Slide Materials Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, you'll be invited to participate in a question and answer session. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Michael Sullivan, Vice President of Investor Relations.
Please go ahead, sir.
Thank you, Kyle. Today, we'll discuss the results for our Q2, which ended on April 26. 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 14, 2015, and Applied assumes no obligation to update them. This webcast 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. Also as a reminder, Applied will hold its next analyst meeting in San Francisco on Monday afternoon, July 13, preceding the SEMICON West Trade Show.
We hope to see many of you there. And now I'd like to turn the call over to Gary Dickerson.
Thanks, Mike, and good afternoon. In our Q2 of fiscal 2015, Applied delivered our highest quarterly revenue in the past 3 years and earnings near the top of our guidance range. These results reflect robust customer investment in both semiconductor and display and most significantly that Applied is delivering the enabling products and services our customers need as they transition complex new devices into volume production. The magnitude of the technology change facing our customers is unprecedented and this creates incredible opportunities for Materials now and in the future. Our core competencies and unmatched talent in materials engineering provide a great platform for profitable growth.
Applied has a compelling strategy. We are investing in that strategy possible by our employees' relentless focus on moving the company forward and their tremendous passion to create value for customers and investors. Over the past few years, we have been driving significant changes across the company, strengthening our capabilities and processes, while aligning the organization to take advantage of our opportunities. We have aggressively shifted spending within the company to better support our customers, provide additional fuel for product development and improve our financial performance. By increasing investment in key areas, we have created a pipeline of differentiated products that will accelerate Applied's growth and we are already seeing a positive impact.
Starting with our semiconductor equipment business, the trend is clear. We are winning market share. Over the past 2 years, we have increased our overall share in wafer fab equipment around 1.5 points. And based on our current view of customer spending, we expect to build on those gains this year. Our traditional leadership businesses where we have high share remain strong and in 2014, we added around 3 points of share in both PVD and epi.
We have our strongest momentum in areas of the market that represent large growth opportunities for us. Our combined revenues in CVD and etch were up over 50% year over year, significantly outgrowing the market. This past year, we gained 2 points of share in CBD and we have highly differentiated products in our pipeline that will expand our addressable market. We are very excited about how our new products are positioned and will provide more details about our progress at our Analyst Meeting in July. Since 2012, we gained 7 points of market share in etch, including 12 points in conductor etch.
In the past two quarters, the installed base for our latest generation etch system has grown from 10 chambers to more than 160. This is one of the fastest adoption rates for any new applied product and customers are telling us they see technical advantages in uniformity and defect performance. We believe our technical position is getting stronger and this provides a foundation for future share gains. We're also driving growth in our service business, where we delivered our highest ever quarterly revenue and we're on track for a record year. At both the leading and trailing edge, our customers face incredible challenges as they strive to bring new innovations to market faster and more efficiently.
By helping our customers solve their device performance, yield and cost challenges, we believe that service can be a meaningful component of our long term growth. We have adapted our strategy, strengthened our team and are bringing together capabilities from across the company to deliver expanded service offerings that provide more value for our customers. Service and spare parts revenues have grown more than 17% from this time last year. During this period, we have significantly increased the number of tools under service contract, which we believe is one indicator of our growth potential. Turning to display, we expect 2015 to be a 3rd consecutive year of double digit revenue growth and to increase our overall share by about 2 points.
As we've highlighted before, our revenue and margin profiles in this business can be uneven. While we see some margin headwinds in 2016 due to customer mix and a weak yen, overall market trends remain positive. As the display industry introduces new technologies, customers' manufacturing processes are becoming more complex and capital intensive. We have invested in a strong portfolio of products aimed at enabling next generation TVs and mobile displays. One example of this is organic LED, which expands our served available market.
We recently received a large order for our OLED encapsulation tool and in 2015, we expect to book about $200,000,000 in this new application. Overall, our growth trajectory in semi and display is supported by a sustained period of industry investment in both capacity and technology. Even after recent customer announcements have been taken into account, we still believe 2015 wafer fab equipment investments will be up slightly over 2014, driven by increased memory spending. Sustained NAND bit growth in the 35% to 40% range, similar to 2014, enables these customers to maintain their investment levels. We expect 3 d NAND to represent more than 40% of NAND investment in calendar 2015 and installed capacity should exceed 120,000 wafer starts per month by year end, which is only around 10% of total This inflection not only increases our available market, but is also enabling us to gain share.
