Good afternoon, everyone. I'm Mike Sullivan, Head of Investor Relations at Applied Materials. We appreciate you joining us for our Q1 of fiscal 2017 earnings conference call, which is being recorded. Joining me are Gary Dickerson, our President and CEO and Bob Halliday, our Chief Financial Officer. Before we begin, let me remind you that today's call contains forward looking statements, including Applied's current view of its industries, performance, products, share positions, revenue growth, profitability and business outlook.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements and are not guarantees of future performance. Information concerning these risks and uncertainties is contained in Applied's most recent Form 10 ks and 8 ks filings with the SEC. All forward looking statements are based on management's estimates, projections and assumptions as of February 15, 2017, and Applied assumes no obligation to update them. Today's call also includes non GAAP adjusted measures. Reconciliations to GAAP measures are contained in today's earnings press release and in our reconciliation slides, which are available on the Investor Relations page of our website at appliedmaterials.com.
And now, I'd like to turn the call over to Gary Dickerson.
Thanks, Mike. I'm happy to report that Applied Materials delivered another record quarter in Q1 with earnings and orders exceeding all time highs, 2017 is shaping up to be an outstanding year. As I look ahead, I see broad based strength in our markets as large multi year inflections evolve and new emerging demand drivers layer on top of mobility and computing. I'm also increasingly confident investments we have been making in our organization and product pipeline. In today's call, I'll begin with a quick recap of our strategy and provide an update on the key trends and industry inflections that are driving our growth.
I'll then translate these into an outlook for Applied's markets before concluding with a brief overview for each of our businesses. After that, Bob will provide additional details about our performance and his perspective on 2017 beyond. The significant changes in semiconductor and display technology that are taking place today depend on materials innovation. At Applied, our strategy is to deliver innovative materials engineering technologies to enable these major inflections. Across the company, we are focused on extending our innovation leadership and delivering solutions that enable customers to build devices and structures that were never possible before.
As I've outlined previously, there are 5 large multi year inflections that are underpinning our record performance today and we believe will fuel our growth for years to come. I'm going to take a few minutes to provide an update on each of these drivers as well as describe how our strategy of inflection focused innovation positions Applied for sustainable profitable growth. Let me begin with 10 and 7 nanometer technologies in foundry and logic. We are seeing significant investments by our customers to meet demand for leading edge silicon to power increasingly capable mobile devices, 4 ks video and new compute intensive applications like artificial intelligence and smart vehicles. This sustained investment in advanced technology plays to the strengths of our leadership businesses where we have unique capabilities and high market share.
The second driver is 3 d NAND, which is a great example of materials enabled scaling. We believe NAND bit demand grew about 45% in 20 16 and that 2017 will be similar. Major memory companies are saying this growth rate is sustainable over the next several years. Our opportunity in NAND is also expanding. While 3 d NAND has significant performance and power advantages, the bit density increase achieved moving from generation to generation is slower than it was for planar NAND to compensate more wafer starts are needed.
The 3rd driver for Applied is patterning, a market which is growing rapidly. It's important to recognize that as customers move to smaller chip geometries, all the layers in the device scale. Some layers will move to EUV and others to multi patterning. This means that even in the most aggressive EUV adoption case, our patterning opportunity still expands considerably. Patterning is an area where Applied is making significant investments.
We increased our patterning revenues more than 60% in 2016 and we have significant room to grow. Beyond semiconductor, another unique growth driver for Applied is advanced display where 2 major market inflections are underway. The first is rapid growth in large format TVs 60 inches and above, which is driving investment in new Gen 10.5 capacity as customers optimize factories for bigger screen sizes. We are now tracking 7 Gen 10.5 projects. In parallel, there's a battle for leadership in next generation mobile screens and demand for our OLED manufacturing equipment is broadening.
We see half of this demand coming from new entrants. As a result, in the past few months, our view of display spending has strengthened further. We now see customers increasing their investments by around $3,000,000,000 in 20.17, a $1,000,000,000 more than we thought in November. Our early view of 2018 is also positive. The 5th driver I'll cover is China, which is an important long term growth opportunity for Applied in both semiconductor and display.
While we believe 2017 spending will be similar to last year, based on the new factory projects we're tracking, we expect to see a significant ramp in investment in 2018 and beyond. Now I'll translate these major inflections into our market outlook. Due to strong shipments in December, we now believe 2016 wafer fab equipment spending ended the year at around $35,000,000,000 We expect 2017 to be higher still, up 5% or more year on year. Within this spending, we see strength across the board with foundry, NAND, DRAM and logic investments all growing relative to 2016. Our early view of 2018 wafer fab equipment is also positive for a number of reasons.
We see foundry investment broadening. We believe memory fundamentals will remain strong fueled by explosive growth in data and investment in new technologies. When we look at customers' total capital spending, we see healthy investment in new factory shelves and we expect spending in China to accelerate in 2018 and beyond. Looking to the future, increasingly excited about trends in virtual and augmented reality, big data and artificial intelligence and smart vehicles. These new applications require major advances in silicon and display technology and create huge demand for memory.
These new drivers layer on top of existing demand for mobility, PCs and other consumer electronics and have the potential to fuel a new phase of industry growth. All of this reinforces
our perspective
that our markets are becoming stronger and less cyclical. I'll now provide a brief update on each of our major businesses. In semiconductor, 2016 was a big share gain year for Applied. While we'll wait for Gartner's final sizing in April before providing all the details, we believe we've gained around 2 points of overall wafer fab equipment share. These gains are broad based with especially strong adoption of our new products.
