Applied Materials' Management Presents at UBS Global Technology Conference (Transcript)

| About: Applied Materials, (AMAT)
This article is now exclusive for PRO subscribers.

Applied Materials, Inc. (NASDAQ:AMAT) UBS Global Technology Conference Call November 19, 2013 12:15 PM ET


Robert J. Halliday – Senior Vice President and Chief Financial Officer


Stephen Chin – UBS Securities LLC


Stephen Chin – UBS Securities LLC

Okay, good morning everybody. We are going to get started with our 9:15 session this morning. My name is Stephen Chin. I am the semiconductor equipment analyst here at UBS. And it’s my pleasure to have Applied Materials here today with us.

With us we have Bob Halliday, Applied Materials Chief Financial Officer. The format of our session this morning will be a fire side chat and we will leave some time at the end for any questions that you might have. So welcome Bob to our conference. It’s been a nice half year again. This year, the last couple of years we couldn’t have Applied Materials earnings calls, so appreciate you joining us this time around.

Robert J. Halliday

All right. We look forward to – we used to go to conference here at New York and this one worked very well for us.

Stephen Chin – UBS Securities LLC

Yes. So why don’t we, I guess you just reported your earnings last week. Maybe we can get kind of another real-time update on how trends are going and then talk a little bit about company specific events. But to start with I think you’ve been at Applied in the role of Chief Financial Officer for a couple of months. We’ve known Gary from his appointment as President late, middle last year. So maybe you can start off by just giving us a read of some of the change that you’re seeing going on at Applied Materials, since you’ve been in the role of Chief Financial Officer.

Robert J. Halliday

Sure. Gary, so maybe you may know my history. Gary and I was – we were at Varian Semiconductor. I was at Varian as CFO of the internal offerings start from 2001 until they emerged with applied and in 2011 November 11, Gary Dickerson and I have been President years ago at KLA. Then he was CEO. Then in from 2004 till 2011- Gary became CEO for Applied Materials in June of 12. I became the CFO of Applied Materials end of February, beginning March of this year.

What has changed – so I actually when Gary in business does apply from November 11 till I became CFO and then I ran a lot of the internal operating stuff from 2001 until Varian merged with Applied in 2011, November 11. Gary Dickerson had been President years ago at KLA. Then he was the CEO of Varian from 2004 until 2011.

Gary became CEO of Applied Materials in June of 2012. I became the CFO of Applied Materials end of February, beginning of March of this year. What’s changed? So I actually ran Varian business unit as part of Applied from November 11 till I became the CFO about a year and a half. So I just know a lot of the people and the product people in Applied. So when I discovered in that period of that the technologist and the people implied are great, really impressive, in fact certain way is the technology is more impressive than the Imprints technology we had at Varian because if you think of barriers to entry in terms of your prior technology and your ability to make money. It’s the sum of your various components you have, like, mechanical engineering chambers that apply big time as chemistry and process know-how.

So Imprints like availability to make money on those products is very high because the barriers to entry are much, much significant. So what I was really pleased about when we joined Applied was very strong product people, very strong engineering capacity. So if you think about a company like Applied Materials, we’re the epitome of a product-driven company. We make products and we have very sophisticated customs, best product wins, right. So Applied has got the ability to engineer great products.

Two or three things Gary and I have focused on is, so winning in a product driven company is three legs on a stool and always done this three legs. One, you know the market requirements. You know what products the customers need better than anyone else. Gary calls that, you know the customers high value problem. We want to know the problem and we will come up with a solution. If we come up with a high value solution we will make a lot of money.

So to beep up your ability to understand customer’s high value prompt, we’ve invested heavily in technical marketing people in the field who talk to the device designers to understand what they need in equivalent. So we’ll come up with winning equipment in the next three years, right. So the first thing of great equipment is understand the prompt than anyone else. We’ve invested in it. Second one is the engineer great equipment, Applied’s always had engineering capacity. We’ve increased the structure and discipline around the process. So the second legacy engineer great equipment fundamentally that capacity is going to company.

And the third, you got to place the bets on winning products and winning markets, so we came in we said, the first thing we did was a market assessment. This whole market is tough market. I don’t see how you make a lot of money in the next couple of years there. So we aggressively took money out of the solar market and put into semi and particular solar and to display, because we see this market as pretty attractive next four or five years.

