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Applied Materials (NASDAQ:AMAT)

Q3 2012 Earnings Call

August 15, 2012 4:30 pm ET

Executives

Michael Sullivan - Vice President of Investor Relations

Michael R. Splinter - Chairman and Chief executive Officer

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

Analysts

Christopher J. Muse - Barclays Capital, Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Satya Kumar - Crédit Suisse AG, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Christopher Blansett - JP Morgan Chase & Co, Research Division

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

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

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

Operator

Good afternoon and welcome to the Applied Materials Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 15, 2012.

Please note that today's call will contain forward-looking statements which are all statements other than those of historical fact, including statements regarding Applied's performance, industry and economic outlooks, customer spending, Varian integration, capital allocation, tax rate and Q4 of 2012 business outlook.

All forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Information concerning these risk factors is contained in today's earnings press release and in the company's filings with the SEC. Forward-looking statements are based on information as of August 15, 2012, and the company assumes no obligation to update such statements.

Today's call also contains non-GAAP financial measures. Reconciliations of the non-GAAP measures to GAAP measures are contained in today's earnings release or in the financial highlight slides, which are on the Investor page of our website at appliedmaterials.com.

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

Michael Sullivan

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

Today we'll discuss the results for our third quarter, which ended on July 29. Our earnings release was issued just after 1 p.m. Pacific Time and you could find a copy on our website, appliedmaterials.com. Also on the website is our quarterly financial highlights presentation, which provides additional details.

Mike Splinter will lead off today's call with comments about the industry environment as well as our performance and strategies. George will then discuss our financial performance for the quarter, along with our business outlook.

And so with that introduction, I'd now like to turn the call over to Mike Splinter.

Michael R. Splinter

Thanks, Mike, and good afternoon everyone on the call today. I'm pleased to report that Applied Materials delivered solid financial performance in line with our outlook despite challenging industry conditions in semiconductor, display and solar. Thanks to strong execution demonstrated by our teams around the world, we posted $2.3 billion of revenue, with earnings near the midpoint of our target range. Strong cash flow performance enabled us to return $615 million to shareholders while maintaining our cash balance.

Over the past 3 months, we have made excellent progress with the Varian integration. We are accelerating our compliance to combine the 2 companies, and we are on track to exceed our targeted synergy savings.

In June, we announced the appointment of Gary Dickerson as Applied Materials President. I've asked Gary to focus his attention on the company's product strategy and development engine, with a view to improving the effectiveness and efficiency of our R&D investments. Gary is fully immersed in this endeavor, and will provide an update at our next call in November.

As we outlined at SEMICON West, demand for wafer fabrication equipment has softened dramatically since the first half of the year, with sharp declines in foundry and NAND investment. As we look to our fiscal Q4, we see a combination of macroeconomic and industry dynamics contributing to a very weak business environment. We believe this pullback in demand is seasonal, and we expect it to be short-lived, with orders and revenue recovering in our first fiscal quarter.

During this period, we will diligently manage discretionary spending, while focusing our investments on critical programs that support our strategic priorities to grow share in wafer fab equipment and expand our total available market.

From European austerity to slowing growth in China and the U.S., economic uncertainty is weighing on top of a seasonal pullback to produce weaker near-term demand. And our customers are choosing to delay their investments until they see stronger demand signals. China is now the largest market for TVs, PCs and smartphones, and the Chinese economy will play a pivotal role in determining how quickly industry investment levels recover.

While mobility remains the most significant driver of growth in the semiconductor industry, this is also causing changes in market dynamics. For the second year in a row, we are feeling the effects of more pronounced seasonal buying, as consumers wait for new smartphone and tablet models to be released.

With foundries representing about 45% of wafer fab equipment spending in 2012, the investment patterns of these customers are the single most important factor impacting our business today. In addition, lower-than-expected PC sales have held back DRAM bit growth to the 30% range and consequently, investments in new capacity remain at extremely at low levels.

The adoption of solid-state drives is not ramping as quickly as forecast and with only modest increase in the bits per box for mobile devices, we now see NAND bit growth in the range of 60% to 65%. As a result, customers have announced they will cut production by roughly 150,000 wafer starts per month on top of reduction in their capital spending.

Looking at the industry as a whole, we are maintaining the 2012 wafer fab equipment forecast that we shared at SEMICON. We believe spending will be in the range of $30 billion to $33 billion for the year, and there is a firm foundation for the multiyear capital investment cycle to continue.