In 2016, about 40% of our revenue came from products that we've launched in the past 3 years. We have great momentum and fully expect to add to these gains in 2017. In our Q1, semi equipment revenue and orders were at a 16 year high with our highest orders ever in etch, CVD and process diagnostics and control. In display, we delivered another strong quarter of revenue and orders. Since 2012, we have grown display revenues around 20% per year and we believe we'll book $2,000,000,000 of orders in 2017.
As display technology becomes more complex, we are focused on building out our product portfolio to deliver the solutions our customers need. We have great traction with our new thin film encapsulation and e beam review products and have more significant new products that we'll announce later this year. In service, our strategy is to deliver more value to customers with our advanced service products. We're focused on reducing ramp times, improving device performance and yield and optimizing output and operating costs for customers. We're seeing the impact of our investments and are increasing our share of the service opportunity.
On a year on year basis, we've now grown our service business for 13 consecutive quarters and our orders in Q1 were also an all time high. Before I hand the call over to Bob, let me quickly summarize. Q1 was another record breaking quarter and we expect 2017 to be an outstanding year for the company. The large multi year inflections that are driving our business remain firmly in place and our markets are growing and becoming less cyclical. We expect wafer fab equipment and display investments to be up in 2017 and our initial view of 2018 is also positive.
Our inflection focused innovation strategy is delivering results. We are outperforming in semiconductor with strong share gains, sustainably growing our service business and we are uniquely positioned to drive significant growth in display. Overall, we are increasingly confident that we can maintain our trajectory of sustainable growth and raise the ceiling on our performance. Now, I'll ask Bob to provide more details about our results and outlook. Bob?
Thanks, Gary. Applied momentum continues in the new fiscal year with record orders and earnings, both up substantially from a year ago. And we're guiding for new revenue and earnings records in Q2. For investors with a long memory, this kind of performance raises old questions about peaks and sustainability. However, I'm confident that our markets are materially better.
And I believe that Applied's ability to deliver value and profitability is increasingly stronger and more sustainable. Last quarter, I gave you numbers showing that the industry is now larger and significantly less volatile. Some of you did the math and saw that this is true. I believe investors will come to recognize that the industry truly is more attractive, owing to 3 important factors. First is that our customers have fully absorbed a tremendous amount of productivity.
The list includes the 300 millimeter wafer size transition, cycle time reductions, supplier consolidation, including the IDM to foundry transition, the shift to highly productive mega fabs, better inventory management, reuse strategies and disciplined profit minded investment by our customers. 2nd is capital intensity. A steadily rising amount of capital equipment is needed to build each type of chip and customers increasingly need the kind of equipment Applied makes. For example, patenting smaller lines takes more CBD, CMP and etch steps. Logic and foundry chips need more metal layers and new materials.
And 3 d NAND memories add bits at a slower rate than 2 d shrinks. You can see these factors playing out in the capital intensity curves in
the industry. 3rd is that
we are seeing more demand drivers. In NAND, server farms are early in the transition from hard disk to solid state drives. In logic and foundry, leading technology and automotive companies are designing custom high performance chips for artificial intelligence. Manufacturers are adding sensors, intelligence and communications into all kinds of commercial and consumer products, creating the Internet of Things. The additional data that's being created drives further demand for advanced processors and memory.
And we have many engagements with new companies China who are strategically committed to participating in future waves of growth. Gary mentioned that we expect WFE spending to be up by over 5% this year, which would give us the highest level of investment seen today. 2017 investment does not include a wafer size transition as in 2000 or a surge in commodity DRAM investment as in 2,007 or an unusually large year of MOCVD spending as in 2011. In fact, I believe our 2017 forecast reflects measured, prudent customer spending designed to beat strong demand patterns that we are seeing continue into 2018 and beyond. Our customers will continue to benefit from making big investments in leading edge capacity to power devices and the cloud.
I believe concerns about the cost benefit of Moore's Law are anchored on the value of yesterday's applications. Consider the value of being created by companies who are using technology to transform industries like advertising, retailing, transportation, television and travel. Today, they are making massive investments in new applications that depend on further innovations memories and displays and a lot more capacity. I see a very healthy future in this for Applied Materials. At Applied, we changed the investment model to deliver higher returns.
We aggressively shifted dollars from G and A to R and D and from sustaining R and D to impactful new product R and D. We significantly increased the percentage of winning products and we accelerated our new product development timelines. These trends have multiplicative effects and are continuing. As a result, we are outperforming our markets and benefiting from delivering more valuable products and services to our customers. Let's start with revenue growth.
As Gary said, we expect WFE spending to grow by around 5% or more in calendar 2017. In fiscal 2017, we anticipate that our services group will grow at twice that rate. Our semiconductor systems business will grow at 4x that rate. And our display business will grow at more than 10x that rate. As a result, we are gaining share in our markets.
The best indication of the value we provide is profit margins. Our non GAAP gross margin was 45.4% in Q1, the 2nd highest since 2,008. Our non GAAP operating margin was 26%, a 9 year high. And next quarter, we plan to be higher in both. Our revenue growth and margin expansion are resulting in strong free cash flow, which grew by more than 300% in Q1 from the same period last year.
