Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in question and answer session. As a reminder, this conference is being recorded. I would now like to turn the conference over to Michael Sullivan, Vice President of Investor Relations.
Please go ahead, sir.
Thank you. In a moment, we'll discuss the results for our Q2, which ended on May 1. 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, 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 Q and 8 ks filings with the SEC. All forward looking statements are based on management's estimates, projections and assumptions as of May 19, 2016, and Applied assumes no obligation to update them. Today's call also includes non GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in today's earnings press release and in our reconciliation slides, which are available on the Investors page of our website at appliedmaterials.com. Next, I'd like to share a calendar announcement.
Applied Materials plans to hold its 2016 Analyst Meeting in New York City on Wednesday, September 21st. Those of you joining us in New York will have the option to attend technology sessions with our general managers. The main event will be webcast live. And now, I'd like to turn the call over to Gary Dickerson.
Thanks, Mike, and good afternoon, everyone. I'm very pleased to report that we are making great progress with all the major elements of our strategy and expect to deliver record earnings in fiscal 2016. We are focusing our investments on key customer inflections that are growing Applied Materials today and creating exciting opportunities for future growth. Our record performance is made possible by the outstanding team we have at Applied. I want to thank our employees around the world for their tremendous passion to create value for our customers and shareholders.
I'll begin today's call by summarizing our strong results and outlook in the context of our longer term strategy for sustainable profitable growth. Then I'll outline our updated view on the market environment and what this means for us. I'll conclude with a short summary of progress in each of our major businesses. After that, Bob will provide additional details about our results and the improvements we're making to the company's operating performance. At Applied Materials, our strategy is to develop highly differentiated materials engineering products and services that make technology inflections possible.
In semiconductor and display, the substantial changes in device technology that are taking place require significant materials innovation. I believe this puts Applied in a unique position. We have the broadest and deepest capabilities in materials engineering and our technology is unmatched. These advantages are helping us deliver the innovations that enable our customer success and move the industry forward. In recent years, we shifted $400,000,000 of annual spending to improve our organizational capabilities and accelerate product development.
Today, these investments are creating significant value for our customers and for Applied. When I look at our results and outlook, there are 5 key drivers of our performance I'd like to highlight. 1st, in semiconductor, our leadership is delivering key enabling technology for logic and foundry customers. These businesses have high market share and highly differentiated products and are benefiting from robust levels of foundry investment in the second half of the year. 2nd, our growth businesses are making significant market share gains as the 3 d NAND ramp accelerates.
Our combined etch and CVD revenues for Q2 are at a 9 year high. 3rd, we are very well positioned in China. Domestic Chinese manufacturers are ramping up their investments and multinational customers are expanding their footprint in the region. As a result, we are setting new records for quarterly semiconductor orders in China. The 4th driver is our sustained growth in service, where we are building upon 10 consecutive quarters of year on year growth.
And 5th, we are successfully applying our advanced materials engineering capabilities beyond semiconductor, specifically in display. New display technologies such as OLED are enabled by materials innovation. This is creating significant new market opportunities for Applied. I'll now give you our latest views on the market environment. While we're paying close attention to the global economy, at Applied, we continue to see strong demand for our products and services.
This is because our semiconductor and display customers are focused on developing and ramping new technologies rather than simply building capacity. The inflection driven investments our customers are making are highly strategic. They are battling for leadership and investing to ensure that they're ready as market demand shifts to these new technologies. In Foundry, we expect investment levels for the year to be similar to 2015. We anticipate more than half of 20 16 spending will be focused on the 10 nanometer node as well as 7 nanometer pilot production.
In addition, as new projects ramp in China, we see the foundry customer mix broadening and increasing investment in trailing geometries. This is positive for Applied because we have a 30 year history of leadership in China and we've built very strong customer relationships and a great regional team there. This quarter, our revenues in China are at an all time high. In memory, we expect overall spending to be more or less flat year on year. However, there are important changes in the mix that play well for Applied.
Investment is shifting from DRAM to NAND and we see DRAM down at least 25%, following very high investment levels in 2015. In contrast, we see NAND strengthening as the year progresses. Our latest revenue will be 35% higher than 2015 as multiple customers accelerate their 3 d NAND ramps. 3 d NAND is a great example of materials enabled scaling that plays directly to applied strengths. As I've said before, 3 d NAND is all about depositing, removing and modifying materials with incredible precision.
Because of this, our available market at a 3 d NAND factory can be up to 3x greater than for planar NAND. In the quarter, we booked nearly $1,000,000,000 of NAND orders, which is a record for us. In logic, we believe the spending levels will be very similar to last year. And when we take all of these factors into consideration, we believe that 2016 wafer fab equipment investments will be similar to 2015 with some upside potential. I will now talk about the progress we're making in each of our major businesses.
In semiconductor, I'm very pleased with our strategy and how our product pipeline is shaping up. We made solid wafer fab equipment share gains in 2015 even though the spending mix was not as favorable for us as it is in 2016. Based on the positions we're winning, I expect much stronger share gains this year. Across our semiconductor businesses, I see tremendous customer pull for our latest generation products. In CMP, our new LK Prime system now has over 130 units at customer sites.