Second thing is, if you don’t invest in products you’re not going to win. So we took money aggressively at overhead – G&A and overhead, put it back into products and profits, and we continue to do that every months, we are reassessing our overhead structures and cutting costs, we’ve aggressively done that. I was doing that yesterday afternoon till 7:30 at night so the internal people are glad I’m off the campus today.

But we made a lot of progress so if I can make great products, so we’re increasing the probability of success to make those great products and we are putting bets on products not on the overhead cost structures. And if we hit on the products, we’re going to make a lot of money, because the incremental profit capability of our products is about 50% to 55%. The incremental profit opportunity of our service businesses which I think is under realized, it can be 40%, so drop through profit if you get share and volume of those markets is very high.

So what we are doing now, we believe we gain share in 2013 in edge, in inspection, DVD, held in places like Implant Fe, very high share. But that’s mostly with our existing set of products that’s been brute force execution, customer response of this 2013. Those products we have been invested in all year, where we’ve shifted about $150 million to $200 million in the products, really it’s about the products that wind is in actually in the next year. So we’ve got a roadmap where we think we can drive profitability for a while.

Stephen Chin – UBS Securities LLC

Great, thanks for that update on that.

Robert J. Halliday

I hope that was more than a one minute update.

Stephen Chin - UBS Securities LLC

The three questions we are trying to get at Bob, throughout the end of the calendar year, it sounds like you are probably doing some planning for 2014. Maybe you can share with us kind of your thoughts and how we should think about wafer fab equipment spending in 2014, how you all have think about that for 2014.

Robert J. Halliday

Yes, we think it is up about 10% to 20% sort of in the low 30%, we think foundry was the biggest market in 2012. We think that in 2013, we think that – in 2014 also, pretty solid, pretty strong actually. It’s probably a little bit more spread out is my guess. Then I think, NAND is pretty interesting right now, we see spending on 3D NAND and 2D NAND I think it’s real.

I think 3D NAND is going to happen, I think it’s enabling technology, commercially in technology wise, we see customers being pretty aggressive on that for 2014. So that’s play up 30% so we think, I think foundry is above 10%, 15% and then we think, NAND is above 30%. DRAM which is a smaller market might be up 5% to 10%, large kind of sort of flattish and we now group in logic other things like I think we even stick some CIS most stuff and answer, so that might be flattened now a little bit. Overall you are up about low $30s and 10% to 20%.

Stephen Chin – UBS Securities LLC

Maybe just a follow-up on that on the especially on foundry comment, how bullish do you think foundry spending can be, it’s really sounds like there is only one customer aggressively investing in 20 nanometer in 2014. So maybe you could elaborate a little bit about foundry.

Robert J. Halliday

Yes, if you look at what we think and subject to change we see pretty heavy spending in the beginning of the year. But we can have good visibility for that, right. A lot of people who was in the public domain that we touched upon the call that it was published in Taiwan that Applied get record orders from TSMC and three month period, like I think it was published $775 million. We said on the call that this has a timing lag on that stuff for us, but our position at TSMC is very strong right now. We think we’re working very well with them. So we think they’re going to be strong. I think layering through the years, it’s a little bit more fan out. I think they are obviously the biggest vendor but just some other pieces that are helpful in 2014.

Stephen Chin – UBS Securities LLC


Robert J. Halliday

Okay and then a big transition there is when the FinFET; 20 nanometer versus FinFET.

Stephen Chin – UBS Securities LLC

Okay. How about just following up on your views on NAND flash in 2014, it sounds like I think NAND flash does at least 30%. There are some pretty big technology changes going on in 2014 in NAND flash. How do you see the capital intensity changing as we go from two-dimensional planar technology to the three-dimensional technology, we think we’re going to gain share in that and that opportunity in NAND flash.

Robert J. Halliday

Well, you got a few things going on. One, I think there is a good chance that the majority over 60% maybe the spent might be 3D versus 2D next year. I think 3D is pretty big next year. Samsung has got the footprint of a very large fab in China. I think the total capacity of that footprint eventually can be 220,000 wafer stocks. So I think 3D is going to be enabling for customers because traditionally they have scaled in two-dimensional shrinks per NAND. There is several challenges for that. There is a technical challenge that’s got multi-bit cell or eight electrons on a cell and lithography challenges get really tough technically. It also get’s commercially tough because if you’re down the next note with the 10 nanometer lithography that’s expensive in terms of patterning stuff.