And we are committed to returning excess cash to shareholders. In addition, we're closely monitoring the policy environment. As a U. S.-based manufacturer with strong exports and a global manufacturing network, we have a great deal of flexibility in adapting to the new policies being considered. Next, I'll comment on our performance during Q1 as compared to the same period last year.
Orders of $4,200,000,000 were our highest ever and broad based. We had a 16 year high in semiconductor systems orders, record orders in services and very strong display orders of $632,000,000 In Q1, we grew company revenue by 45% and increased non GAAP gross margin by 300 basis points. Non GAAP operating expenses grew by 14% to the high end of the guidance range. Our ongoing spending discipline helped us to more than double our non GAAP operating profit. We've reduced the non GAAP tax rate by 6 point two points and we grew non GAAP earnings per share by 158%.
Next, I'll compare our segment performance during Q1 to the same period last year. We grew Semiconductor Systems revenue by 57% and non GAAP operating margin by 11.5 points. We grew services revenue by 12% and non GAAP operating profit by 1.9 points. We also grew display revenue by 66% and non GAAP operating profit by 8.4 points. On the balance sheet, we grew cash and investments by 23 percent to $5,100,000,000 and about 36% remained onshore.
We paid cash dividends of $108,000,000 and used $130,000,000 for stock buybacks, reducing the Endy's share count by 5% year over year to 1,080,000,000 dollars Now I'll provide our guidance for the Q2. We expect overall revenue to be in the range of 3.45 to $3,600,000,000 The midpoint would be up by 44% year over year. On a year over year basis, our semiconductor systems revenue should increase by about 51%. Services revenues should increase by about 9% and display revenue should increase by about 122%. In addition, non GAAP gross margin should be about 45.5%.
Non GAAP operating expenses should be $645,000,000 plus or minus 10,000,000 dollars And non GAAP EPS should be in the range of $0.72 to $0.80 the midpoint of which would be up by 124% year over year. In summary, we are raising the ceiling on our expectations for the industries we serve, And we believe our markets will remain stronger. We've fundamentally changed our investment model to deliver greater value to our customers, and we are seeing that value reflected in higher market share and profitability. This stronger performance is sustainable, resulting in greater free cash flow. Now Mike, let's start the Q and A.
Thanks, Bob. To help us reach as many people as we can, please ask one question at this time. If you have an additional question later, please poll the operator and we'll do our best to answer it later in the call. Operator, let's please begin.
Yes, sir. Our first question is from Faran Ahmad of Credit Suisse. Your line is open.
Thanks for taking my question. My first question is in regards to the linearity of the year. Some of your peers have indicated a significant decline in second half of the year, primarily driven by 3.9. And I just wanted to understand, is that something you are seeing as well?
Sure, Fahad. Prahlad. So let me give you some context for how we think about the year and longer term. We are really driving for and frankly achieving sustainable year over year relative revenue share profit. That's how we think about the business and look at it.
As for 2017, this will be another good year. We see WFE up 5% or more in the year. And then for our fiscal year, as I said in the call, our semiconductor revenue should grow at 4x that rate. Our services revenue should grow at 2x that rate. And our display revenue would grow at over 10x that rate.
So if you look at it, we gave you axles for Q1 and guide for Q2. Our full year should model just as I said just now. With that,
I think you get a
pretty good feel for the second half of the year for us.
Thanks, Fahren. Thank you. Our next question is from C. J. Muse of Evercore.
Your line is open.
Yes, good afternoon. Thank you for taking my question. I guess a question around display. How should we be thinking about the linearity of spend there first half, second half on a calendar year basis? And then considering, I think you said in prepared remarks, you expect to book roughly $2,000,000,000 of revenues there here in the calendar year.
How should we think about the trajectory of revenues through calendar 2018? And I guess as part of that, we'd love to hear your thoughts on new product introductions and when we should think about weaving, I guess, incremental revenues from there and there as well. Thank you.
Sure. I'll start and Gary can jump in. Display continues to go up for us, frankly. In terms of the market context, when we did the Analyst Day back in September in New York, we thought that the 16 would be WFE numbers of around 14.5 as I remember. And we thought the next year would be about the similar number in calendar 2017.
Now when I think it now, it's about 17.4 in 2017. So the market is up about $3,000,000,000 from where we thought. In terms of our own performance, I'll do bookings first. We booked over $2,000,000,000 in 2016. We weren't sure we could get that same volume in 2017 because some of those 2016 bookings shipped through 2017 2018.
In fact, we now think the bookings are pretty close in 2017 to what they were in 2016. What's particularly interesting for me in that bookings mix for 2017 is if you go back to history, we used to be about 60% or so of our bookings were mobile, 65% some years and about 35% from 65% of TVs, 35% mobile. It kind of flipped last year. We thought it would continue that this year. We're strong in both this year.
TV has come back strong. We mentioned the Gen 10.5 fab. We see 7 more of those we're tracking. So this year, we think we'll book about 55% for TV, 45 percent mobile, so strong in both, frankly. And then if you look at the revenues, which you asked about, this year, we think our revenues are going to be pretty strong throughout the year.
In terms of the quarterization, it's a little lumpy. Our Q3 might be a little stronger than our Q2, but pretty strong every quarter.