Based on the positions we have won, we believe that in the transition from planar to 3 d NAND, we will increase our served market share by at least 5 points at these customers. In DRAM, supply and demand remain well balanced and we anticipate bit growth of 25% to 30%. We are expecting this to translate to an increase in customer spending of 15% to 25% relative to 2014. These investments are primarily focused on 20 nanometer upgrades for mobile DRAM with some capacity additions. In Foundry, the leaders are engaged in a fierce battle to ramp FinFET technology at the right yield and cost.
The intense pressure for our customers to accelerate volume production of their FinFET devices is a major area of focus for Applied and creates a great growth opportunity over the next few years. In summary, our customers are making incredible advances in technology enabled by materials innovation and this plays directly to applied strengths. Across the company, we are making meaningful progress towards our growth goals and driving opportunities to accelerate our strategy. Going forward, we are prioritizing 3 areas to further improve execution. 1st, we feel very positive about our new product pipeline and our ability to drive growth at Applied.
In the near term, as we ramp these new products, we see some effects on our margins, particularly in cases where rapid adoption has exceeded our expectations. Bringing margin performance back in line with our financial model is a major company wide focus. 2nd, we will continue to actively manage our product portfolio to ensure we are deploying our investments and resources towards our most promising growth opportunities. In the past 2 weeks, based on our view of future market potential, we have taken actions to further lower the breakeven level of our solar business. And third, we are taking additional steps to optimize our structure, making sure that the organization is aligned to major areas of value creation for our customers and that we have the right talent in the right areas.
Now let me hand the call over to Bob, who will provide additional detail about these priority areas in our financial performance.
Thanks, Gary. I'll add my comments about how we're doing in the transition underway at Applied Materials. Gary talked about how we've moved money from headquarter functions and underperforming businesses to higher growth opportunities, notably in etch, CVD, display and AGS. We've also strengthened the linkages between SSG and AGS for growth. SSG plus AGS revenue grew 20% in FY 2014 and we expect both businesses to outpace WFE in 2015.
Focusing on the total lifecycle of our products will increase both our revenue and profit growth. When excluding EES, Applied's trailing 4 quarter revenue was the highest in 7 years. Now let's look at profitability. You'll recall that our non GAAP gross margin was 40.9% in 2012, grew to 42.1% in 2013 and reached 44.1% in 2014 or 43.6% when excluding non run rate items. Our progress is trending ahead of plan.
This year, we've faced some headwinds due to mix and the higher initial cost of fast ramping new products. In Q1, our non GAAP gross margin was 42.3% and in Q2 it increased to 43.2%, which was nearly a point better than our forecast. We expect gross margin to be flat to up a little in Q3. Looking ahead to FY 2016, gross margin remains a key challenge to financial model performance. Within SSG, if we have similar demand in new product ramp ends, we could experience gross margin headwinds in the first half.
In display, Gary mentioned some of the margin challenges associated with the strong mobile ramp along with yen based competition. However, leaders throughout the company intensely focused on gross margin improvement. Based on our gross margin initiatives, we believe we can achieve year over year improvement in fiscal year 2016, but we expect it to be below model performance for the year. We are equally focused on managing our operating expenses. Quarterly non GAAP OpEx should be around $575,000,000 through the end of this year.
We have a number of new products to launch, which require additional support. But we'll stay focused on our cost structures and continue to optimize our portfolio investments. Last week, we further reduced our solar spending and we will continue to monitor the market closely. Looking to our overall model, we continue to believe the non GAAP EPS of $1.70 is the right level of profitability for the company when WFE spending is at $33,500,000,000 With the merger pending, we were unable to take certain actions including share repurchases. Next week, we'll begin to buy back stock under our $3,000,000,000 3 year $3,000,000,000 repurchase authorization.
We plan to be opportunistic and we execute the program in under 2 years. As the buyback and other initiatives take hold, we believe that we are on a path to $1.70 in 20.17, assuming WFE demand of $33,500,000,000 We'll share our detailed model with you at the Analyst Meeting in July. Now I'll summarize our Q2 results as compared to the prior quarter. Orders of $2,500,000,000 were up 11% led by SSG. Net sales of $2,400,000,000 were up 4%, which was above our expectations.
Non GAAP gross margin was 43.2%, was better than expected due to a favorable customer mix. Non GAAP operating expenses were $579,000,000 in line with guidance. Non GAAP EPS of $0.29 was a penny above the midpoint of our guidance. We ended the quarter with approximately $4,200,000,000 of cash and investments and about $2,800,000,000 of this was offshore. In SSG, orders of $1,700,000,000 were at a 3 year high and were up 19% on increases in foundry and NAND.