The third thing is the technical challenge. So how do you keep going, and then you get reliability issues. So there are a few scale in three dimensions with that more reliable unless and it’s abate in the environment out there. But I think it could be more reliable. So if you have think you can release some of the commercial technical and reliability changes like going three dimensions, vertical NAND, think of an apartment building versus squeezing the NAND cells. Then you might actually grow the market for NAND devices, start to get enabling for more NAND sales and even resulting these drives get more prevalent, right.

So I think 3D is the real deal. I think it’s pretty impressive. So I think customers will push pretty hard on it. So I think 30% increase in NAND spending is pretty possible next year. In terms of who is pushing it most aggressively cells are pushing pretty hard.

Stephen Chin – UBS Securities LLC

Maybe just a follow on to that last point. Now it does seem like there is one customer aggressively in terms of 3D NAND, what kind if you look at the landscape of 3D NAND adoption, what do you think happens after that first customer, pushing in the 3D NAND, you think it’s a quick follow by the other NAND customer so you can kind of wait and see that follower type of…

Robert J. Halliday

Well there is a couple of challenges, one is you have the right architecture to implement, those competing architectures in terms of 3D devices and some falling behind Samsung. I think they’ve the architecture right. Second thing, who knows, I don’t know, not my skill set. So architectural choice is one thing and then the second one is yield, right. So you don’t know the yield or the performance of the different architectures, but I think they’re going to push it pretty aggressively because if you can do 3Ds and good yield and good architecture the scaling becomes very cost effective.

So if you think of going from 2D to 3D, the capital intensity is probably a little higher than a 2D scale. So there is a change in the capital intensity. Instead of with no intensive it tends to be deposition and etch transfer. So the footprint for companies like us and deposition and etch grow, 30% to 50% to do that 2D to 3D transition. Now once they get the first stack done, it’s 24, 32 layers whatever, going to the next stack is pretty cost effective for them because you’re going to probably get bit growth that approaches 100% bit growth versus 2D might be 40%, 50% or about those. So I think the transition from 2D to 3D is pretty good start. It’s led deposition and etch intensive. It’s slightly more capital intensive, my suspicion particularly this change of mix of capital intensity, but then the next generation is probably a little less capital intensive model.

Stephen Chin – UBS Securities LLC

Okay. And thanks for that update. Maybe if you could just elaborate a little bit more on DRAM. The investor community has been told about the DRAM prices relatively strong this year, but you don’t sound that bullish in terms of DRAM CapEx spend. So maybe if you could just spend a little bit – just elaborate on that.

Robert J. Halliday

There’s two things probably [indiscernible]. So the question is what’s our belief that we could change? Our belief is that DRAM spending was about $4 billion in 2013 and maybe a 5%, 10% next year. When we look at it sort of half and half technology wise, capacity wise, when we look at through the year, spread through the year, but a little bit more latter in the year, then the next mix change is PC versus mobile DRAM, for years PC DRAM built of us. Last year, I think between significant growth in mobile devices and the DRAM in a mobile device growing, I think it doubles about every 18 months.

The mobile DRAM volume actually has PC DRAM. So you do have an inflection as this DRAM has got a new growth drive and mobile DRAM because the number of units increase somewhat in capacity for a mobile device. So I think there is a positive opportunity there. What’s the rate of growth? We still think it’s moderate CapEx. Now the pricing thing is probably a reflection of supply and demand in pretty good shape. So the other inflection, some of you may know about, or changed this year was there was a fire in China. Hynix had a DRAM factory. There was a fire and some of the capacity went offline. I think I was at an investor conference when that came out. All the stocks went up and the belief was it add capacity pretty aggressively. The capacity additions have been pretty modulated. So on the service it feels like the DRAM customers are being judicious in capacity additions.

Stephen Chin – UBS Securities LLC

Thanks for that. Our global colleagues attended the Samsung analyst meeting a couple of weeks ago and it sounded like one of the takeaways from Samsung is that they were adding DRAM capacity both because some of the technology knows that were trying to migrate to have little bit lower yield and some of it because some of the mobile DRAM shift that they’re making have little bit higher die sizes. So it sounds like even though they’re adding capacity that the bit supply growth is not really increasing that much. Is that kind of take that you’re seeing?