I could add a little bit more, also CJ on display. So if you look at put display in perspective, it's a great example of our ability to take materials engineering into an adjacent market. And if you go over a 4 year period of time from 2012 to 2016, our orders have increased from around $400,000,000 to $2,000,000,000 so over $2,000,000,000 about a 5x increase in 4 years in display, which is incredible. But again, it shows the ability to take our materials innovation technologies, CBD, PVD, thin film encapsulation, into a new market. And we've talked about Bob talked about the TV size is increasing and 7 Gen 10.5 projects.
OLED mobile is also expanding to new customers. 50% of our demand going forward for this year is new customers for the mobile OLED. And then we've been focused on inflections and increasing our total available market. We've talked about tripling our served market as we go forward. And certainly, as these new technologies like OLED or flexible OLED are adopted, that increases our total available market.
We've been driving new technologies like thin film encapsulation and e beam review, again, reusing technologies that we have within our semiconductor business in the display. You asked about the new products that we've talked about. And what we said is that we'll announce those sometime during 2017. But what I would say, and we're not going to do that today, but what I would say is that those projects are on track and tremendous customer pull and investment for those new opportunities.
Thanks, C. J.
Thank you. Our next question is from Timothy Arcuri of Cowen and Company. Your line is open.
Thank you. So I just wanted to try to ask a question again, Bob, just on the loadings for the year. So if you look at your run rate in based upon what you just booked, and if I assume roughly 25% W and P share, which is what's in your model, you're sort of run rating at roughly $44,000,000,000 I mean value, but the industry. And if the year is going to be $37,000,000 the math would say that you have to get to $30,000,000 sometime during the back half of the year. Now maybe things don't fall off that much, but I'm just kind of wondering if you can sort of take those numbers and tell us if you think shipments are going to fall off during the back half of the year because the math seems to say that either shipments are going to fall off quite a bit or WFE is going to be a lot better than $37,000,000,000 this year?
Thanks.
Sure. Yes. So Tim, I gave you some color on this first half, second half for us a little bit. I'll give you a little more specific to your question. I don't know that the industry is running at quite 44 now.
And our model was to get to 25.5 percent market share in 2019. We think we're well on track to that. I'm not sure we're at that point right now. So in terms of the mathematics, a little bit different. Further, what I'll say to you is that the stuff I said to you earlier would imply the strong first half is strong.
I don't disagree with that. But what I will also tell you is that we have seen the Q3 and Q4 numbers for us firm up as we go month by month the last few months. So my take on it, 'seventeen is a strong year. It's going to be a particularly strong year for Applied as we gain more share and display does well for us. We also think that 2018, 2019, we see growth drivers that are really good for us and the industry the next couple of years.
Will the second half be as strong as the first half? Not sure it is, but the overall trends are positive.
Thanks, Jim. Thank you.
Our next question is from Matif Malik of Citi. Your line is open.
Hi, thanks for taking my question and congratulations on strong results and guide. Gary, some investors are still skeptical on China spending coming in 2018. Can you just provide a bit more color details on how your engagements are going with Chinese domestic projects?
Sure. Let me give you some color on China. So what we're looking at in 2017 for China for Applied Materials is up versus 2016, maybe something like 10% up overall for us. And if you look at 2017 versus 2015, it's up maybe an additional $1,000,000,000 overall. Semi is slightly lower in that mix.
Display is higher and service is higher. If you look at 2015 versus 2017, we've had 2x growth or anticipating 2x growth in semi revenue and about 50% growth in service and display. And China is really one of our strongest regions, both with the multinational companies and the domestic companies there. What and as we spend a lot of time and we have very deep relationships with those the companies that are there, basically what we hear is that there is a big strategic drive in investment in China. There is a big gap in terms of domestic supply versus demand, and then there is also a drive to build a secure supply chain.
So I think all us see announcements in very large investments over the next several years in China. And talking to those customers, they, I believe, understand that this is a long term strategy. They have Phase 1, Phase 2, Phase 3. And in the beginning, those investments aren't going to be as efficient, especially in the more advanced technologies. But what I would say is that very consistently, we see strong drive from a strategic perspective for increased investment in China.
And really what we're seeing is 2018 beyond significant increase. Again, we increased semi revenue 2x from 2015 to 2017. If you ask me, what do I think 2017 to 2019, that's going to be up a significant amount in semiconductor opportunity.
Great. Thanks, Ajith. Thank you.
Our next question is from Stephen Chen of UBS. Your line is open.
Thanks. Hi, Gary and Bob, nice quarter and guidance too. I have a follow-up question on the display order guidance. Can you share, Gary, how much of the display orders this year, the $2,000,000,000 likely come from the Chinese display customers? Because I know we're all waiting for domestic China semiconductor spend to happen, but can sales to China's display customers bridge us over until the domestic, semi CapEx happens in China next year?
Yes. I'll start. We'll put up some slides to help us. So total bookings this year will be over $2,000,000,000 in display. We see a lot of the big orders out of China for TVs in particular and some for mobile.
So the this is the wrong slide. So the numbers are large numbers for China. I'd say the majority of the display stuff is probably China. China revenue. Okay.
So the majority of the $2,000,000,000 my guess, I'm looking for the slide, frankly, is probably of the display bookings, probably half or more is China.
Thanks.
Thank you. Our next question is from Christian Carr of Bank of America Merrill Lynch. Your line is open.