As the mobility trend gathers pace, we believe foundries will need between 100,000 and 150,000 wafer starts per month of additional 28-nanometer capacity next year. In addition, ultrabooks and Windows 8 have the potential to spur PC growth and drive resurgence in demand for both DRAM and flash memory.

Within this investment cycle, the spending mix favors Applied's leadership areas as customers introduce increasingly complex transistors schemes. We expect 2012 to be a record year for our Epi business, driven by an increasing number of selected Epi applications. Our metal deposition group also delivered another strong quarter, benefiting from broader adoption of metal gate transistors.

With the 450-millimeter road map becoming clearer and timing of major milestones more predictable, we continue to ramp our development program to be in the right position at the right time to serve our customers through this transition.

In Display, mobility-related markets represented 100% of our orders this quarter. We expect investment in these markets to remain at healthy levels as customers shift production of displays and touch panels for both smartphones and tablets to larger substrate sizes and more advanced technologies.

In contrast, TV sales for the first half of the year were around 90 million units, which is below the level needed to stimulate capacity additions.

In the near term, TV-related investment will be limited to development tools for new technology, focused on metal oxide transistors and organic LEDs.

As macroeconomic conditions improve, we believe that TV supply and demand can rebalance quickly, and this will provide a catalyst for customers to resume their plans to populate new factories in China. We expect to see the first orders for these factories before the end of the calendar year.

In solar, end-market demand is still robust and we maintain our view that global installations will be in the range of 27 to 35 gigawatts for the year. The industry is relentlessly driving down manufacturing costs and making conversion efficiency improvements. As a result, TV-generated electricity is reaching parity with retail electricity rates in many areas of the world.

At the same time, overcapacity within the supply chain has created an exceptionally challenging environment for wafer, cell and module manufacturers. Our EES results reflect an environment of extremely cautious investment by our customers as they focus on conserving cash.

Industry consolidation is occurring, albeit slower than anticipated, and this rationalization of capacity will be a critical factor in determining when the supply and demand come back into balance.

We remain focused on lowering our cost structure in EES, and have made significant progress shifting our manufacturing footprint to Asia while exiting LED.

In summary, we are currently navigating a period of turbulence in our markets and managing a rapidly changing demand profile in our semiconductor equipment business. We delivered solid results for the third quarter, and we're operating the company efficiently with disciplined spending, aligned to the contours of this business environment.

Although we see a weak near-term outlook, we firmly believe that the fundamental trends in mobility and solar energy adoption provide a strong platform for Applied Materials to generate long-term value and attractive returns for our shareholders.

Now let me hand the call over to George for additional comments on our performance and outlook. George?

George S. Davis

Thank you, Mike. And let me add my welcome to everyone on the call today. In our third fiscal quarter, Applied generated strong operating cash flow and ramped the return of cash to shareholders, buying back 3.6% of shares outstanding in the quarter. In a difficult environment, we are controlling spending while ensuring we prioritize investment in key areas to support future growth.

Let me start by comparing our third quarter results to the prior quarter. Orders declined 35% to $1.8 billion, reflecting push-outs in semiconductor equipment, lower AGS orders due to the absence of a finFET thin-film solar order and continuing weak demand in our non-semiconductor business.

Net sales decreased 8% to $2.3 billion due to lower semiconductor equipment sales. Non-GAAP gross margin was down slightly to 41.6%, primarily due to the impact of lower volumes. Total non-GAAP operating expenses were $543 million, 6% below our Q2 levels and 4% below our outlook of $565 million plus or minus $10 million. Adjusting for onetime beneficial items, our run rate was approximately $560 million.

For the fourth quarter, we expect to lower our target run rate to $545 million plus or minus $10 million, as we continue to tightly manage discretionary spending while selectively increasing our investment for critical programs in SSG.

Our non-GAAP effective tax rate was 27% and for the fiscal year, the rate expectation remains at 26% to 27%. The modest uptick in the rate reflected the impact of lower revenue on our global tax structure.

Cash and investments ended the quarter approximately flat at $3.2 billion, as our operating cash flow offset total cash return to shareholders and CapEx. Our strong cash flow performance was due to effective working capital management, with improved inventory and receivable balances offsetting the impact of lower revenues.

Our capital allocation priorities for cash continue to be investing in attractive opportunities in our businesses, increasing the dividend in line with the growth of the business and utilizing share repurchases as the preferred means of returning excess cash.