This product is winning market share resulting in our highest quarterly CMP orders for a decade. We are also seeing a broader adoption of cobalt in advanced interconnect schemes and this is driving demand for our cobalt CVD systems. This is one of the factors that is contributing to strong share gains in CBD this year. We continue to see rapid adoption of our SIM III etch platform launched at last year's Semicon West. We project that we will ship around 700 chambers by the end of our fiscal year, fueling strong conductor etch share gains in 2016.
I'm also very excited that customers are beginning to transition a number of our highly disruptive new technologies from pilot to high volume manufacturing. These include our selective removal products and Olympia ALD system. In service, we are making significant investments in our organization and capabilities so that we can deliver more value to our customers. These investments are generating a strong pipeline of new service products that help customers improve their device performance, yield and costs. We're on track to grow this business for the 3rd year in a row, which I believe is strong evidence that our service strategy is working.
In display, I'm increasingly excited about our opportunities and the unique position we have in this market. The major technology inflections that are taking place require materials innovation, so our available market is expanding significantly. One great example of this is thin film encapsulation that protects an OLED device from air and moisture. The precision deposition of this film stack is incredibly challenging and relies on Applied's advanced materials engineering capabilities. Overall, we estimate that our opportunity in OLED is more than 3 times larger than for traditional LCD.
I believe we're still in the very early innings of OLED, but we're already seeing a significant impact on our business. This quarter, our orders in display were an all time record. To summarize, as I look ahead, I am increasingly confident that we are in a great position to drive sustainable profitable growth at Applied Materials. Across the company, I believe we have greater opportunities and a stronger pipeline of enabling technologies than at any point in our history. We are investing more than ever to accelerate materials enabled innovations for our customers.
We are maintaining a very positive outlook for 2016 because our customers are making inflection driven investments as they race to introduce new technologies. These investments are both highly strategic and play directly to Applied strengths. Now let me hand the call over to Bob, who will provide more details about our quarterly results, performance and priorities. Bob?
Thanks, Gary. Applied Materials is extremely well positioned to deliver profitable growth this year and for the foreseeable future. In Q2, we generated orders of $3,500,000,000 the highest in 15 years. Our strength was led by silicon systems, which had $2,000,000,000 in orders with nearly half from NAND and by display, which had record orders of $700,000,000 Our backlog now stands at $4,200,000,000 and it's broad based with nearly half in silicon systems and roughly a quarter each in services and display. Our silicon systems backlog is the highest in at least 9 years.
Looking ahead, I'm confident that the investments we're making in differentiated products and services, combined with our cost efficiency programs will drive record earnings. And I expect sustained performance as we help our customers drive their technology roadmaps forward, particularly in foundry, NAND and advanced displays. We have momentum in services and we're improving our execution and operational performance across the board. Today, I'm confident that we're on track to achieve the earnings targets in our 2018 financial model. I'll provide a detailed update at our Analyst Day in September.
But with the disruptive nature of our order strength, I'd like to give you some insights during this call. We're making very good progress growing our revenues. If recent demand patterns continue, which seems likely, then by 2018, I believe we can meet or exceed our targets in silicon systems and services. Through 2018 beyond, we believe display, NAND and China will grow by more than we anticipated last year, and our positions in these growth areas are becoming stronger. I'm also confident that we will meet or exceed our goals for tax rate, weighted average share count and earnings per share.
Relative to gross margins, we are focused on our overall cost structure and on optimizing the gross margins within our product lines. Even as our etch and display businesses strengthen the share, I believe we can hold our overall gross margins flat with last year. Over the model horizon, we now see faster than expected growth in etch and display. The net profitability gains from this revenue growth should be very positive for us, and we're committed to achieving our operating margin targets, even with the impact of this mix change on our overall gross margin percentage. Regarding operating expenses, Gary outlined how we are gaining share in our existing markets and expanding our served addressable markets with strong customer pull.
Today, several of our customers are asking us to develop new technologies to support their product roadmaps, and we are choosing to increase our R and D investments in certain areas this year, notably in display. As we ramp up to support these new projects, we expect OpEx to increase by about $10,000,000 sequentially in Q3 and stay at this level in Q4. At the same time, we'll continue to be very aggressive in controlling and optimizing our spending to invest in sustainable revenue growth while increasing our profitability. Let me give you some insights into how we've optimized our operating expenses. Between 20122015, we cut spending in G and A Organizations by 27%.
In the same period, we boosted the funding of new and disruptive products by $400,000,000 We did this by using G and A savings to fund R and D and by shifting spending from underperforming areas like solar to areas where we can grow and gain share by enabling major technology inflections. Today, our R and D to OpEx ratio is 67%, which is up by over 10 points relative to 2012. Now, I'll comment on our 2nd quarter results. Revenue of $2,500,000,000 was at the high end of the guidance range, led by Silicon Systems. Non GAAP gross margin of 42.7% was slightly higher than expected.