Yes. Hi. Thanks for taking my question. I also had a display question. So Bob, if you look at last year, you did about $2,000,000,000 in bookings and about $1,000,000,000 in revenue.
Should we expect that gap to close as you roll forward with new products and OLED gets more traction? Or do you think the book to revenue is going to still have a lag effect here? And along the same path, what percentage of your bookings or revenue last year was OLED versus traditional displays? Thank you.
So your question is the book to bill, what's it going to stay for display and then how much was OLED? I guess that's the question.
That's right, yes.
Yes. So last year, we booked over $2,000,000,000 and we build now remember, we moved the web business in there and the service upgrade business, and we build about 55% of that. This year, we're going to book over $2,000,000,000 but we'll build a higher percentage. It'll still be north of 1. In terms of the outlook beyond 2017, 2018, we see a continuing strong book to bill continuing strong bookings, but the book to bill kind of narrows.
Last year was like a 1.6 or 7 or something like that. It was a big number. So that's going to trend down over time, but it will stay positive for a while.
Thanks, Krish.
OLED was OLED if you look at last year, OLED booking mobile bookings were 65% of the total. And of the mobile piece, which was 65%, the majority of that was all in.
Great. Thanks, Kiara.
Our next question is from Harlan Sur of JPMorgan. Your line is open.
Hi, good afternoon and congratulations on the solid execution. I think in the prior question you answered, you talked about 50% roughly of your bookings for flat panel being kind of China focused. I'm assuming most of this is large screen, but if we look at the Tier 2 OLED players in China, these guys are trying to play catch up to the leaders in the market. Our research indicates that China is probably going to account for about 30% of the OLED CapEx spend in 2018, which is up significantly from this year's mix levels. So I'm just wondering if you guys are starting to see this trend and just wondering if this is already starting to show up in the order books or the backlog?
Or is that still on the come?
Yes, it's true. So you got a couple of questions. You got the China question, the OLED proliferation question. So if you look at China, as I said earlier, we sell for TV and mobile. TV is pretty big in China this year.
But joining to your question more around OLED and mobile, as we said on the call last time, I think we repeated this time, we had orders from 10 different OLED manufacturers in the last year. Predominantly last couple of quarters, 9 of those were for mobile phones, one was a lighting guy. So if you look at the mobile guys, it's proliferating such that beyond the number one leader in OLED, we think that in 2017, our orders for OLED mobile is going to be probably over half from the followers, not just in China though.
Thank you. Our next question is from Joe Moore of Morgan Stanley. Your line is open.
Great. Thank you. It looks like you made nice progress on the operating margin on the display side. Can you talk about where that can go? And can you remind us where that business stands on sort of gross and operating margins versus the semi business?
Thank you.
Sure. We did make nice progress on the display business. So if you go look at it, we're up significantly this year on the operating margins for display in the quarter in particular. We think the year is going to be up a fair amount year on year. We're well on track to hit the margins in the model and display the FY 2019.
Now not every quarter is going to be exactly the same in display. My guess is Q2 is may not be quite as high as Q1, but the year is going to be up significantly from last year.
Great. Thank you.
Our next question is from Ramesh Shah of Nomura. Your line is open.
Yes. Thank you and congratulations. At the Analyst Meeting in September, you talked about earnings of $2.80 on I think it was like a $35,000,000,000 WFE. This quarter, it looks like your run rating closer to $3 or 2 years earlier than we anticipated. So if WFE is coming in at 37% this year and you guys think it will hold up again next year, what's Bob, what's maybe a more reasonable range to think about earnings in fiscal 2019 because the $280,000,000 does look increasingly conservative?
Yes. There's a few things. I think we'll do very well against that model. That model had a few assumptions. It kind of assumed a $34,500,000,000 WFE.
And right now, we're running a little north of that, frankly. There was a $37,000,000,000 model we showed that same day, which was 3.17. And the second thing that was the market environment in that model was we assume that the display equipment spending was going to be north of the historical number of 8, but not necessarily up to what we realized last year 14.5. So I would say in market environment, condition number 1 in those models, I'm more optimistic that the environment in 2019 is north of the 34.5 percent and I'm more optimistic that the market environment for the display spending is north of what we have in that model. So the market is positively biased towards our base model last year, which was a $2.80 okay?
The second thing is the share position we had in both semi and display. And we said we'd do 25.5 points in semi and we thought we'd be in a strong position in display. We are very confident of that. We gained 2 points in 2016 up to about 22. So we got to go about a point a year the next 3 years.
We'll hit those numbers, I think, probably some upside. And then in display, the market and our products look good against the revenue in that plan. So I'd say that the function of share and market result in a revenue opportunity against that model. I think what kind of pleases me as much as anything, frankly, what we result we announced today and for next quarter is the margin profile. We had in the past iteration of the model, we didn't move much on the margins.
We reported today, what was it, 45% to We reported today, what was it, 45,000,000 to, I guess, 45,400,000,000 no, the actuals, 445.4. And then what we said about gross margins last quarter was that in fiscal 20 17, we'd be up to about 44% in the year. That was a gain of 0.8 per point. We now think in fiscal 'seventeen alone, instead of 0.8 of a gain versus 'sixteen, we're going to gain a 0.5. So if you look at that on the model you asked about, we're probably very comfortable that we can hit the 44.6% gross margin, which is at the 34.5% and the 45.1%, which is the 37, we're probably pretty comfortable.