We increased share buybacks to $500 million in the quarter, repurchasing 46.7 million shares at an average price of $10.71 per share. We also paid $115 million in dividends, reflecting the 13% increase that we announced in March.

Over the past 4 quarters, we have repurchased approximately 97 million shares or more than 7% of shares outstanding at an average price of $11.08. We expect to continue to be an active buyer of our stock in this environment.

Next I will comment on our segment results as compared to the prior quarter. SSG orders were down 41% to $1.2 billion, led by foundry customers. For our fiscal year, we expect SSG orders will be weighted 60% to 65% in the first half, with nearly 70% of foundry orders in the first half of our fiscal year.

Net sales decreased 13% to $1.5 billion, consistent with our outlook at the SEMICON West briefing. The largest sequential declines were from foundry and NAND at 17% and 18%, respectively. SSG's non-GAAP operating margin was 31.2%, in line with model performance.

In AGS, orders were $531 million. Excluding a thin-film solar line booked in fiscal Q2, orders declined 4% sequentially. AGS net sales were up 5% to $579 million, as strengths in spares and services offset weakness in 200-millimeter equipment demand. AGS achieved model performance, with non-GAAP operating margin increasing to 23.3%.

In Display, orders decreased to $67 million, as LCD equipment spending continue to push out. This is the fourth consecutive quarter with orders below $100 million, reflecting exceptionally low demand for television manufacturing equipment. Net sales for Display were up 6% to $142 million, with mobility investments for touch panel and high-resolution screens accounting for the majority of revenue. Non-GAAP operating margin for the quarter was 8.5%.

In EES, orders decreased to $35 million, reflecting low solar equipment demand as capacity continues to be absorbed. Net sales were approximately flat at $77 million, with solar sales largely reflecting deferred revenue. EES had a non-GAAP operating loss of $64 million, which included an inventory charge of $26 million.

Next I will talk about our expectations for the fourth quarter. As Mike indicated, we are seeing strong seasonal effects in our wafer fab equipment business, along with macroeconomic uncertainties that are leading our customers to reduce spending until they see signs of stronger consumer demand over the next few months. Accordingly, absent further weakening in the global economy, we expect the company's orders and revenues to bottom in our fiscal Q4.

Turning to our business segments, we expect SSG net sales to be down 45% to 55% in Q4, marking the low point of our business for the year. We are seeing a strong pullback across all categories of semiconductor equipment customers, and this is the primary factor in the near-term reduction in earnings for the company.

In AGS, we expect net sales to be up 5% to 15%, including more than $75 million in revenue from a thin-film solar line.

In Display, we believe net sales will be down 25% to 40%, as the TV capacity ramp in China is pushed out for at least an additional quarter. Despite the low level of revenue, we expect Display to remain profitable in the quarter.

In EES, we expect net sales to be down 10% to 30%, as the timing of the solar equipment recovery remains uncertain.

We expect our overall net sales to be down 25% to 40%, and our non-GAAP earnings to be between $0 and $0.06 per share.

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

Michael Sullivan

Thanks, George. [Operator Instructions] Jay, let's begin.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of C.J. Muse with Barclays.

Christopher J. Muse - Barclays Capital, Research Division

I guess first question, in terms of calling a trough here in October and looking for a recovery in calendar Q4, I guess can you talk about what you're seeing, what conversations you're having with customers? And I guess what gives you the confidence that they were in this seasonal pause and that we will see a recovery? And as part of that, where do you expect to see customer spending come back strongest?

Michael R. Splinter

Yes, thanks, C.J. As we look at what's happening in our Q4 and a drop-off in our discussions with customers, this is pretty much the seasonal low. We're also obviously discussing what's ahead, so our capacity is ready for them in the next month ahead. So we're quite certain that this is on the bottom from those discussions. But I would also add that we still view the 28-nanometer build-out for capacity in 2013. We still need between 100,000 and 150,000 wafers or so to fuel the growth in smartphones and tablets, as well as the build-out of the LTE infrastructure. And then we also think in 2013, we're going to see investments of about 50,000 wafers of 28 nanometers. That will come a little bit later in the year. But I think when we look at last year's pattern, this year's pattern, this year's more accentuated, but really quite similar in this seasonal cycle. I think my big caveat on that is what's going to happen macroeconomically. But macroeconomics are kind of pushing everybody down not only in the foundry sector, but in the other sectors as well. But we really think foundry is going to lead the way out of this in the calendar -- late in the calendar fourth quarter.