Non GAAP operating expenses of $575,000,000 were within the range. Our non GAAP tax rate declined to 14.4 percent as more profits were generated lower tax jurisdictions. We believe 15% is an achievable rate for the balance of the year. Non GAAP EPS of $0.34 was the highest in 4 years and the highest in 8 years when excluding solar. Next, I'll update you on our cash returns during the period.
In Q2, we returned more than $1,100,000,000 to our shareholders. We used $900,000,000 to repurchase over 45,000,000 shares of our stock and paid $113,000,000 in cash dividends. We ended the quarter with 1,100,000,000 shares outstanding, which is the level we targeted in our 2018 model. We've now completed 95% of the $3,000,000,000 authorization we announced last April, and we expect to complete the program in the current quarter. We remain committed to returning excess cash to shareholders using dividends and buybacks, and we plan to discuss the buyback program with the Board of Directors at our upcoming meeting.
Before I turn to guidance, let me share some observations and expectations surrounding our display business. Disruptive technology changes are happening in the display market that will increase customer spending this year and beyond. In the TV market, while there is sufficient overall capacity at this time, we expect additional investments in certain regions. In longer term, I believe the technology is now being piloted in mobile will be attractive in TVs as well. Such adoption would be very positive for us.
Today, customer demand for our display products is increasing, particularly in mobile. As a reference point, over the past 3 years, our display orders were $750,000,000 per year on average. Our display orders were $883,000,000 in the first half of this year alone. The growth we're now seeing in display comes largely from new products we've funded and developed over the past few years. Based on conversations with our customers, we expect display order strength over the rest of 2016.
Most display systems are very large and often take 2 to 3 quarters to build, deliver, install and revenue. And customers are pulling for Applied to develop new display technologies that I believe will significantly expand our market opportunities over the next several years. We'll invest in additional new and disruptive products to capture these opportunities. And while our display orders and revenues will continue to be lumpy from quarter to quarter, I believe we'll deliver sustainable growth over time. We have more to say about our display opportunities at our analyst meeting in September.
Now I'll provide the business outlook for our Q3. We expect our overall net sales to be up by 14% to 18% sequentially. Within the revenue outlook, we expect silicon systems net sales to be up by 10% to 15%. AGS net sales should be up by 5% to 8%. We expect display net sales to be up by 70% to 90% to approximately $300,000,000 and ES net sales should be flat to upside.
We are modeling the non GAAP gross margin percentage to be up by 50 basis points to 100 basis points sequentially. Non GAAP operating expenses should be $585,000,000 plus or minus $10,000,000 The midpoint is up just 1.6% from the same period last year. And we expect non GAAP EPS to be in the range of $0.46 to $0.50 The midpoint is up 45% from this period last year. This EPS guidance represents a new record that is significantly above any previous performance for Applied Materials. To summarize, while overall economic and semiconductor industry conditions are relatively flat this year, Applied Materials is uniquely well positioned.
We plan to set new records in a number of areas, including EPS for the full year. We have significantly biased our spending towards disruptive new products and customer support. And I believe we now have a great pipeline of new and emerging products focused on the key technology inflections. We also have strong customer pull in markets and regions that give us sustainable opportunities to deliver profitable growth in the years ahead. Now let me turn the call over to Mike for questions.
Thanks, Bob. To help us reach as many of you as we can, please ask just one question and no more than one brief follow-up. Let's please begin.
Your first question comes from the line of Soshiya Hari from Goldman Sachs. Your line is open.
Hi. Thank you for taking my question and congrats on a very strong guide. My first question is on the display side of the business. In the past, you guys have talked about increasing your SAM by, I think, 3x over the next couple of years. I guess my question is how much of that have you realized already?
And how much of that is still coming going forward?
Sure. Let me see if I can Scott and Gary can jump in. What we're seeing is 2 or 3 things helping us here. 1, the overall market is growing for spending. 2, our position in it is growing.
I don't think we've reached the culmination of our ability to grow RCM. I think that's going to go on for the next several years.
Okay. That's helpful. My follow-up is on the core SSG side of things. In the quarter that you just reported, obviously, NAND orders were up a lot sequentially, and I was surprised to see foundry down a little bit. On the NAND side, where are you picking up share?
And on the foundry side, is it fair to assume that orders pick up in the current July quarter? Thank you.
Yes. Thanks, Toshiya. On the NAND business, very, very, very strong pull from customers as NAND moves from litho enabled scaling to materials enabled scaling. So we see very strong pull for etch. We're gaining new steps in NAND, very, very strong performance.
Overall, we believe this will be a strong year for our etch business. We'll gain share. And certainly in 3 d NAND, the growth there is significant. Deposition is another area. CVV is an area that's very, very strong in NAND.
We have additional epi steps in NAND. There are many additional CMP steps. So, there are a number of areas where there's really significant growth for us in 3 d NAND. And we look at this as a wave that will continue over the next few years. So, it's really a great opportunity for Applied where our TAM is going up as you're moving from litho to materials and we are also significantly increasing our share in 3 d NAND.
Thank you very much.
Your next question comes from the line of TJ Muse from Evercore. Your line is open.