And then we're maintaining pretty big of tight control on the operating expenses, too. So if you back calculate the guide we give for next quarter, now next quarter is a good quarter, its operating margins north of 27%. So in the annual models we showed for 2019, we showed operating margins of about $25,100,000,000 in the $34,500,000,000 and $26,400,000,000 $400,000,000 in the $37,000,000,000 environment. So at the operating margin, we're making progress, right? And then if you finally go down to the WAS, we said we'd shrink the share count to 104.4, we're confident we'll hit that.
So we're not going to redo the model today. But around the market environment relative to that model, around our share position relative to the model, around our execution on gross margins, OpEx and share count, we're pretty confident that we'll hit or potentially beat that low.
Thanks, Ramit.
Thank you. Our next question is from Patrick Ho of Stifel Nicolaus. Your line is open.
Thank you very much and congrats on the quarter and the projected outlook for 2017. Gary, maybe just looking at 3 d NAND and the market opportunity still going forward, you guys obviously have made great inroads in terms of edge and deposition, capital intensity, but also your own share gains. As you look at the industry moving to 64 layers and then eventually to 96 layers, one, how do you see the capital intensity trends for the market overall? And maybe secondly for Applied, how do you see your competitive positioning increasing as the industry progresses?
So let me take on our position and Bob can talk about maybe capital intensity. So as we talked about overall, we gained 2 points of share in 2016. And actually, our strongest gains are in 3 d NAND. And one of the really big drivers for our company is that 3 d NAND is materials enabled scaling versus litho enabled scaling. I met 3 of the top 4 memory CEOs in the last month.
All of them are very bullish. The pull that they have for 3 d NAND is really tremendous. And if you look in servers, for instance, and the total cost of ownership and the power consumption, I was our data center, it's 80% less power consumption and total cost of ownership is significantly better. So all of the people I'm talking to are very bullish about 3 d NAND. Our position in 3 d NAND, as we've talked about, we increased our TAM, our total available market, by a factor of 3.
And when we're talking also about operating margins and our opportunities in display or in semi, our strategy is to focus on inflections. So we're winning share in inflections and we're also delivering new capabilities. And so that comes through in 40% of our revenue being introduced from products that were introduced in the last 3 years. Just in 2016, our etch revenue was up 30%, CVD 33 percent, CMP revenue up 33 percent, our e beam products, another area where there's a big inflection, the largest part of our PDC business, up 33%. So we see tremendous pull.
And as you go to these future generations of 3 d NAND, it's really all about materials innovation, how you scale to those additional numbers of layers. And we're in a really great position. The pull that we have from our customers is earlier, deeper and broader than we've ever seen in the past. And then Bob can talk maybe about the capital intensity.
On 3 d NAND? Yes. So what was your comparison again, Patrick, which to which? Which layer to which layer? Well, I'll see if I can fill in.
So the capital intensity for 3 d NAND, if you go from planar to, say, 50 layers, the total CapEx is about $3,600,000,000 $3,500,000,000 on planar. At sort of 48 layers, it's about $5,000,000,000 for Greenfield. Now I think the thing that's interesting is if you go from a planar reuse to a 50 layer, 48 layer, the total CapEx to upgrade is $2,600,000,000 $3,200,000,000 almost the same as the opportunity in planer at 3.5 percent. Now what's really interesting for companies like us and Land Materials is very etch and deposition intensive. Now what's particularly interesting for Applied Materials, additionally to that, to be frank, 1, we didn't have the products or incumbent positions at the plaintiff position, so the level of reuse for Applied is very low.
And you can see that our share gains, which have really been driven in etch, CBD and some in CMP, is around the share gains we have made within etch CBD and CMP around some of these conversions from plan to 3 d NAND and also some on DRAM. So 1, total spend is bigger 2, it's really etch and deposition intensive and 3, it's been really good for Applied Materials within those products in the transition.
Thanks, Patrick.
Thank you. Our next question is from Edwin Maugh of Needham. Your line is open.
Operator, we're not hearing Edwin.
Hey, sorry about that. So I want to ask you guys about foundrylogic. Just from what your last report to this report, have you seen more broadening of demand in 7, 5 nanometer or in the trailing edge, it sounds like you guys are more upbeat on China? And then on AMOS specifically around 7 or 5 nanometer, in terms of opportunity or growth in 7.5, is it more just complex transistor technology that demand more of your product because you guys are strong around transistor technology? Or is it like you expect share gain around patenting at 75 nanometer that allows you to grow in that as those nodes go into production?
Well, I'll do the first one and Gary will do more the second one.
So on broadening, this has been
a year that's interesting in foundry. What might surprise you that of the trailing edge, and I'll define trailing edge as 28 20 nanometer, 28 nanometer and above 45. It's 40% in 2017 will be those nodes. And you got 55 percent we think for 7%, 10%, about 5% 14%, 16%. So what's the point?
40% of spend this year in the foundries is 20 nanometer and above. So it's really strong. Last year was about 38%. So in a bigger spend year, it's actually a bigger percentage, which is interesting. Now what's so what you have this year is spending by the biggest foundry leader pretty strong and pretty big spending at the trailing nodes.