SSG net sales of $1,600,000,000 were up 8% at the high end of our expectations. SSG's non GAAP operating margin grew by almost 3 points to 26.8%, driven by higher volume and a favorable product mix. AGS orders of $641,000,000 were down 7% sequentially, due to a seasonal decline in service contract renewals. AGS orders were up 19% for the Q2 of 2014. AGS achieved record net sales of $646,000,000 The 11% increase was driven by growth in spares and services along with 200 millimeter equipment.
AGS non GAAP operating margin was 26.3%. Display orders increased slightly to $120,000,000 and net sales declined to $163,000,000 as expected. Display non GAAP operating margin decreased to 24.5 percent on lower volume. EES orders were $50,000,000 and net sales grew to $73,000,000 as expected. EES posted a non GAAP operating loss of $4,000,000 Now I will provide our 3rd quarter business outlook.
We expect our overall net sales to be up 2% to 6% sequentially. Within this outlook, we expect SSG net sales to be up 3% to 8% sequentially. AGS net sales should be up 2% to 7%. We expect display net sales to be approximately flat. And ES net sales should be approximately $50,000,000 We expect non GAAP earnings per share to be in the range of $0.31 to $0.35 which would be up 18% year over year at the midpoint.
Now let me turn the call back 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. Kyle, let's please begin.
Your first question comes from the line of Jim Carvello from Goldman Sachs. Your line is open.
Hey, guys. Good afternoon. Thanks so much for taking the question. I guess, Bob, first question is on the margins. If I think about what's going to be necessary to get you back in line with the target model, Is what of the 3 mix, scale or lower component costs, how would you rank order those drivers in terms of the importance of getting your margin model back to where you want it to be?
I'd say
in the intermediate short to intermediate term, which is next year and a half maybe, Mix hurts us the most quarter to quarter. In terms of the second one, probably margin cost because most of our product component cost, most of our product cost is materials. And then the third one is the scale issue which is like overhead absorption. Now longer term if you can make progress on that those are sort of time sequenced also. Okay.
That's helpful.
And then if I could follow-up Gary, on the 3 d NAND ramp, it really seems like that's gaining some incremental traction in the back half of this year. What is it that's finally making customers feel more comfortable to ramp the 3 d NAND? Is it the yields are where they need to be? Is it that the opportunity in enterprise solid state drives is bigger? Is it just the customers trying to make sure one doesn't get too far ahead of the other?
What's really why are we starting to see this inflection because it's been kind of a while in the making? Thank you.
Yes. I think good question, Jim. The yield was certainly a big challenge. This is the biggest change in memory technology in decades going from planar scaling to 3 d. So that was a big, big challenge.
All of the customers were focused on making the transition as we had discussed before. But the yield is getting to the point where more volume is going towards 3 d NAND. All the customers have been focused with heavy technology investments in that area, but more customers now are moving to that technology into manufacturing. So that certainly is a big transition. And what we said for Applied Materials is that the transition from planar to 3 d NAND is really good for our business because planar is more litho intensive and 3 d NAND is more in the sweet spot of materials engineering types of technologies, etch, deposition, we have additional epi steps there.
So we talked about the opportunity for us on an equivalent wafer start basis going up 35% to 50%. And what we're seeing, we are very optimistic more towards the top end of that range relative to the opportunity for us in growth. And the other aspect is not only is the TAM increasing, but we believe that we will increase, as I talked about in the script, our share of that TAM. So that's another incremental growth driver for us within Applied. So we see the 3 d NAND ramping certainly in 2015 and then really the majority of spending in NAND beyond 2015 is really towards 3 d NAND.
We also said that the capacity for 3 d NAND is really 10% of total NAND capacity by the end this year. So there's still opportunity as customers make that transition and really good tailwinds for us in terms of TAM and market share.
That's really helpful. Thank you so much. Good luck.
Your next question comes from the line of C. J. Muse from Evercore ISI. Your line is open.
Good afternoon. Thank you for taking my question. I guess first question, can you walk through your latest thoughts on linearity first half, second half in terms of you and industry shipments?
Sure. We think the second half is a little stronger than the first half. And we think particularly, we think foundry is up second half versus first half. I'm doing revenues. DRAM is a little softer, NAND stronger and LOGICS above neutral.
Very helpful. And I guess as a follow-up, as you look at the handoff from DRAM to NAND going first half, second half, can you walk through what your intensity looks like in one sector versus the other? And also how we should think about the implications to gross margins? Thank you.
Yes. If you look at historically in the last year or so, our share in DRAM versus NAND overall is comparable. If you go look at the transition though at NAND, as Gary said earlier, the growth at 3 d for a company like Applied is we said 35% to 50% increase in the greenfield. It's probably a little more even. And if you look at our share gains are about 5 points in that transition.