Christopher J. Muse - Barclays Capital, Research Division

That's very helpful. And then I guess as a quick follow-up, in terms of the product strategy and you talked about providing an update on your November call, I guess what should we expect to hear at that point in time? Are we going to hear primarily on the product side and where you're going to refocus R&D efforts? Or as part of that, will you be talking about optimization of your product portfolio, cost rationalization? What kind of color do you think we’ll hear at that point?

Michael R. Splinter

I think we're going through a lot of detail right now on each one of the products and looking at high-value problems that they're solving and the return on those products. As you know, we really try to look at this on a product -- the return on a product-by-product basis and judge where we should invest. So we'll be ready to talk about that in November, but I think the starting point is the product-by-product analysis.

Operator

Next question comes from Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

So a question on the WFE, Mike. You didn't change the WFE, even though you provide a pretty weak outlook for the fiscal fourth quarter. Is that just a calendar versus fiscal thing? And then regarding recovery, I think on an answer in prior discussions, you said that mostly will come from foundry. What do you think will happen on the memory side?

Michael R. Splinter

Sure. Thanks, Edwin. Yes, what we're looking at is really calendar versus fiscal here. The timing of our particular fourth quarter gets us into this air pocket. But we're expecting that foundries will lead the way out, and we will see the overall WFE in the range that we had talked about earlier. When you look at it -- if you said, "What's going to happen to drive it to the top end or the bottom end?" We would have to, to get to the top end it would have to be all about foundries pushing harder for capacity in the last few months of the year. And the downside is both NAND, I think, and foundry even pulling back a little bit more than we currently anticipate. But -- so in large part, it's a foundry story for the last part of the year.

George S. Davis

Edwin, it's George. One of the reasons why we're not changing it, when we updated at SEMICON, we talked a lot about the uncertainty in foundry and the outlook that we have seen, which was a strong pullback in foundry. So when we lowered it, we already have the foundry action pretty much in our thinking. I would say the one thing that is marginally worse than we expected at SEMICON has really been NAND push-outs have been stronger and deeper than we anticipated.

Edwin Mok - Needham & Company, LLC, Research Division

Great. That's was helpful. And then, George, a question on R&D expense. I think on your prepared remarks, OpEx was down again in the October quarter because of the cost reduction. But I think you guys are also starting the investment in 450. Do you see that as the bench that you would drive your R&D to go back up in the coming quarters?

George S. Davis

Yes. I think what you've seen is if you kind of compare year-over-year, that's probably the easiest way to think about it. We've had -- the biggest drivers of increases in our OpEx is number one, we didn't have Varian last year at this time. So we've got the Varian spend and then you’ve got 450. And what you're seeing there though is a reduction in OpEx from a variety of discretionary activities which quite frankly, we also had some of those in Q4 last year, because that was the down quarter for last year. But if you look at our non-semi businesses, they're down between 17% and 20% in their OpEx year-over-year. And that's helping us be able to kind of manage some of the fluctuation and also it's part of obviously the restructuring program that we have going on in EES as well.

Operator

Next question on the line is from Terence Whalen with Citi.

Terence R. Whalen - Citigroup Inc, Research Division

This question is related to the solar business. It looks like solar revenues were roughly flat sequentially. However, the operating income loss was steeper. I know part of that sounds like it may have been from an inventory charge. Just wanted to understand what other trends you're seeing in solar profitability there that caused this deeper income loss.

George S. Davis

Terence, your analysis is right on. It's -- the difference is the inventory charges taken. And we've been running with some degree of inventory write-downs as we've been going on. And that -- if you look at the underlying operating impact of that business, it will be about $0.06 for the year, and then the inventory adds another, say $0.04 to that picture. Gives you about $0.10 for the year. But that's for the quarter, your analysis is spot on.

Terence R. Whalen - Citigroup Inc, Research Division

Okay, terrific. And then as my follow-up, it sounds like since SEMICON West, where you were expecting foundry spending to be down about 30% in second half, it seems like things have slipped a little bit more since you're now thinking that it's going to be a little bit of a steeper decline. Can you just help us understand how you're thinking has developed since SEMICON West with regard to foundry spending? Have things weakened even further from what you had seen in the later months of June? And also is it broadening out to other customers, or is it just deeper cuts at the top foundries?