And the opportunity you have to sustain foundry spending, which people are questioning about next year, is that we think that in 2018, we're going to have continued spending at the trailing edge. We think secondly, we're going to a broadening of foundry spending, particularly next year. You asked about broadening of spend, I think it's a bigger impact next year. Because if you look at the shelves they're putting up in the opportunities in SMIC and GlobalFoundries in China and places like that, you're going to see some broadening of that. In terms of the leading edge on 10,7, by the end of this year, you're going to have 120,000 to 140,000 wafer studs of capacity for 10 and 7.
We think that could probably at its peak double. So there's still some chance of running out 10 and 7 next year. So next year, we're not pessimistic on founder. We think there's over to, A, the trailing edge stay strong, number 1. Number 2, we see some still significant additions for Tencent with those conversions of Greenfield.
And 3, we see broadening among some of the customer base.
So on the share gains, we have, as Bob talked about, I think pretty good line of sight on 7 nanometer and very strong pole for our transistor and interconnect products where we have extremely high share and we're seeing more steps and increase in our total available market as you go to 7 nanometer. In addition to the 3 memory CEOs I met, I also met the Head of R and D for our largest logic and foundry customers within the last month. And what I would say is that we have a stronger pull for earlier, deeper and broader collaborations than we've ever had in the history of Applied Materials. And one of the things that we're really focused on, if you go past 7 nanometers, how do we enable our customers to build devices that they could never build before? So certainly, we have great pull for new products like Selectra, which again gives designers the capability that they never had before in designing new types of devices.
And you will definitely see and we're seeing the ability to grow as fast as we can qualify with this kind of new capability. We have new films that our customers are adopting for 5 nanometer and beyond that also enable them to design devices in different ways. And certainly, the transistor interconnect patterning is another area we've talked about where we have tremendous pull with SIM 3 Selectra, Olympia, Precision CVD, ProVision, the LK Prime for CMP, we're in the early innings of adoption of many of those products. And as you go beyond 7, the opportunities for us even become much larger for these products and other products that we have in our pipeline. So for me, those conversations with those people running R and D are incredibly exciting and the pull is really tremendous for Applied.
Thanks. Thanks, Edwin.
Thank you. Our next question is from Weston Twigg of Pacific Crest Securities. Your line is open.
Hi, thanks for taking my question. I just wanted to dig into, I guess, China and NAND a little bit more directly. A company a couple of weeks ago, SmallCap, said that they thought their revenue from NAND memory customers would increase in the second half, partly driven by domestic Chinese memory producers. So some of these new fab projects that have been in the works. And just wondering if you're actually seeing any of that kind of demand that you would actually commit to maybe delivering some equipment in the second half or if you still think those domestic projects might be more of a 2018 event?
Well, we definitely see we're engaged with all of those different companies. Our share in China is the highest or near the highest that we have for any region. So our engagement with those companies are very strong. We don't really see in 20 17 significant revenue growth coming from those companies. Again, our overall revenue in China, we anticipate in '17 is somewhere around $2,600,000,000 So for us, having something that moves the needle for us has to be fairly sizable.
We are definitely deeply engaged with all of those companies and we look at 2018 and beyond as a much bigger opportunity.
All right.
Thank you.
Thanks.
Thank you.
Our next question is from Craig Ellis with B. Riley.
I wanted to return to the comments regarding reduced industry volatility because some of the measures we have for upstream semiconductor industry volatility show about a 75% reduction over the last 5 years versus the preceding 15%. So it seems like for a company like Applied Materials in that environment, there should be certain parts of the business that benefit from increased operating efficiency. So the first part of the question would be, are you seeing that and to what extent is that realized? And the second part of the question is, there should also be in that environment increased free cash flow predictability. And how does the company think about in a more stable environment, more seasonal environment, increasing systematic cash return or cash actions to create value?
Thank you.
So there's probably about 3 levels to that volatility question. 2 was the benefits to the operating margins from volatility and 3, the benefits to cash returns. So in terms of volatility, I completely agree with you, the volatility is trending down. Almost every metric we look at it indicates that. I mean, the long term metrics are the demand drivers for the industry are much more diverse and sustainable.
And then later on that, you get all these technology conversions. But I was just looking at some data today that the volatility is down, but within Applied, it's down too because we're a much broader company. So I gave you a couple of data points that I hadn't shared before. So if you just look at our revenue split in semi in 2015, 2016 and 2017, 5% that was memory has stayed pretty steady at 48%, 47%, 47%. And then our percent that's been foundry has ranged from 38% to 42% and LOGIX 12% or 13%.
So within device type, we're much stronger than we used to be. And we project in 2017 that our market share by device type in NAND, DRAM, foundry and logic in all 4 of the major categories will be 21.5% or above, whereas we used to have a 10, 15 point spread between our low some of our low memory ones and our high foundry. We've gotten a lot stronger memory, okay? So the volatility of the industry is down and the volatility when applied is down a lot. And then you'll lay in the strength in the service business, which has grown a lot and the display business, which has grown a lot and it's sustainable.
I agree with you on the volatility, Andre. Where will we see the benefits from the operating margin? We're going to see them in a few places. 1, we will grow our revenue line and it will be more predictable. So that results in a few things.