So we gained 5 points of that TAM. So the transition from DRAM to NAND 2 d NAND is somewhat better for us. The transition to 3 d is substantively better for us.
So the other thing I would say is that we're gaining share in memory in both NAND and DRAM. Last quarter, what we had discussed was we had our highest DRAM orders in since 2010. We actually exceeded that this quarter. So for the last two quarters, the DRAM business for us is up significantly and we are gaining share in both of those different areas.
Your next question comes from the line of Timothy Arcuri from Cowen and Company. Your line is open.
Thank you. Couple of things. I guess, Bob, first, a question on OpEx. Did I hear you say that OpEx will be down $35,000,000 quarter on quarter between April to July?
No. I said it'd be about $575,000,000
$575,000,000 Okay. All right. Then I guess to follow on to that, if you look at that element relative to your financial model that seems to be the area where given where your revenue is that's
the line item that's sort of
the most out of whack. So either you have to grow revenue without growing OpEx or you have to cut OpEx to sort of bring that in line to where revenue is. So can you just talk about that? Can you talk about which of those do you think more likely? Thanks.
Sure. Yes. The model was a 16 model. So we actually see growth we actually see revenues growing next year. We think this year is probably a little under $33,000,000,000 a year for WFE next year.
The models are $33,500,000 so WFE is a little better in that model. Secondly, we think our share will be up in WFE this year and next somewhat. And then we think AGS is showing good growth momentum. So and display should be pretty good in revenues next year. So we think the revenues could be an uptick and approach the model next year.
In terms of the biggest discrepancy in my opinion, frankly, is a little bit of gross margins, right? 44.5% was the model. If you look at the document, it said 45%, but the math is 44.5 We're up to 44.1 in fiscal 'fourteen. The quarter just ended, we're at 43.2. We go up a little bit, maybe the second half.
And then the first half, if that's just heavy and there's a little bit of display mix problems, we're not up. So I'd say the biggest delta is probably the gross margin line. If you look at expenses, we're at 5.70 $5,000,000 If we hold at that line, which is what we're saying, there will be at $2,300,000 The model is $2,228,000,000 So we're $72,000,000 over. But a lot of that's related to all the new products coming out. I think the biggest discrepancy is probably the gross margin line personally.
Jeff. Okay, Bob. Thanks so much. Your next question comes from the line of Farhan Ahmad from Credit Suisse. Your line is open.
Thanks for taking my question. My first question is regarding the backlog. I saw that there were some de bookings in the quarter. Can you talk about what those were? And was some of the impact from the recent cuts that we are seeing from TSMC and Intel?
From the backlog, there was some de bookings of stuff that either slipped out of the quarter, turned around. There's cats and dogs in there too, frankly. There's a little bit of foundry, so on the miscellaneous. There was foreign exchange was $10,000,000 of that. So that was just FX.
So I wouldn't draw too many conclusions on it.
Got it. And then another long term question just talking about the balance sheet structure. Have you given any thought to how what level of debt you need or you can support on the balance sheet and try to recapitalize your balance sheet and return some cash to shareholders?
Yes. We've given a lot of thought to everything, especially in the last few weeks and look at the 3,000,000,000 We think I'm actually pretty optimistic we can get the $3,000,000,000 done in less than 2 years. I'm actually reasonably optimistic that we can continue a significant buyback through 2,000 I think past for a number of years without going into heavy debt. I think we're going to moderate debt, but I'm actually kind of getting optimistic on the tax and the cash flow. And then if we need to take on some debt to continue significant share returns to investors, we're willing to look at that too.
And we plan to do some of that too. But I'm actually getting more optimistic on the foreign cash lately.
Thank you. That's all I have.
Your next question comes from the line of Krish Pankaj from Bank of America Merrill Lynch. Your line is open.
Yes. Hi. Thanks for taking my question. 2 of them. 1 first one for either Bob or Gary.
As you look ahead and focus on both trying to gain share and renewed focus on gross margin, I'm kind of curious, is there going to be a difference in the pricing philosophy for the company? Are you going to look at pricing differently be more rational? Or is there going to be status quo? Just kind of curious on that. And I also had a follow-up after that.
Yes. So let me talk a little bit about the model. Bob, Tim had asked this question earlier. In semi, we're very optimistic. We talked about the growth in our business as these new memory technologies are ramping into production and certainly in FinFET 1st generation, 10 nanometer, that's a great opportunity for us with the products we have enabling those transitions.