Robert J. Halliday

As of now I think that’s true. I think everything you’ve said is true about the die size and, I don’t know, about the yield. I think probably there might be a little upside to what we’re seeing, but right now we’re seeing a 5% to 10%.

Stephen Chin – UBS Securities LLC

Okay. Thanks for that. And then maybe just to follow-up lastly on the logic CapEx view that you have for 2014. I have been reading all the data points. It still seems like the PC growth in 2014 is still little bit uncertain. You sounded little bit cautious on logic. Is that kind of the main trend you are looking for as we try to optimize your CapEx?

Robert J. Halliday

Both these questions think about DRAM and logic. To some extent your forecasting is a function of your past experience, right. So DRAM hasn’t been spending too much in the last few years. Logic has been spending a fair amount. A lot of it’s on technology as much as capacity-wise. So we read the prognostications on PCs. We just read as much as anyone and then we listen to our customers, couple of big – one particular big logic customer and it seems like there’s moderate growth. So we’re still seeing it’s a big market for us.

In 2012, I think logic and other was about $9 billion of wafer fab equipment spend, some other stuff in there. Then next, we think it’s a big number too, maybe same, a little lower. So it’s still a pretty good number.

Unidentified Analyst

Okay. Thanks for all the color on the 2014 wafer fab equipment spending. I think, and one of other points I want to follow-up on is, you talked about some potential silicon equipment market share gains and inspection as well as even edge tools. The competitors in those two markets are also quite confident. How would you expect us, investors to think about this opportunity?

Robert J. Halliday

Well, it’s still one at a time. Inspection, I think we have made progress that people with our leading-edge, foundry and logic type people, I think the way we’ve done is we’d call five more layers. There is some data in the public domain that we posted the highest orders we ever had early in this year and inspection right through in particular. And so we believe we have some momentum. We’re seeing higher sales there, but I think it’s true.

In terms of etch, little bit different story. We’ve made significant progress qualifying that boundary in particular, but the revenues growth has been more in memory. So if you look at places like Samsung and Toshiba, we think we’ve gained share and etch there. If you look at some of this high aspect ratio etch, we think we’ve done well.

Now one of our competitors in that domain, we’d say they’ve done well too. Now there are sort of four moving pieces in there. There is us, there is our competitor nearby and then there is the Korean competitors and there is Tokyo Electron too and then other Japanese competitors too. And so I think there is a bunch of moving pieces where what we’re saying and one of our local competitor is saying, both may end up being accurate, but there is other players involved.

Unidentified Analyst

Okay. The next for [indiscernible] and maybe I could ask a question about the display business. It looks like display equipment orders in your October quarter were down substantially pretty sequential quarter-on-quarter basis. Are you concerned at all about the cycle there and the display CapEx cycle?

Robert J. Halliday

Let me talk about our fundamental position. Our fundamental position in display is pretty strong growth. We were a 59% market share in that market and now we’re plus 465, number two our customer position is really good, and we just had customer surveys in display were really positive and the customer probably feel about Applied Materials as it vendor. So I think our positioning on share, technology and relationships is very strong.

So then the next thing is they will do is order to balance, so I think it becomes a question, and the other thing I will tell you is that, we are growing our backlog a lot for crystal display. So that we have backlog it’s playing and these tools have long lead times, they are very large tools, so they could take as much out of the nine months to build. Because you are basically assembled in one sites bigger picture, TV, at home a big TV they made probably six to eight of those panels in one large panel.

So it’s very large equipment, so we have a big backlog. We’ve guided that – our orders were down this quarter and we guided down and leverage in Q1. So the fundamental question is crystal display equipment, two types of displays TV’s and the other stuff cellphones and iPads. Not just we are getting close to the same volume of sales growth. The volatile one right now is TV, so there where centers in China, to get people buying more TV’s and that help the market less share or two.

Those are centers on the way, so our best insight now is we are down in Q1, we’re sort of flattish revenues in Q2 or then up second half. I think that’s an accurate read but we are going to watch it closely.

Stephen Chin – UBS Securities LLC

Okay, thanks for the update on the display. Maybe the last piece of the business, the services business, so I think the AGS business, that you call it, if you look at the numbers it looks like revenues in that business have been declining in 2011, I was just wondering maybe you can share with us, what your plan and do you maybe turnaround that business, return it back to growth perhaps?