Yes, good afternoon. Thank you for taking my question. I guess first question is on the silicon front. So a couple of parts. So the first one is you talked about upside potential to flat WFE outlook.
Would love to hear your thoughts there. And then as you think about growing share and etch, very favorable mix in terms of foundry and as well as China and what you're doing around 3 d NAND, how should we think about your growth in calendar 2016 relative to that flat to slightly up WFE outlook?
Yes. So I'll try and Derek can jump in. We agree it's flat to up a little bit this year. The year has unfolded as we hoped last November and it's gotten better and better for us frankly. If you look at it, the NAND has picked up.
We now think it's up about 35% year on year, whereas DRAM is probably down about 25%. Foundry is not up a lot this year, up somewhat. But if you look at our position within foundry, it's really, really strong. And then DRAM, we're also gaining. So if you go look at our position with H, we're gaining share, I'll give you a factoid you may not have picked up on.
Pre-twenty 12, we were only over 15% share in one of the 4 major groups, whether you look at NAND, DRAM, Foundry and Logic. This year, we project to be over 20% in all four. So if you look at the NAND spending of $9,200,000,000 our share is going to go probably from under 15% to north of 20% this year And the spending is up to about $9,200,000,000 whereas in the base year of 2012 was about $4,200,000,000 So the market is up and our share is up significantly. And the NAND strength goes on for a number of years. As you know, by the end of this year, we're only going to have about 375,000 wafer studs converted.
There's about another 1,000,000 wafer stats out there planar. If you go look at foundry, we anticipate it being a reasonable year in foundry, but our position has done really well, whether it's in Taiwan or a lot of the activity going in China. So we're gaining we're doing very strongly there too. And then also logic, we're doing a lot of leading edge logic. So the way of the year has laid out, our positioning of our products in the markets are fastest growing, whether it is NAND, strength in leading edge foundry, strength in China and also strength in display is playing very well for Applied.
So we expect within semi will gain share this year.
Thank you, TJ. I'll take the Yats question. So as I said earlier, we think that 2016 is going to be a really strong year for us in growing our etch share. We have a very strong position very, very strong position in 3 d NAND conductor etch. So as that business continues to grow, as that wave moves forward over the next few years, we're in a really great position.
And we have some of the most exciting products in this group that I've seen in my whole career. The SIM 3, tremendous pull from customers in 3 d NAND and also in other segments. We're winning new steps and strong pull really across the board for SIM III. So very, very, very strong position there. And also in selective material removal, we have very strong corporate from customers and that business is growing also for us at a strong rate.
So overall, we think 2016 is going to be a great year for us in Natch. And again, some of the strongest products I've seen in my career.
Very helpful. If I could sneak one quick one on OLED in. I thought your commentary on the TV side was interesting. When do you think you'll start to see your 1st Gen 8 plus orders for OLED?
Right now, what's driving the market in 2016, as we said earlier in the year, over we said earlier in the year, over 60% of our orders and revenues this year were going to be mobile versus TV. In fact, that's turned up. It's probably over 70% now because the order rate. If you look at the big inflection that's taking place in mobile, it's around OLED. That inflection may come sometime in TVs, but not it's not
Chin from UBS. Your line is open.
Thanks. Hi, Gary. Bob, congrats on the execution. Just a question, Bob, on the comment that there may be display order strength for the rest of 2016. Is the display visibility from a follow on order to a big Korean customer?
Or do you have visibility from other display customers perhaps in China who are constructing a lot of new display fabs? It just sounds like the message is aimed at total orders could be strong in the second half of the year. Just trying to get some color on that thing.
Well, I think as Gary referred to sort of the waves, the things that are happening for us now are not 1 quarter events. There's several inflections going on. In displays, it's around OLED. In NAND, it's around V NAND. And even in the China thing, it's going to go for years.
And the foundry strength we're seeing at 10 and 7 is going to go on next couple of years. So these big inflections are going to go on for a number of years. So for instance, in display, we think it's going to go on for a while. It's not a 1 quarter event. And we see the concentration in mobile.
In terms of your specific question on TVs, I guess, in China, was that the specific question? More like the second
half of the year.
Oh, second half of mobile. Yes, we think the display order rate will stay strong for the rest of the year.
Okay. Thanks, Bob. Just a follow-up question on the foundry orders. So I just want to clarify, do you think we'll see second half foundry orders up? Because foundry orders are up in the second half, it's possible AMET's total orders could remain quite strong for the second half of the year, too?
We think in our fiscal year, we think our orders in FOD remain quite strong. We think in the calendar year split for the business, we think FOD is second half weighted also. So we think second half is pretty good on foundry.
Okay. Thanks, Bob. Congrats.
Your next question comes from the line of Tim Arcuri from Cowen and Company. Your line is open.
Thanks a lot. I had 2.
I guess, Bob, I'm just looking at the upside
of the orders and it really seems like it was driven from clearly OLED and it looks like China memory stuff. So it like you're finally beginning to see some of these China memory projects move within your 12 month shipment window. So I guess my question really is how much can China add to WFE, say, next year? Because if you booked like an incremental $400,000,000 to 500,000,000 dollars this quarter from those projects, that would argue that you could add maybe a couple of 1,000,000,000 to WFE next year. So I'm wondering if that is if that math works
with you?