We gained 1.5 points over the last 2 years. We indicated we believe we'll gain share again this year. And as these transitions Display, we've I talked earlier today about 3 years of double digit gains in revenue in the display market. We have again, there are major technology transitions there. We talked about a new area where that generated $200,000,000 revenue will generate $200,000,000 in revenue this year.
So again, we have some good growth opportunities in display and service our service and spares was up 17% in our service and spares from last year, record revenue. So we have really good growth opportunities. So when you look at the model, the top line revenue growth, if you look at where we were when we published that model to where we think we'll be, we're going to be in the range of that number for top line revenue growth, which was an incredible accomplishment versus what we said we would do. We still believe these opportunities are great opportunities for us. One of the things I also talked about was in etch, we went with a we're introducing a new chamber that customers are telling us technically has advantages in uniformity and defect performance.
But as you're ramping these new many new areas simultaneously, we have great, great new products that are targeted at these inflections. There's going to be some margin pressure with start up in some of these areas and frankly they're going even faster than we'd expected due to the pull from the customers. The key thing in any business is to have value, technical value and differentiation you're delivering to our customers. So our focus is to enable these inflections for our customers in semiconductor and display. And in that process, we will drive market share higher and hopefully the value for the customer with these differentiated products will also go up over time.
As Bob had said earlier, in 2016 due to mix, we believe that the margins are going to be behind, but we are still driving to achieve those margin goals. The timing may be a little bit later than what we've talked about, but the momentum for the company relative to revenue growth is in the range of what we discussed when we published the model. And again, the margins are going to be off, as Bob talked about, but we are driving. There are number of opportunities for us to drive to close and exceed that gap from a gross margin standpoint.
Got it. Got it. And then just as a follow-up along the same path. If I look at SSG products, the one that has the biggest potential for share gain is conductor etch, but that also looks like probably one of the lower gross margins. Would the conductor etch product do you think get to the same level as some of your other dominant products like PVD?
Or do you think that is going to be structurally a lower gross margin product division?
Well, over time, we see a lot of opportunity for us to drive higher margins in that business. I mean, certainly, the share gains over the last couple of years have been pretty significant. Our business went from, I think, 2012 from $350,000,000 to about $1,000,000,000 last year. So just dramatic gains in the etch business. We think over time, there's still a lot of upside potential.
And it really, as I said, comes back to how are you technically positioned in the markets. And there are some significant advantages that customers are seeing. It's in the early innings of that being validated with customers, but you really look for architectural advantages in your products where you can solve high value problems for customers in these inflections. We believe there are those areas that we can drive over time and certainly a lot of opportunity for us to improve our margins in that area.
Got it. Thanks, Gary.
Thanks, Krish.
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 results. Gary, if I look at the foundry spending at one of your customers that the CapEx, if you look if I look at the CapEx divided by the capacity, their CapEx per unit capacity is kind of flat over last year and that's partly because the 3 nanometer demand wasn't strong and they're reusing more equipment. So my question is, if I look at 10 nanometer, how should we think about that ratio of CapEx to capacity as you move to 10 nanometer for the Gripen makers?
So 10 nanometer is we'll talk more about this at Semicon. I've heard some customers say that this is the most important node in the history of their company. So you look really at where the pull is from an end user perspective in terms of mobile devices, certainly there is a lot of value. People are trying to pack more performance, more features and drive lower power for those devices. So 10 nanometer is a big battle for all of the different companies and there's tremendous focus there and the engagement with the customers are very deep and very broad.
When we look at the opportunity for the CapEx, if you take equivalent number of wafer starts, it goes up a significant amount versus what we're looking at for the 16 nanometer and 14 nanometer node. I don't we'll talk more about this at Semicon, but it is a great opportunity and there is a significant change in that device as the customers are ramping 10 nanometer. And we look at that being a great opportunity for us. In the transistor area, we have more EpiSteps, real strength in PVD implant, a number of different areas and then also the interconnect structures relative to materials engineering. And we look at 10 being a really, really great opportunity to drive our business over the next few years.
I don't know, Bob, if you want to add anything else on that one.
Yes. Maybe I could, if you don't mind. If you want to look at this capital intensity and reuse and nodal transitions, you have to look at 3 things really. 1 is, what's the relative capital intensity to node? 2, where are they in the transition to a node?
And 3, how big is the node? So what is worrisome to some people right now is, geez, they're getting a lot of reuse and is that not as good for you on capital intensity? I'm not actually too worried. If you look at the data, we think this year is probably a $33,000,000,000 year. And if you adjust for foreign exchange, with the weaker yen and weaker euros, probably north of 33.5%.