George S. Davis

Yes. I would say again, I think directionally, foundry is where we thought it would be. We gave it a range, we said foundry would have about a $0.15 to $0.20 impact on the year. I would say we're probably more at the $0.20 end of the range as we look at what actually came out. But it was within kind of our view of what could happen. Again, I would go back to the fact that NAND has been a little bit weaker in the second half. That's been a factor that's certainly impacting us in this quarter. But also as Mike said, the macroeconomic effect is if you look at DRAM customers we think could be down, this is on a revenue basis, close to 35% to 40% in the quarter as well. Logic will be down probably 20% to 25% quarter-over-quarter as well. Obviously the big hitter is foundry and NAND, but even the other customers are down in the quarter.

Operator

Next question comes from the line of Satya Kumar with Crédit Suisse.

Satya Kumar - Crédit Suisse AG, Research Division

Just wanted to go back to this point about how the year has changed. 3 to 6 months ago, we called the number for WFE, which is still the same number that most people think. 3 to 6 months ago, we thought that shipments would be sort of flat for the start of the second half. I mean is it just the fiscal versus the calendar year for AMAT? You need to see a very, very sharp pickup in your January quarter for making the WFE numbers remain consistent with what the chip companies are saying? Or perhaps we have some downside to WFE? So I was wondering if you could talk a little bit about perhaps the magnitude of the pickup that you're expecting to see in January.

Michael R. Splinter

Sure. Thanks, Satya, for the question. The euro has changed kind of pretty dramatically. I think from our standpoint, we thought that wafer fab equipment was going to be closer to flat year-over-year, and now we're in the kind of down 10% to 20% range. And so that's a pretty big impact over the last few months. We really -- I think our supposition earlier in the year was that foundries needed to power through the seasonal curve that we saw last year because of the shortage of capacity, and that's clearly not the case. They added a lot of capacity in Q2 and are now more in the put-it-in production and produce phase of adding capacity. As far as chip companies' projections on their overall capital spending, I think there's 2 factors: one, it may be at somewhat at a lower range of what they projected; and two, then there's the mix of what they're spending, their CapEx on how much is really on wafer fab equipment versus buildings and other equipment. So I think that's one of those factors that we know is going on because some of our customers need more space and capacity to add the next phase of capacity.

George S. Davis

Satya, I would also observe that our non-semi businesses, if you go back to the beginning of the year to where the year has played out, that turned out to be weaker in general that we had anticipated at the start of the year.

Satya Kumar - Crédit Suisse AG, Research Division

Yes, understood. My question is more on semi, but the answer was useful. A follow-up question for, I guess, Mike. On the Display business, if you just look, take us back, look at 10-year trends in the industry, and it's clearly benefited the last 10 years with LCD TVs have become a bigger part of the mix. More people bought TVs and the size of the TVs increased. As you look at those sort of fundamental drivers over the next 10 years, has something structurally changed relative to area of demand growth? And as you look at that, I mean, how do you think about sizing the Display business over the next 10 years?

Michael R. Splinter

Sure. I think the drivers for the Display business that -- I don't know that I can talk about 10 years, but kind of 5 years, number one, is still build-out in emerging markets. TV -- flat panel TV penetration still has a long way to go. We've been disappointed with the demand in China. But I think that is coincident with kind of a slowdown of the economy there. So I think as maybe stimulus comes back there and the economy improves, we're going to see a significant build-out. Then there's the change in technology that we're seeing that -- moving to OLED, moving to metal oxide, these experience-oriented elements, we believe, are going to shorten the replacement time for TVs coming up, certainly over the next 5 years. And then the final element is we still believe that smart TV or potentially Apple TV, if it's a disruptive factor, can spur a replacement demand for TVs. So we still think there are elements out there in the market that are going to push demand even though today, flat-panel TV is the -- we've moved from the flat-panel TV build-out era, if you will, where every 1.5 years we change the size of the glass to now we're really looking at viewer experience, working with the customers on how to improve the technology to deliver that.

Operator

Next we have a question from the line of Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

First question. You talked about a product review on the next call. Is it fair to assume or safe to assume that everything is on the table relative to that product review, including exiting product lines or exiting business segments to the extent they don't need the high-value solution approach criteria?

Michael R. Splinter

No. I would say, Jim, we've had a history of looking at our businesses and product lines that don't meet our investments hurdle, and I don't think that's changed. We're going to look at every one of our products and make sure that they're really solving high-value problems for our customers and they have significant enough differentiation to be sustainable in the future. But everything, certainly in our portfolio reviews, everything is on the table.