Yes. Let me give you you sort of have 2 questions, Barry and then Tim. Let me see if I can do them both. First, in terms of the second quarter just ended, we were pretty strong across the board on orders. We had a very strong quarter, almost $1,000,000,000 as Gary mentioned in NAND.
And then in terms of the other devices, foundry, DRAM and logic, we were reasonably strong actually across the board and display was very strong and services did well too. So our strength was pretty broad. In terms of the China impact, the Chinese talk about spending $20,000,000,000 to $30,000,000,000 over sort of 4 to 5 years. We're seeing record revenues for ourselves in China this period and it's gone up. Our expectations for the year have gone up every quarter basically.
So in terms of if we spend $20,000,000,000 to $30,000,000,000 over 4 or 5 years, how much is incremental? That's about $4,000,000,000 a year, roughly $5,000,000,000 a year. I would say for the next 3 years, you could see some maybe half of it incremental. I think it provides an underpinning for overall demand. So that you feel pretty comfortable that next year is probably a good 32 year, if you'd guess, because you've got this underpinning of good NAND, good China.
I think the second wave of 10.7 is okay. DRAM, I'm not sure about.
Yes. One other thing I would say is China is probably our strongest region relative to our position with both the domestic companies and multinational companies. And as Bob said, momentum just keeps building. We've doubled revenue in China over the last 2 years. And the I'm spending a fair amount of time there myself.
And certainly, you look at what's happening there now and discussions for future projects, as Bob said, multi year wave opportunity in terms of China. Hard to say exactly what the number would be, but it's definitely going to be up a fair amount.
Got it.
Thanks for that. And then I guess, follow-up is, I know previously you guys talked about 3 d NAND installed target of like 350 ks to 400 ks industry wide exiting this year. So it seemed like maybe the industry was going to add roughly $200,000 this year. So my question is, how much of that is conversion versus how much
of that is greenfield? Thanks.
Sure.
This year, we came into the year with 150,000 installed. We think the year goes out to 3 50 to 400. In terms of the mix, we think adds capacity adds are probably 100 to 150 converts to 100 and 50 in the year. So that's in the year, right? Yes.
Great. Thanks so much.
Your next question comes from the line of Farhan Ahmad from Credit Suisse. Your line is open.
Hi, guys. Congrats on the great quarter. One question on your spending pattern on NAND. Like, do you still think it's a first half weighted this year? Or do you think like it will grow in second half?
And the incremental strength you are seeing in the NAND, is it stronger in is it more in the second half that you're seeing the uptick? Or was it already captured in your bookings in the first half?
Yes. In terms of the NAND split, we think the second half is stronger for NAND, but the second half is pretty good. So we think it's more first half weighted, but that doesn't fall for Cliff in second. It's pretty good. What was your second question?
I'm sorry, I was looking at the
Just like the uptick that you're seeing in NAND, like you mentioned like NAND spending is now you expect it to be stronger than your last quarter call. And I just wanted to understand is the uptick more in the first half or second half?
Yes, we're up to about $9,200,000,000 on NAND right now. And I think last quarter we're about $500,000,000 less maybe. We're seeing broad based spending. Some stuff was pulled into the first half and second half is staying strong.
Got it. And then regarding China, obviously, like it's the strongest region this quarter, but even going back, it seems like it's been tracking to the 2nd strongest region for you guys for a while. I just wanted to understand in terms of your exposure to China, how much of that this quarter was display versus semiconductors? If you can provide some color on that, that would be really helpful.
Yes. We were particularly strong in semiconductor this quarter in China. We see despite has been very strong, but right now the TVs in China, the order rates are quite as high as it was.
Got it. That's all I had. Thank you.
Your next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open.
Thank you very much. First, Gary and Bob, in terms of the foundry orders and outlook that you have, have you started seeing any pickup in 10 nanometers? Or are you still seeing, like the Q1, some of your orders coming in from the 28 nanometer node?
Yes. We're going to have a strong 10 year. Daniel is going to have some 7 also. In terms of the split, we think you came into the year with 10,000 and 7 of about 10,000. We think you go out of the year maybe 60s to maybe add 50 concentrated in Taiwan.
Then if you look at it, what's unusual about this interesting, Patrick, some of the trailing edge stuff is pretty strong. So you see a fair amount of over 40 and above and you see pretty good 28 year also. And a lot of that's the China impact.
Great. And in terms of your shareholder return, you mentioned that you're completing your shareholder I mean, on your stock buyback this current quarter. Can you just maybe perhaps give a little bit of update of what you think you're going to do on a going forward basis?
Yes. We're going to just talk about this at the Board of Directors meeting. We are, as obvious, we're very committed to shareholder returns, cash returns to shareholders. In fact, in the last year, we've returned 2 50% of our free cash flow. So we can't stay at that level.
We are committed. And as we also said in the call, we will beat our targets weighted average share in the model in 2018. So, you know we're almost there now. So, we'll continue to get better on that. In terms of the magnitude of the better, we have to talk to the Board.