So the year is pretty good. Now look at what they're spending on. For 3 years in a row, 12, 13, 12 to 13, 13 to 14 and 14 to 15, the percentage of the spending that's going to companies like Applied, actually Applied has gone up as a percentage of 100%. So this PME thing has really taken traction. 3rd, if you look at where they are in the nodal transition, 2016 to 2014, they're pretty early, 20 wasn't a big node and they're doing some reuse.
But if you look at it as they get later into the node, the percent reuse probably goes down somewhat. And 2, as Gary said, 10 is a big node. And if you look at the capital intensity, which we'll talk to you more it at Analyst Day, it looks like 10 mix again plays for companies like us. So I'm actually not too upset about the nodal transition or the mix for us.
Thanks. Very helpful. And as a follow-up, Bob or Gary, your services growth is outstanding. If I compare it to the WaferStart growth, which is about 3% to 4% year over year, can you provide us a percentage of your installed base that's currently under contract, so we can see how much headroom you have?
What I would say on the service contracts that we are making really significant progress relative to service contracts and all of those tools under contract really provide a great forward momentum for us in the service business. We've made a lot of changes relative to our strategy, our structure, bringing new talent into the organization And also the connection between the service business and the semiconductor business units, we've relocated people, is really stronger than ever in terms of those value roadmaps for customers. So that's translating into significant growth in our service and spares business with I talked about earlier with 17% growth in service and spares year over year, And we believe there is a huge opportunity. If you look at the share, it's still very, very, add something, connect the dots with a question that was asked earlier. The point is,
we add something connect the dots with a question that was asked earlier. The point question that was asked earlier is can etch gross margins get to be where some of your higher product gross margins are? I think the answer is they can certainly improve from where they are. But even if you look at other etch companies in our industry, the overall etch gross margins are as high as some of our other high gross margin business, higher share businesses. But what is very attractive about Edge is a few things.
1, if you look at our growth in operating profit since 2012 in Etch, it's outstanding. In terms of what's dropped through to the bottom line, it's very good. Second thing is, if you look at Etch as the aftermarket and we're focused more and more at the product, total product lifecycle profitability of a business, Etch is probably the biggest opportunity because these tools, as Gary said many times, eat themselves. So in terms of driving long term profitability and predictable profitability, Etch is a very attractive business.
Your next question comes from the line of Harlan Sur from JPMorgan. Your line is open.
Good afternoon and nice job on the quarterly execution guys. As a follow-up to the previous question on 10 nanometer, it sounds like another solid move up in intensity for the Applied team. We've heard pilot production later this year to kind of first half of next year. Question is, are you guys seeing the 10 nanometer spending in your order pipeline for this quarter, the July quarter? Or is it more targeted to come into your order pipeline more kind of in the second half of this year?
It's really not amounting to a large number right now. And certainly, the engagements that we have with the customers is really better than ever across all of our different products, certainly in the transistor area with EpiPVD, more EpiSteps, that's a great opportunity for us. And in the patterning space, one of the things that we did in the organization is pull all of the patterning groups together. So we have ACH, the selective material removals, CVD, ALD and the synergies there for us as we have the we are delivering these new materials, our ability to deliver those materials and etch them and remove them, that's a great synergy we're driving as part of the organization change that we made. So the opportunity for us there, the engagements we have are great leading indicators of where we're going to be when that ramps and they're broader and deeper than we've ever had.
But from a revenue standpoint right now, it's not a significant number for us. It's a very small number for us.
Got it. Okay. I was talking more about orders there, but I understand where you're going with that. And then on the NAND segment, obviously very strong orders up I think 40% sequentially. How much of this order mix in the April quarter was 3 d or is it still being focused on planar?
And I'm assuming that the 3 d spending mix is moving higher here in the July quarter. Are you seeing this order trajectory spread across multiple customers?
Yes. We on NAND in total, we had a good bookings quarter as you said and we think it's pretty strong for the rest of the year as we told you earlier. We think the trends the second thing we told you earlier was by the end of the year we see 120,000 wafer studs installed, which is about 10% of overall capacity, up from about 60,000 last year, the end of last year. So we see a heavier weighting of the 3 d in the second half spending.
Great. Thanks guys.
Your next question comes from line of Stephen Chen from UBS. Your line is open.
Thanks. Hi, Gary and Bob. Just a follow-up question on the gross margin next year. So is the gross margin issue mostly because of the display margin headwinds and less from these new etchers? What is the display margin issue?
Is it mostly from this new OLED display win that you're just ramping for the first time?