James Covello - Goldman Sachs Group Inc., Research Division

Terrific. And then for my follow-up, not just Applied Materials but most of the semicon companies now are referring to the seasonality in the business or a seasonal decline on top of the macro issues. And the discussion around seasonality in semi equipment is something pretty new, I think, relative to the last 10 or 15 years. It used to be the customers just kind of had to order relatively far in advance. Is this -- is the discussion of a seasonality emerging in the equipment business a function of shorter lead times? Or is it a function of just business kind of what happened last year, so everybody kind of running the playbook back for this year? Or are there other dynamics at work?

Michael R. Splinter

I think shorter lead times are necessary for this seasonality to be in play. But the primary driver of this seasonality is the introduction time of new models, so smartphones and tablets and the buying pattern of consumers. And then our customers are backing up from that when they need to have those parts in production to the dates they need equipment. And because those are pretty consistent, I think, among most of the process equipment companies, you can see these kind of seasonal peaks. And I would say that we've mapped this out. Actually, you can see it for 3 years, at least maybe you can see it for longer. But in the last 3 years, each year the peak has been getting higher in and around our Q2 time period. So that's kind of how we're looking at. It takes more than one factor here to produce this. But you're right, part of it is supply-chain compression.

Operator

Next question comes from Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

I wanted to just follow up on some of the comments you made earlier about weakness in foundry and memory. I was wondering if you can comment on the logic segment. Have you seen any incremental change there since the last time you provided guidance?

Michael R. Splinter

Well, we would say that -- as George just mentioned, logic is down in Q4. But what we would say about the overall segment is we would -- 2012 has pretty much played out as we thought it would. We think 2013 will still be an up year for logic spending, as the major player there moves to the next generation of technology where we're certainly seeing many more process steps moving to the next node. So I think there's no real fundamental changes in logic other than the macroeconomic effects.

George S. Davis

I agree that's -- yes, Vishal, I would also add that I think you certainly see a more moderate pattern and more -- you don't see quite the level of seasonality in the logic side. And I would say in the fourth quarter, it may be one of the few positive order areas for the company as well.

Vishal Shah - Deutsche Bank AG, Research Division

That's very helpful. And just one other follow-up. On the memory segment, I know you mentioned that logic and foundry segment will be up next year, will be strong. What do you think about the memory segment? Do you see a similar trend there? I mean, 2012 has been somewhat disappointing. Do you see a recovery in NAND? And is it going to be more front-half loaded or back half loaded?

Michael R. Splinter

Yes. Memory is really still largely tied to the success of PCs. So if we see more strength in the PC business next year, that could provide increase in capacity. But in flash, flash factories are under loaded today. I think we've seen cap -- investment pullback fairly significantly. We're kind of down to $1 billion a quarter in both DRAM and NAND investments per quarter. I don't -- I would not predict that we're going to see an early change in that vector. Maybe later in the year as we see more momentum. We would expect more mobile DRAM and some increase in bits per box on the mobile devices. But that's just not enough to provide greater than, let's say, 70% bit growth in NAND that we kind of need to see increased investment and greater than 50% -- 40% to 50% in DRAM to get that kind of investment growth.

Operator

Next, we have a question from Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

Mike and George, I was just curious if your view on 2013 WFE has changed in SEMICON West. It sounds like you're seeing increased seasonality and it sounds like a similar trend is forming in 2013 with 65% in the first half, Mike.

Michael R. Splinter

Well, we certainly think that this seasonality trend will continue into 2013. We can already get views from customers on how they want us to position our capacity and orders throughout the year. I would say it's too early to make any specific claims on 2013, other than we do think that again, it will be above $30 billion of overall investment. So that's still a pretty strong investment as we see the continued build-out of smartphones, tablets, increased investment in logic. And we're quite hopeful that there will be a bounce in PCs with ultrabooks getting more cost effective and Windows 8 really coming into large-scale production.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And then my follow-up question is on the solar business profitability. We're starting to see some financial troubles at some of your solar equipment competitors, especially in solar cells, who have a few customers in India. Is this the trend you think that can help Applied maybe get to break even in solar sooner?

George S. Davis

So we're certainly seeing competitive -- many of our competitors that don't have the kind of balance sheets that one would like to have to weather the kind of market environment we're seeing, certainly it's a little deeper and longer than we had anticipated. So we're taking actions to lower our cost structure in the face of that. But there are some companies where the ability to weather this time period is a real question. And ultimately, that should be helpful coming out of this.