Robert J. Halliday

Yes, we used to a couple of things, the one is I think there is an opportunity I think there is real opportunity, number one. Number two there is couple of tactical things going on and some utilization data was down little bit so people buying less spare parts, based on utilization. I do think we’ve put a new person trying to hold business, Ali Salehpourwho is in charge of solar and display, with a senior fellow person – executive at KLA until about a year ago. I think Ali and his team they just are going to push it really aggressively.

I do believe this is a real opportunity. I think it’s important for us to realize it could be – I think the opportunity is even bigger total – so we’re going to focus a lot of attention of that. So if you look at within the services it is about three or four different businesses. There’s the spare parts sales where we were selling parts for own equipment and this sort of even with – so this spare part sales is service sales, it’s upgrades which are large upgraded tool. And for there is used tools 200 millimeter tools.

So the two biggest opportunities tend to be parts and services, even within parts is different business whilst is the very high IT parts, we have very high share and then the lower IT parts, they can go to alternate suppliers and then that one – customers will buy from cost competitive, your prices are in the ballpark. Because they rather buy from you, so that market ship value is going to outsourcing, so I think we are going to look more aggressively at outsourcing those parts in Asia to keep our share, and I think we are basically keep our gross margins, so we’ll grow our revenues keep our gross margins and drop to a fair amount of profits. So I think there is a much opportunity.

Stephen Chin – UBS Securities LLC

Okay, thanks for that update. Maybe to next Bob, if you could talk a little bit about gross margins and I think on the call last week, and one of the interesting takeaways, to us was we talk about gross margin is just figure 2014, being up at least 100 basis points, maybe you could just elaborate a little bit on the gross margin confidence that you have, to grow gross margin next year?

Robert J. Halliday

As the gross margin at a company like Applied are function of multiple things. There is a sort of a mix, I call it mixed, mixed price cost per value. So this mixed between segments and then this mix within segments then this the value proposition with customers and your cost management. So if you look at mix between segments, our highest gross margin segment is SSG, followed by services and display, and the lowest is solar right.

So the fastest growing segment for us over the next few years is semi including the shifts. There will be a strong semiconductor chip. So the mix between segments gives us a little bit of wind in your back and we think our biggest growth opportunity over the next several years is semi. Our incremental gross margin is pretty high on semi north of 50% and so mix between segment helps us. Then mix within segments if you go and look in semi, we inspection by – edge is pretty high gross margin, PVD, all are high share segments, pretty high gross margin because those were very valuable tools for customers.

Edge is a little over, but I think if you look at the mix within segment, within SSG, it’s kind of neutral, trending up longer term but during the year, this mixed changed. That’s why it’s sort of in the quarters now. And then so mix within cycle, within SSG is sort of neutral longer-term positive. I think the next thing is value proposition, you provide to customers. So as we’ve got a whole pilot of disruptive products coming out, we think there is greater value for the customers with those products.

And then cost, we have a number of initiatives that will help us across this year; material costs will actually help us some. And then it was pretty good year, we got overhead absorption and pretty good share. So last year we got about 120 basis points, 140 basis points increase in gross margin, 2013 versus 2012. Some of that was all of the above, which is some of those saves Alex in 2014. I think we need to work harder and harder on gross margin. I don’t think we’re done, but they are similar levels.

Stephen Chin – UBS Securities LLC

Okay. Thanks for sharing that. I guess last few questions I would have when we open up to the audience and see if they have any questions. Bob, just maybe just to talk a little bit about the merger with Tokyo Electron and things like when did the full changes that you and Gary brought that to the company. Maybe if you can just remind us first of all, what drove that decision and where are we in the process of closing that merger agreements.

Robert J. Halliday

Yes, there will be more information coming out in the middle of January we’ll file the S-4 and S-4 filing will detail a few things, we will show that Tokyo Electron results on U.S. GAAP basis. It will also show some of the actual meetings and the case and of the dialog which we encompasses some of that you’ll get there. What we said in the public remain is that my mind was sort of three time or as long as merger. One was with 10 years, 15 years with leaders of the Company with each other very well. Gary and Mike at Applied Materials and Terry and Tom at Tokyo Electron, so there is a deep respect over the years for each other personally and that’s really a big deal in Asia.