Yes. It's if you go look at it and look at the data actually so I can be more accurate. So if you look at it, we're a little below where we want to be. We'll be up next year, we believe, in SSG in absolute gross margin percentages, but not as far up as we want. Now the reason we're not getting as far as we want is mostly mix.
The reason we're improving in absolute dollars is within each product we're doing better, okay. But the mix is still a little bit off, particularly in the first half. Within display, again, it's a mix thing that's next year. Our business predominantly for many years has been driven by TV equipment. So we sell equipment to make TV panels or TV screens.
Next is a disproportionate number of sales of very high, I think the highest ever probably the highest we will have for the foreseeable future sales of smaller screen sizes, which is somewhat different mix of tools, somewhat different mix of customers. So this is for cell phones mostly. And so that's the mix that's hurting us in display next year and it's unprecedented in the volume.
Okay. Thanks for sharing that. And my follow-up question is just a general question on multiple patterning. There seems to be a perception that once UV tools are put into production, there'll be a big decline in some of these etch and deposition sales for multiple patterning. I was just hoping you could share your thoughts on this given the big EUV order that we saw recently?
Thanks.
Yes. Thanks, Stephen. So I think our position on EUV is consistent with what we've said in the past. We think it's post-ten nanometer when you would start seeing any real volume on EUV. And so as we said, over the last over the next few years, the real big driver for us will be the 10 nanometer node and maybe the 2nd generation of the 10 nanometer node.
That we anticipate to be a big node, a real important competitive battle for our customers and we'll talk more about this at Semicon, but really a great driver for us from a TAM standpoint. EUV is out beyond that timeframe, so it's out beyond the next few years. And then the other aspect is when EUV comes in, we believe that we'll also come in potentially with multiple patterning. So the timeframe for EUV to really have any impact on our business is out there several years. So we don't see anything really near term.
And certainly, again, the big, big, big driver for us over the next, I would say, 2, 3 years is going to be the 10 nanometer node and maybe the shrink of that node.
Okay. Thanks, Gary.
Your next question comes from the line of rahmet shah from Nomura. Your line is open.
Thank you. Gary, you've mentioned that revenue growth in this industry is hard to come by. And given that and the developments over the last couple of weeks, why can't you guys do better than the OpEx run rate of 2,300,000,000
dollars Well, I'm not sure I completely understand the question. The revenue growth as I talked about earlier, we have a lot of momentum around these inflections in semiconductor and display. And in semi, we gained 1.5 points over the last couple of years. We expect that we will gain share again this year. And as these new technologies ramp, we're still in the early innings in terms of the change in memory technology and the whole FinFET battle that is happening with our customers.
So we're very optimistic based on the investments we've made and our teams that we will continue our momentum in growing our share of WFE in the semiconductor business through those transitions. As I said earlier, the display, 3 years of double digit revenue in the display business. So we have very good opportunities there. And also in display, that market is undergoing significant changes from a technology standpoint, including this new area in OLED that we're ramping. So again, we have a lot of confidence in the growth longer term in our display business, a great team, they're gaining share and also we're expanding our TAM with these new applications.
So that part we're very, very, very happy with the progress that we're making in all of the major parts of our business. The OpEx question relative to the $575,000,000 number that where we're at right now, Our number one focus is that we want to capture these inflections with our products in semiconductor and display and continue to grow the service business. And as I said earlier, we're pretty much on track for significant top line growth. If you looked at where we were at when we talked about the model versus the momentum that we have, we're in the range of what we talked about earlier for top line revenue growth. So as you said, it's really hard, but I am very proud of this team that we have at Applied and what we've been able to accomplish and the momentum that we have in these different businesses.
We will continue to look for opportunities to optimize the business. We moved 100 of 1,000,000 of dollars over the last couple of years into areas that will drive longer term shareholder value. We Bob talked about the action that we are taking in the solar business right now. There are probably more opportunities for us to continue to optimize the portfolio longer term. We will continue to look at structural changes that will lower our overall spending in the company and improve productivity.
But in the next year, we are very, very focused on top line revenue growth. And as you said, that's very, very difficult to come by.
Thank you for that. And one of the things you highlighted in your monologue was just the strength of the services business. And if I look at that as a percentage of SSG, it's around 41% sort of attach rate. Is that a number is that the right way to think about it, services as a percentage of SSG and is that 41% a number that you think you can improve on?
Yes. So again, the 17% growth in service and spares in the last year. So think about the service business around $2,500,000,000 this year will be north of $2,500,000,000 dollars And I think in the model, we had something like $2,600,000,000 $2,700,000,000 for 2,000
No, the original model was only 2, 561.
