements and so forth about making a fuller conversion to that. The general lighting transition, we believe, especially when you look at things like warm lighting, the efficacy is way too low to make that transition in -- certainly in 2012, and we'd even argue 2013. So we see this market as somewhat soft. And that's partly why we've had some challenges penetrating it.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Thanks. Jagadish Iyer, Piper Jaffray. Two questions. First on your charge on your guidance on 9.1 to 9.5 on a flat CapEx. What amount of conservatism is built into that kind of a guidance on 9.1 to 9.5 given that flat CapEx, but Varian contributing almost $800 million to $1 billion? And then I have a follow-up.

George S. Davis

Yes. As I said, the base forecast actually doesn't assume flat. It's in line with our flat to down 15. So more of a midpoint around down 7.5%. And Varian, in that case, does come in at between $850 million and $1 billion adds that incremental revenue. So we see that year-over-year flat would be something in the order -- and again, the problem with talking about specific impacts, if you just make the delta changes, does it happen in November and December of the calendar year? Outside of our fiscal year, we saw some very big spending at the end of last year in November and December. So that, overall, the -- if you went to flat from sort of our base mid-case, you're probably looking at maybe an additional $0.10 to $0.15 of earnings in that situation. But that's assuming that you see that all in our fiscal year. So that's the challenge of making that kind of call. We think it's too early to make a flat call. We are encouraged by what we see going into the third quarter. But it's still too early to come off of our current view.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Second question. Mike, you had alluded to the buildout of the iPhones and in terms of how you have to be prepared. So how much visibility do you have on the second half on your silicon systems in terms of the kind of conviction level that you think potentially you could have orders sequentially grow or at least remain flat?

Michael R. Splinter

Yes, well, we're not quite giving our Q3 forecast yet. But I would say, again, confidence there is growing, that we know that our customers have to have capacity prepositions by, let's say, August or so to produce the necessary die for the next generation of smartphone. I think that goes both for the big -- the 2 biggest suppliers of smartphones. So I think if you wait a few weeks, we'll give our Q3 forecast at our quarterly update. But I would say confidence is increasing.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Mahesh Sanganeria from RBC Capital Markets. Question. You talked a lot about complexity in transitional fabrication. Just as the cost of capital going up pretty significantly from node to node, can you bucket where the incremental dollar is going on the broad category? I'm looking for something that may be the biggest beneficiary, the patterning and the second biggest transitional fabrication. So can you give us a little bit more color where the incremental dollar is going from node to node?

Michael R. Splinter

Randhir?

Randhir Thakur

So if you look at transistor as an example node over node, we see 3 primary areas where most of it gets bucketed. One is in the Epi space. Epi went from what used to be a small business to become fairly significant but very instrumental business and their sub available market for this grew. The number of applications and passes grew. So that's one phase where we see it going. The second is in the doping area because of the finFET. And new -- and these are the structures that are adopted. The doping has to be done in a different fashion. So a number of the doping steps grows. But more than that, controlling it properly becomes important. So that is where we see the growth. The third is in the controlling the overall thermal budget and thermal processing and a lot of the anneals and a number of anneal steps and then getting the integration done with the PVD for the cili cibation [ph] to define the total structure. That's another place where we see the growth. And there is also -- next to that is on the implementation in etch area, some of the inspection. But those are relatively standard.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Just a quick follow-up again, coming back to your -- at the guidance. At the last meeting, you gave the guidance of WFE expectation flat to down 15%. And since then, we have heard a lot of incrementally positive commentary from foundries, particularly TSMC considering increasing the CapEx. Just wondering that you're not changing. Are you more cautious on the NAND side? Is that tempering your expectation for WFE and are increasing based on TSMC and Samsung CapEx?