Operator

Next question comes from Chris Blansett with JPMorgan.

Christopher Blansett - JP Morgan Chase & Co, Research Division

I had a question related to your guidance for the third calendar quarter versus your peers. Obviously you're guiding down a little more than some of your U.S peers. And I just wanted to get a feel for how much of this is potentially due to revenue recognition policy, lead times and things like that versus -- just to kind of get a feel for why you're seeing such a bigger drop-off.

George S. Davis

Yes. My sense is when we break these things down, particularly when you see downdrafts like this, it's virtually always a function of rev rec or and shipment recognition.

Christopher Blansett - JP Morgan Chase & Co, Research Division

And then the second question was tied to the solar business. Although you have a longer positive look for this area, it's pretty weak right now. And I wasn't sure if you think there's some need to bring the breakeven level down even further than you had previously expected.

George S. Davis

Well, we're working hard on the program that we announced. We just took the first restructuring charges this quarter. So -- and we've got a lot of work to do. We'll continue to look at it. And if we need to take additional action, we will. But we've got a lot to do right now.

Operator

Your next question comes from Mehdi Hosseini with Susquehanna International.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Mike, do you see any significant difference among foundries in Korea -- I'm sorry Korea, Taiwan and U.S.? And as a follow-up, it seems like the Varian semi booking contribution declined less compared to the rest of the SSG. Should we assume the Varian semi to see a steeper recovery in bookings by the January, April quarter?

Michael R. Splinter

First, I think the real difference between -- differences between the foundries is their -- part of their business that's dependent on smartphones and tablets, mobile devices, I think that's the biggest factor. And whether that divides out by Korea and Taiwan versus U.S., it may. But I think there is somewhat different. But the rest of the foundries can't make up the difference for the 2 biggest foundries major seasonality that we're seeing. On Varian, actually if you look inside our businesses, the products that are aimed in and around the transistor are doing better than those that are more mature processes. So I think that's kind of a general statement that we're to look where we have real strength even in the bottom of this cycle. So I think when you look at some of the CVDs, some of the metal depositions in and around the transistor where things are changing very, very rapidly, people have moved high-k, then to High-k/Metal Gate, metal gate last, and now to finFETs, we're going to be seeing rapid changes here. So customers have to invest in those areas that are really making the transistor. And of course that includes the implant, Mehdi, to your point.

Operator

The next question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

My first question is either, Mike or George, if you look at your sales guidance for SSG for October, this level of sales last seen was sometime in '08-'09 time frame. But you also added Semitool and Varian to it, but the numbers are still low. So I'm just trying to get a sense of, is there something more bigger like market share loss? Or is it more a function of seasonality? And if it's seasonality, is this the magnitude of depth we should get used to going ahead? And then I had a follow-up, too.

George S. Davis

Sure. I think if you adjust for Varian, you'd have to look back probably closer to Q4 '09 to see this kind of quarter. And I would say what you're seeing is hyper-seasonality this quarter where you've got not only kind of the typical pattern that we've been talking about. But you can see, if you look from the peak to the bottom, you've gone almost 11 -- we had about 33% of our SSG quarter was in our Q2. 14% of our full year will be in our Q4. So you've got a major delta between the high and the low. And I think that's really seasonality. In fact in the first half of the year, I mean there's a lot of observation about how we were outpacing the rest of the industry. So you're really seeing more timing and seasonality. And for this kind of move, share is not a factor.

Krish Sankar - BofA Merrill Lynch, Research Division

All right. And then a follow-up. When I look at the big picture of you, last year NAND CapEx actually exceeded DRAM spending, but the NAND market size is still smaller than DRAM. So I was just wondering that from your view, when do you think the NAND as a market will get bigger than DRAM?

Michael R. Splinter

I think that's really totally dependent on solid-state drives. And this has been something that we've been expecting to take off for some period of time, it hasn't taken off. I think our next hope is that solid-state drives will take off in ultrabooks. We've been quite disappointed that tablets and smartphones haven't accelerated the use of flash capacity. It's been -- really DRAM per box has been very, very modestly increasing. Right now, our estimates are that the NAND business is $26 billion, $27 billion. DRAM is $28 billion to $30 billion. So they're pretty close right now. So if one of them had a surge, it would pass -- of growth, it would pass the other. So it could happen even next year.

Operator

Next we have a question from Patrick Ho with Stifel, Nicholas.