In fact Tokyo Electron was distributor for a number of years for both KLA and [indiscernible]. So on a long-term basis there was a few things going on. One, the personal relationships were quite strong. Two, there was a fundamental belief for years that in this industry we then have a couple of things going for you. You need really strong product positions, you need high share of products positions. Two, a large installed base of tools, a big plus for cash flow; and three, you need some scale, specialist customers consolidated scale and technology footprint scale and service footprint, the ability to execute, since the windows are really tight now.

There’s two tight windows, one the ramp window, because you Apple comes in as one drilling in smartphones for Christmas. You got to hit that huge production ramp. But the process windows and thin film and devices like that are really tight. There is no margin for error. So technical and production and service capability and scale is a big deal now.

So I mean I had investment bankers visiting me 10 years talking about deals and every CFO [indiscernible] and there were no deals really, right. And there was the Varian and Applied deal, and the Lam-Novellus deal and then there was the Cymer ASML deal, because the industry dynamics are much more conducive to this type of activity.

So for a long time we understood that the relationships were good and the fundamentals were there for strong share positions, strong installed base of services and highly respectable customers. Tokyo Electron is probably the highest rated quality supplier in the industry, number one quality ranked by Intel, right. So the fundamentals were there and then the industry dynamics changed to make it more and more attractive. So earlier in calendar 2013, the dialog picked up incrementally where they saw that in this environment really wanted to merge two strong companies, not strong and weak, because strong positions lead to most acquisitions, we just believed your company frankly.

So fundamental strength of the product positions between the two companies, service business and the capabilities were really good. So then they come down to the most – for two months we don’t know to be on September 25 and then last couple of months, even the last two to five months we’re still about how would we manage the company, how would we succeed together. And so there was a lot of detailed discussions. So the Chairman of the combined company will be Tetsuro Higashi. Gary Dickerson was asked to be the CEO and I’ll be the CFO of the combined company and in fact Gary has committed he will be moving to Japan to manage the combined company.

So lot of details on how we will execute on or both including, we both are committed to increasing shareholder return. We’re both committed to being in very attractive markets. We find the family of display very attractive, some other markets little more challenging and we also worked aggressively and exhaustively to figure out the corporate structure or we’re going to be a Dutch company and that will be resulting favorable cash flow to investors. So lot of work, but sort of three timer or long-term relationship than early this year and is this doable and then in the last few months how we succeed.

Unidentified Analyst

Okay. Last question I had, and [indiscernible]. Maybe if you could just review with us kind of what your financial expectations are this new company and now you got a couple of months to look at EBITDA.

Robert J. Halliday

We published a model on the day of announcement. It was a 2017 model and there was a $37 billion wafer fab equipment number, which is a pretty big number, sort of the data number probably the most single creditable data point is that expectation. It’s capital intensive for customers we go on trending up and we think it’s fair amount of devices and so. But we – Tokyo Electron had used the $40 billion scenario, which I think is out there with expansion. We hedged to $37 billion. And then the share gains, I think about three points of share gain. I think it’s applying to company 2.8 or something like that and these independent companies had the higher numbers. If you add them together we hedge it down about two points if I remember and even though we don’t compete we just right, now we showed that’s a drop through the 25% operating margins about 2017. So there is a few things going on in there; one, it’s a pretty good ways to have equivalent number, pretty good shared numbers, although we hedge both. We said we get into 2017 $500 million synergies between the two companies. Now that’s across the whole avenue, so if you look at 75% of the revenue because including a lot of material cost on the building, on the infrastructure, it’s a pretty doable number, and the companies is made up of different pieces, companies we’ve have acquired, companies we invest in. So there is a whole list of opportunities for being more efficient.

So the other thing we did on the model was we said that this structure by incorporating at Holland and a lot of the intellectual property will be in Singapore. We think that the tax rate can be 17% [ph]. We think we’re pretty optimistic that this is going to work. So then you look at the cash generating ability of the combining companies, it’s pretty powerful and it’s $2.40 a share now.

Now some investors even said they’ve heard this question, is $37 billion a realistic wafer fab equipment number, I don’t know but internally what I have said it applied is we want higher levels of profitability to every ways of equipment numbers. So even if the wafer fab equivalent number is significantly less, we usually get 20% of the large significantly lower volumes.