George S. Davis

Sure. I think what we're seeing is first up, as we talked about on almost every call, the degree of concentration is very high. And so the ability for customers to change their view or when it's -- this is concentrated is -- could be extremely impactful. So given the concentration, we believe that it is prudent to really take a more balanced view of the full year. I do believe the signs are improving. There's -- you cited one of the big signs. You can also see -- if you saw PC demand picking up, you might see logic activity pull in into the year. There's a lot of number of factors that you could look at. I would say NAND does seem to be continuing to be a little softer than people would anticipate. But overall, I would say the signs are generally positive. It's just at this point in the year, we feel moving off of the -- of our current position is just premature.

Stephen Chin - UBS Investment Bank, Research Division

Stephen Chin from UBS. I have 2 questions in the silicon division. The first one is about the foundry market share goal of 24% going forward. In general, there's been a typical perception that when your competitors, KLA has always been the beneficiary of foundry spending. But maybe you could help elaborate where these share gains are coming from? Is it the adoption of High-k/Metal Gates that maybe we've lost track of? And then I have a follow-up.

Michael R. Splinter

Sure, a big part of it is in that transistor area, Randhir, you want to talk a little about that, how you're improving your share as a spend in foundry?

Randhir Thakur

I think the market share in foundry for us still over years, has been strong in the transistor and interconnect area. And that goes for last 10, 12 years. But what has happened since then is with some of the new things that we acquired, the capability. For example, the plating, we have now more and more share. Most of the share of that came on the -- from the foundry side. Similarly, in the case of Epi, it became larger piece in the foundry for the transistor definition. Now with acquisition of Varian, it increases our market share in a -- very significantly. Most foundries are using the implant for high current, medium current, as well as high energy. So there are these components added into the business that has increased our share. The comment about -- I wanted to mention is about the defectivity in inspection. In the leading foundries, pretty much for whether it is our UVision product or SEMVision or the mass inspection, we pretty much have seen strength in our inspection space as well.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And then just a quick follow-up to the foundry question. I think you called out a wafer start number around here of about 1 million wafer starts over the next 3 years? If we assume it's about $1 billion per 10,000 wafer starts, that could be about $100 billion market opportunity over the next 3 years. Is that kind of the way that you're thinking of modeling the foundry industry? Thanks.

Randhir Thakur

I'd say the total model for the 1 million wafers starts is the -- related to the overall mobility that is driving the total starts. Out of that, about 400,000, 450,000 is related to the foundry, and the remaining 500-plus is related to the memory that goes with it. So this is just modeling the modulating space only.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Patrick Ho, Stifel, Nicolaus. In terms of the wafer fab equipment forecast, Mike, that you gave in terms of $30 billion to $40 billion, I could see the $30 billion to $35 billion range that we've been in the last few years, what's the incremental that gets you to the top end, say, from $35 billion to $40 billion? And I have a follow-up as well.

Michael R. Splinter

Sure. So if you think about, the $30 billion to $35 billion is pretty much the same trends that we're seeing this year in mobility from foundries and NAND flash and in some degree, logic to support the servers that are needed to communicate with these devices. To get to the high-end of that range, we would have to see our PCs come back in some significant fashion from where they've been in the last year, kind of in single digits. We think the first leg of that is just recovering from the supply chain issues. Then the second leg of that is our consumer adoption of Windows 8 and ultrabooks with touch panels. And then the third leg of that would be corporates trying -- starting to do conversion to Windows 8, say, in the second half of 2013. That would affect both logic spending and DRAM spending, we believe, because the addressable bits go up with Windows 8 and the new architectures from Intel. So just to summarize, we see increased logic and -- your cell phone is near your microphone. Somebody. But anyway, that we'd see increased spending in logic and DRAM to get to the high-end. And DRAM off of the very, very low base of $3-some billion this year.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

And speaking of DRAM, can you give your color and your perception on some of the stuff that's going on right now, particularly with the Elpida bankruptcy and how that could affect the overall DRAM space for, not only you guys, but the equipment space as a whole going forward?