But we are committed to shareholder returns. We are committed to beating away our shares in the model. And the details of it will have to go through the Board in June.
Great. Thank you.
Your next question comes from the line of Ramesh Shah from Nomura. Your line is open.
Yes. Thank you and congratulations on the success here. Bob, you've kind of given it to us in bits and pieces, but I was just hoping you could just overall give us a sense of how you're thinking about second half calendar revenues over the first half. On one hand, with the strong July guide, you've got arguably a tough comp. On the other hand, I did notice that your revenue growth guidance for July is well below your growth in your backlog, which kind of implies that sales should be strong for the balance of the year.
So just how are you thinking about second half calendar year versus first half overall?
Well, I'll piece together the data you already have just to give you some more pieces to the puzzle. Our backlog at the end of the quarter was 4 point $2,000,000,000 And we said in the 10 we're going to say in the 10 gs, I'll say it right now, 73% of the backlog is shippable in the next 6 months. And then if you look at it on the semi side, the lead times and that stuff typically are not too long. On display, we've said that the lead times historically have been 6 to 9 months. Now we're able to increase our outlook for display revenues next quarter because we're trying to pump a little bit in the supply chain.
So we're optimistic that display can continue strong in revenues for the rest of the calendar year. So we are feeling pretty good that our second half will be up from first half and it will do well in the year. And the underpinnings that we talked about are strengthened display where we have the orders in backlog and continue to be strong. In semi, we have said, we think that share gains goes up this year and assist in semi equipment and services will get strong for the rest of the year, it will continue to be strong. And so we feel pretty good about the second half.
Great. And then just on display, as the revenues improve, how do we think about incremental margins on this business? I think it's averaged about 20%, but we know that it does bounce around.
Yes, we think the operating margins prospectively for display are pretty positive. Right now, we're ramping a lot of things. We're ramping new products, we're ramping production. So we think over time, as we basically said or implied in the financial model of the company, the display operating margins for the company will be similar to the overall average for the company. Now both display and AGS have a slightly different business model than SSG and that the gross margins tend to be a little higher in SSG, but the operating expense metrics are less in AGS and display.
So your net net come down about the same operating margins.
Okay. Thank you.
Your next question comes from the line of Krish Sankar from Bank of America. Your line is open.
Yes. Hi. Thanks for taking my question. I have 2 of them. First one, either Bob or Gary.
Of the $700,000,000 in display orders, how much of them was for OLED specifically? And would most of these be revenue in fiscal 2017? Can you give some color on that? And then I have a follow-up. Sure.
What we said earlier in the year that of our display business this year, over 60% was going to be mobile. And in fact, it's probably over 70% now. And the vast significant majority of that the great majority of that is focused on the OLED market this year in terms of the order rate. In terms of revenues, we anticipate as we guided that our revenues will be up next quarter. We are positive about our revenue opportunity for Q4 and we think we'll do very well in display next year too.
They won't all obviously revenue next 6 months, 3 to 6 months, but we feel good about our opportunity on a long term basis in display.
Got it. Got it. And then I have a follow-up question for Gary. You guys are getting some traction in etch, especially on the 3 d NAND side. Can your current etch tools actually do 96 or 128 layer 3 d NAND?
Or do you need to develop new tools? Just trying to figure out the R and D profile on H or SSG like 2 years down the road.
Sure. So let me first also add to Bob's comments on display, then I'll get to Etch. So I really think it's important for people to understand where are the early innings of this opportunity in terms of the OLED wave. And relative to the questions on sustainability, if you look at the waves that are really driving our business, in display, NAND, China, we're in the early innings of all of those different waves. We are continuing to invest and we've expanded our TAM by a factor of 3.
We have an opportunity to expand our TAM more in the future. So that one, really very optimistic that we're going to continue to drive significant growth in display going forward. And then in etch, we're in a very strong position in etch to gain share in 2016 and beyond. As I said before, the products that we have, the SIM III selective material removal products, It's almost on a weekly basis, I hear new opportunities, very strong pull across the board, all customers for these new technologies. And so relative to 96 payers or over 100 payers, we have pull from customers in some of the most critical applications where PTOR, DTOR and some of the most critical applications.
So, I'm extremely optimistic that we're going to continue to gain share in 2016 and beyond.
Thank you.
Your next question comes from the line of Joe Moore from Morgan Stanley. Your line is open.
Great. Thank you. I wonder if you could give us an idea of the kind of puts and takes on gross margin in the back half. I would think that the ramp of display and CTV and Match and the mix shift towards memory all would be sort of headwinds in gross margin? Just any way we should think about that?
Sure. That's a good question.
We are working a lot on gross margins. Let me give you we ran an analysis the other day you might find interesting. So the company gross margins, as you know, were 40.9% in 2012, 42.1% in 2013, 44.1% in 14%, and we were down a little bit around 43% last year, I think. And we'll probably be about the same next year. I guess we were 42.9% last year.