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

Mike, I think obviously with the marketplace and the uncertainty there, 28 demand -- 28-nanometer demand continues to be strong. With some of the foundry pushouts that you've seen, what's the issue that's probably driving it? Is it more just the digestion period timing of that? Is it yield? Or is it some concerns on the macro front even though the demand for those products appear to be strong?

Michael R. Splinter

I believe that it's primarily digestion and where they have to meet their peak demand, they have to have product and they have to have these products in production to meet their peak demand over these next 3 months to be prepared for holiday selling season. So I believe that's primarily it. There are some facility issues we know that have pushed out some of the equipment demand. I think the only thing that would slow down a recovery or a bounce back where they're putting on capacity, again getting ready for next year is a macroeconomic slowdown that's more pronounced than what we have today. We have to remember if we look back to the first part of -- first half of 2012, foundries were short of capacity. It has spurred a lot of talk about customer owned capacity and the like. I don't think that the foundries want to get into that situation again, if they can avoid it. So we're confident that we're going to see a step-up of buying near the end of the year and into next year.

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

Right. Just my follow-up question in terms of the cost structure -- I mean the restructuring and the cost savings efforts that you guys have put in place. Obviously you're putting also a lot more effort into the product development side, particularly with the opportunity for 20 nanometers. How are you rationalizing, I guess, the targets that you previously stated versus probably the need to increase or better maximize the investments needed for next-generation nodes?

George S. Davis

By targets, I'm assuming you're talking about the models that we have for...

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

Exactly, yes.

George S. Davis

Well, as you know, we took the models down in recognition of the fact that we have this additional spending already. We'll certainly -- we're looking wherever we can at places where we can further reduce costs so that we can expand the spending further on critical programs without moving away from the existing business models. And that's our plan for the time being.

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

And basically I just want to be clear, so you got levers that can move around to keep things in line?

George S. Davis

Yes, because we're -- as we've already talked about, you've already seen a shift of spending towards SSG and away from some of our non-semi businesses as we restructure -- particularly as we restructure our EES segment.

Operator

Your next question comes from the line of Vasanth Mohan with Piper Jaffray.

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

This is Vasanth calling for Jagadish Iyer. I have a question regarding the Display. Based on your revenue guidance, it looks like we might be looking at a new bottom end revenue for Display. Can you give us an idea of what the environment is like? Do you expect a surge in the January quarter? And you also mentioned that you would still be profitable despite hitting a new low. Can you give us more color on that?

George S. Davis

Certainly, it's -- I wouldn't describe it as a new low. We had a period during the '09 where we were lower. But certainly if you look through normal operating conditions, the midpoint of the guidance would be slightly below the lowest previous quarter in there. And again, I think it's a reflection of how that organization runs and how we've been able to basically invest in the new products that they've needed. They've done a great job in taking share in these new mobility markets, while at the same time, as we said, taking down their operating spending. So they're very focused on being breakeven in a difficult environment, and that's currently what we see.

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

And as a follow-up, is the weakness related -- has anything to do with the problems that companies are having with the OLEDs?

George S. Davis

No. This is really about basic television infrastructure build-out, primarily in China and the timing of that, which has been impacted by the macroeconomic conditions, and also the largest market for televisions now is China. And China has been much softer than expected as people set their plans. I think a number of our customers felt they'd be ramping up capacity in China at the back end of this year, and now it looks like that will be sometime in '13.

Operator

And our final question today will come from the line of Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

Just one quick question. George, I think you mentioned that you expect silicon order to be 60% to 65% front-end loaded for this fiscal year. Should I take that number, I think 60%, I get to around $1 billion of orders in the fourth quarter? So with lower orders eventually, what gives you confident that business will rebound beyond the October quarter?

George S. Davis

Say that again, now?

Edwin Mok - Needham & Company, LLC, Research Division

Yes, sorry...

George S. Davis

You're talking about confidence that Q1 will rebound if we have a very low order quarter in Q4, is that the question?

Edwin Mok - Needham & Company, LLC, Research Division

Yes. Yes, you got it.

George S. Davis

Again, it gets back to the comments Mike made earlier, which is foundry is going to have to come back. And as you know, when foundries are ordering, we typically go to almost a turns business, where in the first half of the year, many of the orders were earning about 70% in the quarter, booked and shipped in the quarter. So you can't always -- you can't always see the -- or use the prior quarter as predictive as we used to be able to do in the good old days.

Michael Sullivan

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

Operator

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

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