Michael R. Splinter

Sure, well, first of all, as I just alluded to in the DRAM space, there really not much capital spending that's going on, especially not much capital spending in areas of addressable market for Applied Materials. Certainly, most of their spending is going into technology conversion, which is largely litho. So any of these short-term impacts are not really impacting or concerning the equipment industry. It's more services and support for that -- for Elpida and other companies in the industry. Now if we extend out a little bit, it really for us gets down to demand. Can some of the capacity be rationalized, may be taken offline? That would actually, I think from our standpoint, be a good thing and get capacity and demand closer in line. But in the end, the overall demand on DRAM on a year-over-year bit growth has to get above 40% or 50% to really get significant investment back into this regime. I think we can all think back to 2007 when bit growth was 70%, 80%, 90% in those years are very, very high, and we saw dramatic investments in DRAMs. We're nowhere near that today with DRAM still being an insignificant part of smartphones, although a growing part of smartphones. It's just not significant on overall capacity level. Yes?

Unknown Analyst

Sal LaCardo [ph] from Source Capital Group. Two questions. First, with your big move in manufacturing to Asia, what factors would you consider to slow that or to move more of it back to United States in terms of the government's goal to increase jobs in this country?

Michael R. Splinter

Sure. Joe, maybe you want to comment, but I'd just say the biggest factor here is 80% of our customers and 100% -- 80% of our semiconductor customers, 100% of our display and 90% of our solar customers are in Asia. That's been the biggest factor. But Joe, do you want to comment about cost and other factors?

Joseph Gerard Flanagan

Yes. No, I think -- I mean the first comment I would say, as I mentioned, we like our footprint right now. We've got -- especially on our semiconductor business, we've still got a great footprint, a great set of assets in North America that will perform very well for us. And that's complemented with the capability in Asia that we brought online. That gives us good flexibility to serve customers. It gives us good flexibility to a changing macroeconomic environment. The second comment, I would say is operationally, moving factories is a lot of heavy lifting, and it's disruptive. So as I look over the next 24 or 36 months, I'm really excited about optimizing the assets we have and getting just the good old fashioned productivity out in those assets via a tried and trued methods. So that's really how I think about it operationally, kind of holistically.

Unknown Analyst

Okay. Second question, on TV displays. Why was there no mention of plasma?

Joseph Gerard Flanagan

Tom, you got that one?

Thomas T. Edman

Sure. Actually, If you do -- if you look at our forecast, plasma displays today are a pretty insignificant part of the total television unit volume. We actually, in our forecast period, see that continuing to decline. And LCDs and then organic LEDs becoming a bigger part of the unit picture. So -- and plasma displays simply because of energy consumption and also I think the cost structure favoring LCD at this point have been moving downwards in terms of unit volume.

Unknown Analyst

[indiscernible]

Thomas T. Edman

So I think that the....

Michael R. Splinter

Could you repeat the question? Because I don't think people can hear it.

Thomas T. Edman

Yes. The question was the picture quality of plasma versus LCDs and organic LEDs. I think with the efforts that are ongoing with LCDs and high-resolution LCDs and then with the efforts around organic LEDs, that picture quality will certainly -- it's always hard to compare the technologies, but I would say would be optimal picture quality.

Vishal Shah - Deutsche Bank AG, Research Division

Vishal Shah from Deutsche Bank. So you talked a lot about the foundry capital intensity increasing, and that's all great. But just wanted to ask about the NAND capital intensity, specifically as some of your customers are now moving from memory to logic. I was wondering, to what extent can they reuse some of the equipment? These investments are supposed to last many multiple nodes, as that used to be the case in the past. So I was wondering, to what extent some of your large customers are going to try to reuse some of the leading-edge foundry equipment into memory fabs and that may potentially cause some reduction in memory capital intensity. Thank you.

Michael R. Splinter

Randhir, you want to take this question on NAND capital intensity?