Because if you look at this industry we shouldn’t have a lot of fixed cost, right because we are somewhat cyclical still, so fixed cost is really – fixed cost and time here are enemies of this industry. Take the fixed cost out and get past to run everything. I don’t get slow technology, right. So if we take the fixed cost and get faster then we will get higher operating margins in every volume and the cash generating ability of the company is pretty powerful. You don’t have fixed costs. You pay for it every day of the week for the rest of your life. You start to material costs savings throughout the whole supply chain. You get to leverage on a tax structure and you fundamentally drive strong product. So I think you will have pretty good levels of profitability once you get going. That’s our goal internally.

Stephen Chin – UBS Securities

Now thanks. We’ve got about five minutes. I think we’ll see if there are any questions from the audience. We’ll be happy to take a couple.

Question-and-Answer Session

Unidentified Analyst

[indiscernible] from UBS. Just a couple if I could, it looks like the kind of transistor cost that has been coming down so many years now, so leveling off maybe even increasing you mentioned a few other reasons effectively in NAND I was saying lay out going out. We’re seeing logic with the intensity going out may because of these delays whatever but what do you think the knock on implications are potentially, do you think consumer demand and the elasticity of demand slows down, do you think now the foundry businesses take it on the chin in terms of margin profitability where does the pain get felt in the industry, did they pass on to you, how does it play out?

And then I guess, secondly I just you mentioned fixed costs and I just wondered what you feel or the fixed cost pay count within the Japanese business looks like to you going forward and how easy is that to achieve? Thank you.

Robert J. Halliday

So the first thing was about increasing transistor cost segment of the market, so if you look at V-NAND works which I think it will. The technology and commercial challenge has become less daunting because once you get the V-NAND working you can scale bit grow pretty aggressively from 32 and 64 layers. So capital intensive are little less, but I think they’ll actually grow their addressable market. Now, the capital intensive highly bias [ph] through its deposition, which is good for us. So I think the cost technical and reliability things become pretty favorable for demand then, right.

DRAM, it’s not super-expensive and what you have to look at is cash flow, right. So if they don’t have real high growth rates we may have to increase the price and that’s actually pretty good for them because they use the same equipment overall. So the cash flow is about to get pretty interesting. So I think DRAM, the technical challengers are moderate. The commercial challengers are somewhat mitigated by tool use and moderate growth rates. So I think the cash flow is probably pretty good actually. I think since logic that technology is more capital intensive because you are going to more layers, more tighter process windows. So I think in that they’re looking to alleviate in couple of ways. One is, the way you can make chips that continue to scale in two dimensions, which is getting more difficult, much more difficult where you’re going to third dimension, then going to third dimension – three, you can change materials.

And then looking more and more aggressively change in materials playing down different films, different types of materials and that’s where we play very well and that could be very enabling to both, on technology and cost. So we think that while we do precision materials engineering could be very enabling. So there’s roadmap within foundry. If you look at things like FE and PVD, they’ve been really strong, we introduced last few years and in the future for foundry.

So then finally, how do they alleviate those cost measures? I think then you get down to they’re making higher value devices. We think we’re enabling to help them make higher value devices. So I think looking at the segmentation, I think Applied Materials were helping a lot of materials deposition etch to levitate some of these high costs of scaling in two dimensions.

I think the other question, which was the cost structures, we haven’t engaged in detail with Tokyo Electron. We’re going to the group of process. I think there is a lot of opportunity for synergies between the companies and I think they’re all over the place. I think they’re revenue technology synergies. If you look then we have a good footprint in conductor etch there, good footprint in dielectric etch and I think there’s real opportunities for both revenue growth and cost savings between the platforms. If you look at all the different platforms we have there’s a lot of common elements and software and we’ve been handling. So I think there is lot of revenue opportunities.

I think the other thing is cost. The vast majority of our cost in materials, product costs – 85% of the materials, we have two completely different supply chains and we got a reasonably cheap network of course. So we think we can take a bunch of material cost out. Then you get all the other stuff, corporate that’s still reporting, building all that stuff we can work. So the target you get to headcount, you got a pretty good list. And then you look at headcount, which is in Japan, outside Japan, all over the world, and the $500 million numbers are 2017 number too by the way and then $250 million exiting 2015. So we got a pretty good set of opportunities, which are realistic.

Stephen Chin – UBS Securities LLC

Okay. I think we're at end, Bob. We are out of time, but thank you very much for attending today. I appreciate the perspective you shared.

Robert J. Halliday

Thanks very much for the time. Thank you.

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


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