1, you tend to use factory utilization higher. So cost of goods sold, gross margins tend to trend up. So if you look at the benefits on gross margin, we are just grinding away on material costs and factory utilization and that's helping us on these gross margins. As I said earlier in the call, we thought our gross margins would be up this year by 0.8 points to 44 points. We now think we're going to be up 1.5 And a lot of this kind of is this efficiency drying in a way, so sustainability less more predictable, less volatility we talked about.
And then I said earlier in the call that we predict our operating margins in Q2 to be north of 27%. So we are seeing in the numbers. The company is becoming more efficient, more effective with the products we're doing, but also with this less volatility is contributing. We are now, for instance, in our factories looking at being much more aggressive in what we shipped in the 1st 4 weeks of a quarter to even more level load our factories. So you're 100% right.
In terms of the benefits to the investors, we are starting to generate significant more significant cash returns. So if you look at the operating cash flow was 20% this quarter, which is very high for us in Q1. Last year, Q1 was kind of like 9%. So we are doing now the question is getting back to investors. We are going to do it.
We didn't do too much last quarter because of some we were looking at boundary conditions around what's going to change in the tax laws, movement of cash between overseas and U. S. But we see, 1, we are committed to do it 2, we think we'll have the flexibility to do it and 3, some of the changes that are being proposed, it will actually maybe beneficial to us in multiple ways, long term tax going to territorial system around a worldwide system. So I think it's a great opportunity for the investors applied on this.
Great. Thanks, Craig, for the question. And operator, I think we have time for just one more, please.
Yes, sir. Our last question is from Sidney Ho of Deutsche Bank. Your line is open.
Great. Thanks for taking my questions. Your DRAM orders have bounced back to where it was a year ago. Obviously, you're gaining share there as well. But can you talk about what you expect bit growth wise that could translate into for DRAM?
And do you share the view that DRAM suppliers are remaining disciplined in capital spending during the period where pricing is pretty good? Any color would be helpful. Thanks.
I think it's Don. Gary can jump in. I'll tell you what's encouraging for me on some of this stuff. If you look at NAND and DRAM, I was looking at NAND the other day and I'll talk to DRAM in a second. We look at NAND bit growth in supply as pretty much in line and growing about 45% a year.
And that's 45% over a bigger and bigger installed base. So the end use demand for NAND is pretty damn strong. And DRAM is pretty similar. We see bit demand in 2016 up about 30% and then we see server DRAM up about 40%, 45% in 2017. And supply has been a little tighter.
We see 2017, it's only supply bit growth is only about 25% to 30%. And then we see a lot of smartphone consumption of the new Android 6 gigabytes and the Apple 3rd generation. But what's good for Applied is our market share within DRAMs of about 5 points from 2012 to 2015, and we think we're going to get another point in 2016. So we think, 1, this market and demand for DRAM and NAND is growing pretty healthily. 2, it's growing pretty disciplined more frankly.
Even with the NAND capacity additions, what we see is big demand drivers for more NAND. For instance, another factor that I don't think we gave you is that as the solid state drives become more and more cost effective, there's probably going to be a need for up to about 500,000 more wafer studs greenfield to add capacity to what they have today. In other words, if you look in the world, there used to be about 1,400,000 wafer studs of NAND. Now we might be 1,600,000 wafer studs. But that's not even enough.
Over the next 4 years, they probably have to add another 500,000 just for servers. Each 100,000 of NAND is worth about $5,000,000,000 That's about $5,000,000,000 that they have to have to reach their growth in their markets. So what's the point? Good growth drivers for NAND and DRAM, number 1. Number 2, pretty disciplined even with the capacity to do it on NAND because their market is expanding.
3, our position has gone up where we've gained by the time we're done in 2016, we'll probably have gained about 7 points both NAND and DRAM from 2012.
Okay, great. So thanks
for that question. And then Bob, if you'd like to summarize it all
before we close the call. We talk about a lot of esoteric stuff here, bit growth and materials engineering. When I step back even more than a few years ago, I think Applied has a really good business. I mean, if you look at our markets in which we compete are doing really well, better than they were years ago, our position is much better. And as somebody answered on the call, our better resulting in significant improvement in operating margin to cash flow.
So we have a really good business. And what we're doing here is driving sustainable year over year growth in revenue share profitabilities. So the three things, as I summarize again, is 1, our markets are getting better, bigger and less volatile. WFA and display are both strong with positive long term outlook. We have strong share, as I said, in all device types.
We're up in memory in particular and foundry have always been strong and then display is doing very well. And if you look at our service business, which was $2,000,000,000 back in 2013, we're going to hit the $3,200,000,000 in 2019. So that's grown a lot and that's a very strong baseline business. 2nd, our execution is better. Our deep pipeline of products enabled by the product development engine, where 40% of our equipment revenue now is generated from products we've introduced in the last 3 years.
We have multiple years of share gain. And what I don't think we mentioned on our call, we have record backlog of $5,500,000,000 at this point. So that's all around better execution. And finally, the question I just got asked, the ability to return cash is better than ever. Revenue is outpacing our markets.
Operating margin is growing. As I said, we're going to be over 27% next year and we have great deal of flexibility to return more cash to shareholders. So I just think Applied has got really good business when you cut through it. So I feel really good about the business.
Great. Okay. Hey, thanks, Bob. And we'd like to thank everyone for joining us this afternoon. A replay of our call is going to be available on the website beginning at 5 pm Pacific.
Thank you for your continued interest in Applied