Randhir Thakur

As some of the equipment we use in the cases of customers who have multiple devices, that's already happening in fab, where they are shifting capacity and using it for other purposes. But specific to NAND, in the case of NAND, ultimately, in terms of timing, it may not be as clear when really the onset of additional investments will happen. But the big growth today is in 70% range. And we really believe that we will look at the long-term channel for the -- if you look at the channel and for the NAND where the overall demand is, the demand is much -- there's a much higher chance for the demand to return here as the bit growth goes above 80%. We kind of have to look at the NAND a little bit differently because the demand that I was relating to SSD or in the mobile device side, some of the growth is coming from the MLC and the 3-bit per cell usages as well. So that is kind of offsetting some of the bit consumption. But, overall, we really see some timing aspect other than that investments on NAND will be there and helping.

Michael R. Splinter

I wonder, maybe you can comment on when you see 3D NAND becoming a significant part or whether when R&D investments or production investments will ramp-up there?

Randhir Thakur

So at 3D -- on the 3D NAND, customers really started driving it last year in 2011. By end of this year, we'll start seeing the pilot parts. So as a result in coming the VNAND, vertical NAND and all of these 3D NAND-type devices, some combination of 3D NAND devices from leading players, we really see this as a 2013, 2014 pilot production from now on.

Michael R. Splinter

Was there a follow-up?

Satya Kumar - Crédit Suisse AG, Research Division

Satya Kumar from Credit Suisse. Question for Randhir or Mike. I guess you mentioned the DRAM spending going down in 2011 as part of the reason why your market share might have declined. If I go back several years, back to '04, your market share in terms of the portion of the WFE CapEx that you capture has declined even in the past when DRAM spending was going up in the last cycle. And I believe it's probably because of the productivity of the equipment has increased a lot in your case. How do you see those productivity trends going forward into the future? Do you still continue to see that weighing on the overall SAM growth? And the second question is for Mark and Tom. I thought you both have some interesting points on the potential for recovery in solar CapEx and Display CapEx over the next few years. What do you see near term in terms of the order picture? I mean, the order levels are extremely low right now. Do you see any signs of hope or green shoots in terms of the orders?

Michael R. Splinter

Okay, so maybe we can start with the question about even if you go back in the past, previous high DRAM cycles, where we did not gain share, you're right. We added a lot of productivity, and machines went from 50 to 100 wafers an hour. But Randhir, maybe you want to talk about -- more about what's happened recently in the last few years in our share in DRAM?

Randhir Thakur

Now that's really a good question, Satya. And I think the productivity part that you pointed out and certainly, we have delivered the productivity and that has not necessarily played favorably to the SAM growth. But if we look at the overall history going back, there have been some other products that we admitted in the past. So the picture today is we have not many products in our portfolio. So as the DRAM returns, we think we will have strength there. Historically, in the DRAM though, our market share has stayed stronger. Recently, in the last 2 years, there's some of the changes that would come with the new implementation of our latest DRAM technologies is in some critical areas like adoption of, for example, Epi or some of the new steps in the CVD space, thus we're able to maybe relaunch just recently, which is fairly critical for internet or [indiscernible]. These are some areas that we would see an uptick for our growth. And the productivity part is valid. It's something that continues to be -- on one hand, it's good for our customers. The there is that how do we make sure we generate additional SAM and it will stay as a challenge for us. We would work it.

Michael R. Splinter

Mark and Tom, any green shoots you're seeing in -- it's you.

Unknown Attendee

We found the culprit.

Randhir Thakur

All along, it was me, I didn't know.

Mark R. Pinto

The mobility guy.

Michael R. Splinter

Randhir didn't hear that message about turning his phone off before...

Randhir Thakur

I'm not hiding any solar panels.