And so I said, well, we're making any traction or not. So I had the guys run all of our BUs in all of our segments with current gross margins by BUs segment with 14 mix. And if you take the 14 mix when we earned 44.1, the gross margins this year would be 44.7, which is up 6 tenths from then and north of our committed model of 40 four-six. So what you see is within virtually all the product groups and within exercises like cost reduction and negotiation, we're doing pretty well actually. And it is in fact mix that's a challenge for us.
So I do think that as I said earlier, for instance, display has a similar operating margin as a company, but lower gross margins. And at we're doing great in terms of growing profitability, market share was a little lower gross margin also at this stage. So those are headwinds in our phase this year, but we think we'll offset them and still hit the roughly 43% on the year that we said earlier in the year.
Okay. And can you give us some idea how much different the display gross margins might be just qualitatively? And does that change when you're at sort of 3 times the run rate that you've been?
Yes. We haven't gone into that level of detail. We think over time the gross and operating margins in display will trend up, but we haven't been specific on the numbers.
Okay. Thank
you very much. Great quarter.
Thank you.
Your next question comes from the line of Harlan Sur from JPMorgan. Your line is open.
Hey, guys. Great job on the quarterly execution and on the strong guide. Given the pricing environment in DRAM, there seems to be more pressure on your DRAM customers to move to the 1x nanometer node. So I guess question here is, are you starting to see some of
the early spending for 1x in your second half pipeline?
And how do you see DRAM spend second half versus first half?
I'll start. Gary can jump in if you want. We think DRAM was front end loaded, first half loaded on the calendar year, softer in the second half. In terms of our outlook for DRAM specifically, we think it's stronger in the first half and the second half. We hear speculation about some of that early spend in DRAM, but it's not in our line of sight yet.
Got it. Thanks for those insights. And then on OLED, the team obviously has been talking about the 3x to 4x increase in dollar opportunity versus amorphous silicon. You've also on this call have been talking about some new tools that could even drive further increase in your OLED SAM opportunity. Thin film encapsulation was a good example of that.
So I guess the question here is, are
you guys already sampling some of these new tools? And when should we hear about formal introduction of these tools and when could they start to add to your revenue streams?
Thanks for the question. So, you mentioned stem film encapsulation, And certainly that's a great example of materials engineering, enabling new capabilities for our customers and also growth for Applied. So as you said, we've talked about that being a great opportunity. And that's part of what we're seeing in terms of a very, very strong opportunity in display. We do have other areas that we're working on, but we're not really ready to forecast or signal when those technologies will be ready.
But I would say that that team in display is an incredible team of people. They've demonstrated that they can grow in these major inflections. And I'm very optimistic that this wave that we're seeing in display OLED is a multiyear wave. And then I really believe that we have a great opportunity to not only ride that wave, but expand our TAM and share in display. So very, very optimistic about that business.
I'll just pile on. The team has done a great job, number 1. Number 2, the market is going to grow for a while and our ability to capture with products we're still pushing down the pipe and look very optimistic on is going to grow. So, surface addressable market looks good too.
Thanks, Gary. Thanks, Bob.
Your next question comes from the line of Atif Malik from Citigroup. Your line is open.
Hi, thanks for taking my
question and good job on the quarter. If I look at your foundry orders for the last six quarters have declined on a year over year basis. And I'm just trying to reconcile that with your expectations of second half being better for foundry. And given the TSMC said on the call that 10 nanometer could be a shorter demand node as the customers are taping out more products for the 7 nanometer. So I just want to understand the risk in the second half foundry expectations.
Is it more China weighted or more Tier 1 foundry weighted? And then I have a follow-up.
Yes, I got three questions, Bert. In the annual trend going back a few years to half this year and a little bit projection into next year. So if you look at the trend, you're correct that total foundry spending from 2014 was down to 15 down sort of flat up a little bit in 2016. I don't have 13 in front of me. I think it was similar to his 13, that's not total.
So there it is. 13 was about the same. So 2013, 2014 about the same, down a little bit, 2015 down a little bit, 2016. So that's the annual trend. If you look at the year, we're pretty confident that probably strong in the second half based on the timing and the specifics of it.
Now what you have going on, which is a little different than a lot of people concerned about sort of the dynamic of what happened in 'fourteen going to 'fifteen and what happened could happen in 'sixteen going into 'seventeen. So if you go look at 'fourteen, when we turn down to 'fifteen, you sort of had a latent excess capacity, right? You had the 28 nanometer business had been purchased a year or 2 before capacity for big phone manufacturer. And then a lot of the capacity was added very aggressively in 2014 for 20 nanometer for the same phone customer. So that you had latent potential capacity there that hit us in 2015.
And that also hit us a little bit with another foundry customer who thought they could get some of the business. You don't have the same type of dynamic this year because you're in the very early stages of the build up 10.7 to the overbuild you had from the previous notes, say 28 in this case, you don't really have that as much from 2014, 2016. And thirdly, they haven't ramped that much on 10 at this point. In 2014, at the end of 2014, they had about 1 100,000 wafer studs, total installs of 20. At the end of this year on 10, alone, they might have 50,000, right?