Mark R. Pinto

Satya, we've already begun to see a little bit, but not enough to make a dent. As Mike said before, we're having -- or Mike and George said a lot of our revenue is still deferred from new technology that we put out the past couple of quarters. So -- but the orders are increasing. So we are seeing signs -- there are customers who, I would say, they have to be strong from production and technology point of view and have good visibility to their channel. For instance, ones that have a very strong business in China, right now, are ones that are adding and actually pulling in capacity. So we are seeing that. Another place that we see strength is in Taiwan where we've seen and we believe and I think others have said that we believe that some of that is coming from potential alternate supply pads into the U.S. depending on how the trade issue works itself out. So we see high utilization in some of those factories and some capacity being added there as well. But the fact -- and I think similar to what Tom is going to say, that these companies are all losing money. They have to be very, very confident in making an investment in a payback period. And they see the trade thing, they see all kinds of different opinions about what happens in Europe, so they're just being very, very cautious. So I would hesitate to predict when we'll see it. Efficiency is another one where they would like it, but one of the questions, where was my payback? How fast do I get that investment paid back? So those kinds of things we're working with customers right now. I do think in the next couple of months, maybe even leading into our earnings call, we'll get some more view of that as the German situation in particular and the trade situation become a little clear. Tom?

Thomas T. Edman

Sure. On the Display side, starting out with mobility, I think the -- what we are seeing is the touch panel situation coming into a much better balance. That's been a positive for our customers there. These touch panel sensor manufacturers tend to be a little bit less well capitalized historically. And so they would look for demand, supply-demand to come into balance, shoring up in their balance sheets. I think we're starting to see indications of that, which is a positive. On the television side, as Mark was alluding to, there, what I would really track is the price points of televisions as the supply-demand comes into balance in there. So we'll look carefully at that situation today, we haven't yet seen that move up that they were hoping to see and that we should start seeing indications of later in the year. The other aspect would be the balance sheets of those companies, I'd say on the good news front, many of the leaders in the television and the display industry are taking steps now to start shoring up their balance sheets. You're starting to see restructurings occur. And in April, most of these companies start their fiscal years, and so they're in a budget situation, pulling together their budgets right now. So as that goes forward, I think they're going to start getting increasing confidence that they can go forward with their next investments. The last thing I would add is, they also have to make technology decisions. And this is one of the factors that makes it most difficult for us to really understand are the final timing because they are investing now in multiple technology paths, and they have to make some critical decisions on which technology they're going to move forward with.

Michael R. Splinter

And Tom, isn't there -- as some of these factories get converted to the next-generation of technology, some loss of capacity and...

Thomas T. Edman

That's correct. If you look at -- that's a good point. The supply-demand balance of televisions, one factor you do have to consider is, as some of these companies convert their lines to metal oxide, then metal oxide does pull down on the overall television capacity available, and that would then again be favorable for the supply-demand balance.

Edwin Mok - Needham & Company, LLC, Research Division

Edwin Mok with Needham & Company. So just a question for Tom as well. If I look at the data you presented, you talked about the mobile display equipment market going to shrink this year. But yet, you guys are projecting a mobile display revenue to increase this year. Is that just revenue, delay revenue recognition, or is it share gain? And if so, why you [indiscernible] market so much? And then I have a follow-up question for Mike.

Thomas T. Edman

Sure. So both factors -- so there is a timing difference there. The revenue -- some of the mobility products that we pushed out into the market would take revenue recognition upon acceptance versus shipments. So there is a timing difference there. More importantly, certainly, from our perspective is we've been working very hard on bringing up our share in mobility in that area, particularly with our CVD products. And so there's also a share gain there reflected as well.

Edwin Mok - Needham & Company, LLC, Research Division

Great. And then Mike, just a high-level question. So recently, one of your competitor in Japan bought a company up around Boston? And, obviously, we have seen our M&A because you guys bought Varian, right? How do you kind of see the industry just over the next few years assuming that you guys are correct that we'll remain at this elevated capital spending level, do you see more consolidation and then maybe more specific to why do you see other tuck-in acquisitions that might make sense for you guys on the silicon side?

Michael R. Splinter

I hope you're not going to compare the acquisition of Varian with the acquisition of Max [ph] or maybe Airlicon [ph] or something like that. So I think those are pretty disparate. But I'll let George comment in a minute. But we don't see -- we do see mergers and acquisitions continuing in the industry. I don't -- I think this trend perhaps that we started a couple of years ago with Semitool is going to continue. However, as George alluded to, our particular pipeline doesn't have anything that we're even thinking about of the order of magnitude of Varian, or if you added them all up, you won't get to the order of magnitude of Varian. George, you want to...

George S. Davis

Sure, I think as we've seen, the industry outside of the specifics we just mentioned, the consolidation has really taken place through share. And with the -- it's the exception that you would see a company that is very small, has a strong enough technology and product portfolio that you could get cash on cash return by buying that and growing the share position. Sometimes, it can happen with a small company when the market that it's serving is in the early stages. That's what we saw with Semitool. So that was an exception in that sense, and it's turned out to be -- the timing was quite good on that. So I think it's clearly in our view, Varian was, far and away, the best opportunity to acquire a market leader where you had a great strategic fit with our roadmap and also made us really the indispensable transistor provider to our customers. Those -- if you look around, you don't see a lot of those opportunities. There might be some tuck-in technologies that we see, but we have to be convinced that it really fits strategically with where we want to be positioned, where we think an inflection is coming. Otherwise, it's going to be really a focus on the things that Randhir was talking about, which is how do you grow share, get in the right SAM, and once you're in the right SAM, how do you grow share within that SAM?

Michael R. Splinter

Thanks, Ed. Yes?

Terence R. Whalen - Citigroup Inc, Research Division

I'll just keep it to one quick question given the time. Terence Whalen with Citigroup. So I thought you had a pretty interesting slide showing your projection for node foundry capacity. And what I couldn't help but notice was that pretty strong ongoing 28-nanometer ramp. But then a fairly flat 20-nanometer ramp. I wanted to understand how the customer is thinking around 20 nanometers evolving? And what are the primary factors that are going to influence the shape of that adoption, whether it be the equipment of level of competition, chip level competition, LTE balance assumption or some factors around die size?

Michael R. Splinter

Randhir, maybe I'll make a couple of comments, then you can jump in and tell it since it was you in charts. I think that in the foundry aspect, what's going to drive the next generation of technology is adoption of features in smartphones. So that's going to be the primary -- smartphones and tablets. As long as there's more features that are needed, wanted, desired, it's going to drive more processing power requirements. That's going to push up the natural die size at the older technology, which will force the customers and their customers to move to the next generation very quickly. So if we're going to say, "What's going to happen at 20 nanometers?" iPhone 6 is going to drive and whatever tablet number we'd be at, at that time is going to drive a big time push to 20 nanometers.

Randhir Thakur

Just to add a couple of points, one is on the 28-nanometer, the ramp is just happening. So this is really less than 20% at the moment. And most of the -- actually, as far as the capacity is concerned, all customers standards is sold out. So we'll see more of a 28-nanometer going. But the transition here is important. That was to hike a [indiscernible]. And the -- actually, the customers really struggle with the cost aspect, not only just the technology integration part, but the cost part. At 20-nanometer, it again will be challenged, that cost element to it. As far as the technical aspects are concerned, customers are more comfortable with the 20-nanometer and its integration getting it to the yield. 28-nanometer was challenged. 28-nanometer, according to our customers, will be a much bigger node than the 20-nanometer. But currently, for 20-nanometer the gap is really not as much of the technology, but the cost element.

Michael R. Splinter

Thanks, Randhir. That is going to have to conclude our webcast. We're out of time on the program. So if you didn't get your answer -- your questions answered, we'll be available certainly on lunch and throughout the day. We'd like to invite all of you to join us for lunch across the hall, will be informal time together. So if you can, please join us. Thank you.

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