Well, 10 and 7 would be 55, maybe 60. So you're in the early stages. So one, it's been trending down over the years. Yes, partly because there's capacity issue there. And 2, as you know, phone growth is a little bit down.
2nd, though, is the second half good this year? Yes, it is because we can see it. 3rd, do we have this big capacity issue next year? Not so much because it's different. And related to that, an unusually high amount of spending of foundry this year is at $40,000,000 above and $28,000,000 pretty strong because of the China phenomenon.
So I think catching all on the foundry sort of floor is the China phenomenon is adding to foundry floor.
Thanks. All very helpful. And as
a follow-up, is your ability to ship or revenue display equipment being constrained by other display equipment makers' ability to capacity ramp? For example, you've heard some of operation tools might not be able to ramp capacity as quickly as the market is demanding.
I think right now it's independent of that.
Thanks.
Your next question comes from the line of Weston Twigg from Pacific Crest. Your line is open.
Yes. Hi. Thanks for taking my question. Just wondering if you could help us understand as the 3 d NAND customers migrate from adding some greenfield capacity this year to more planar NAND conversions. Can you
give us an idea of
what your revenue opportunity is maybe per 10,000 wafer starts of greenfield 3 d NAND versus planar conversion 3 d NAND capacity?
Sure. So this is confusing as hell. So I'm going to try and make it half confusing as hell. So I'm going to give you a really simple numbers first. So in 2012, total NAND spending was $4,200,000,000 We think total NAND spending this is $9,200,000,000 Applied Materials' share of that spending in 2012 was a little under 15%.
Applied Materials share of that spending is over 20% this year. So our revenues are going to go from about $600,000,000 in NAND in 2012 to close to $2,000,000,000 this year, okay? So the market has more than doubled, but our revenues have more than tripled, okay, because our share is up 50%, okay? The next observation I'll give you is, if you compare greenfield to greenfield, I'm happy to do that for you. A 100,000 wafer start last plane at greenfield is $3,500,000,000 a 3 d greenfield 48 pair is $5,000,000,000 But what you kind of have to model is, well, what were they 2012, there was a mix of ads and converts, right?
And so if you go look at the data, it was actually a fair amount of adds, oddly enough, in 2012. But for us as a company, we mostly were getting the shrink money. Most of that spending was more weighted on converts for litho. So if you go look at it and you go to a fifty-fifty model now roughly between converts from planar and 3 d, our revenue opportunity for where we were in the planar world is up more than 3x. And the simple math of what's going on, it was 3x.
You'll say, well, Bob, it should be even more because the total spending is up. It will be it wouldn't be more, but there's unusually high spending on later ads in 2012. So our revenue opportunity apples to apples is kind of over 3x.
All right. I think I got all that.
How is it half confusing for us 5 times?
All right, good. And the other piece of the question is or the follow-up question is, how much 3 d NAND capacity do you think the industry can realistically absorb each year without flooding the market with 3 d NAND bits since you get more bits on a wafer?
Well, what's going to happen is that I believe and I think many people believe that as 3 d NAND matures and becomes even more reliable and reduces its cost point, particularly when you go to 48, 64 layers, it's going to significantly expand its addressable market. So you're going to get a growth in sulfate this drops. So right now, you have, I think last year you had 1,394,000 wafer starts in the world of NAND. And through the end of last year, 150,000 deferred. The end of this year is about 375,000.
I think the vast majority of it's going to get converted over time because they're not going to be able to sell that to the end device very well because it's not going to be competitive. Yes.
One other thing I would add on 3 d NAND overall. Our position in 3 d NAND is really better than any other company. If you look at our strength in etch, the share gains will become evident this year, very, very strong. We're number 1 in deposition. We have additional CMP steps, epi steps.
So again, you look at our opportunity in 3 d NAND, really we're in a unique position. So as those greenfield factories ramp or the conversions happen, if you look at the spending profile, the spending profile is completely different than it was at 2 d NAND and very, very favorable for Applied.
The funny thing you wouldn't intuitively say is that in 2 d, our market share of conversions was less than our market share of ads because it's mostly litho enabled. They just bought litho tools. If you go to New NAND, our market share is high in ads, but even higher in converts because I don't have to buy new litho, okay? So if they were to convert model, the total TAM goes down, but our share is pretty good actually.
All
right. Makes sense. Thank you.
Yes. Thank you, Wes. And we've got time for just one more question, please.
Your final question comes from the line of Jerome Rammel from Exane BNP Paribas. Your line is open.
Yes. Thank you for taking my question. Could you just give us a little bit color on your traction in ALD?
Yes. We have very strong momentum with ALD and we're pretty much on track with what we've previously communicated. Very strong position in leading logic and foundry customers. They're seeing device advantages as they're going to the most advanced technology nodes. So we look at this as a really good opportunity, one of the areas that will fuel our share gains in 2016.
Thank you.
Okay, great. So Jerome, thank you for your question. We'd like to thank everyone for joining us this afternoon. A replay of this call will be available on our website beginning at 5 p. M.
Pacific Time today. And thank you for your continued interest in Applied Materials.