2561. So anyway, so I'll beat that. But if you can achieve double digit revenue growth in service as we are this year, that's $250,000,000 $300,000,000 that's almost 1% of WFE. So through a lot of changes in our strategy, our structure, We are increasing our service and spares business. We're adding value to the products.
So that can be a great revenue driver as we're adding more value for our customers. So certainly that's an area that the whole company is focused on is really creating more value for customers and then driving growth in that area.
Thank you. Thanks, Odeon. Your next question comes from line of Patrick Ho from Stifel Nicolaus. Your line is open.
Thank you very much. Gary, first, in terms of the share gains you've gone on the memory space, can you give a little more color on the gains that you've achieved on the foundry space where you've traditionally have had strong exposure in many of your process segments. Can you give a little bit of color of where you see some of the gains?
You're talking about in foundry, Patrick?
Yes.
Yes. So in the last year, certainly PVD and we talked about both of those areas being up 3% and those are great growth drivers for us. All of the different areas around the transistor, if you look at our implant business, for instance, that business is very, very, very strong. The switching cost in the memory is much higher than in any other market. So that area, our high current share
In foundry.
In foundry, our high current share in foundry is in the 90% range. So that area is extremely strong. Last quarter, we said that our etch business had the highest revenue in foundry since 2007. So we are making some progress there, Not we are making more significant progress certainly in VNAND and the memory space, but that's an area that we think longer term is a really, really great opportunity for us. So I would there's a number of areas.
I don't know, Bob, if you want to add anything on this one. There's a number of different areas. And I think as you go to these future nodes in FinFET, our TAM opportunity will increase a significant amount around transistor, interconnect in a number of different areas.
Yes. I think the 3 things you look at here are how big is your product footprint in foundry and how strong is it in 2 and 3 are you getting DQR wins, right? So if you go look at our foundry footprint, it's very strong and they're highly differentiated products. That's why it stays strong as a share position. In terms of gaining share because they run so many different devices and so many different customers and they're so complex, they're getting turning D2Rs into P2Rs takes a little longer, but we've got some pretty damn good D2R positions that we've worked on the last 2 years, which very well could turn into P2Rs later this year.
Yes. The other thing I would say that the other thing I would say in our PDC area, we're stronger in foundry and logic. And this last quarter, we had some good wins in a couple of major foundries. One of the things also, if you look at our 2015 business in PDC, it's about 60% e beam and 40% optical. And in e beam, we have very high share in the e beam review area with the SEMVision.
And you look at the different areas of the segments within e beam of CD SEM, e beam inspection and defect review, those are all areas that are growing very fast. And our technology there, especially electron optics imaging capability is really world class. So that's another area we look at as we go forward where we see a potential for growth.
Great. That's helpful. And maybe Bob a specific question for you in terms of the margin impacts on some of these new product ramps. Obviously, you mentioned that the faster than expected traction has obviously put some pressure on the near term. When do you expect to see some of those supply chain efficiencies kick in, in terms of, I guess, supply agreements and volume buys that will help margins improve over time?
Yes. What we're doing, Patrick, is what's driving us down is mix, where we're gaining some share a little faster probably than we expected and the new products tend to track in. And now what we're doing to mitigate that is get the new products up the gross margin curve faster and also to get gross margins up everywhere else across the company and that's through material cost absorption. So the cost reduction efforts across the whole company in terms of PPV are picking up reasonably, not heroically yet, we're getting better. In terms of the new products, it's picking up faster.
So my guess is you'll start to see you're seeing progress now, it'll pick up more next year. What's killing us in the first half of next year is mix again.
Great. Thank you. Your next question comes from the line of Sidney Ho from Deutsche Bank. Your line is open.
Thanks for taking my question. First, a clarification. Did I hear correctly that earlier Bob you said you expect the 2016 WFE market to be 33.5% or are you just referring to your operating model that you've talked in the past?
We don't have an official forecast. That's our model. We don't have any detailed analysis of that. If you ask take me out for a beer, it's a working model that's okay to work with, but we don't have a real number yet.
Okay. My first question then is in the DRAM side, obviously, very strong bookings in 1st 2 quarters and record level last quarter. And you've talked about the second half DRAM revenue will be lower than the first half. I know you're not giving 20 16 guidance yet, but are there any reasons why this will this strength would not continue in 2016 given the increased complexity in multiple patterning steps used in advanced nodes?
In terms of DRAM you said? Correct. Yes. I'll tell you my guess I don't know if you got it here, but I'll tell you my guess. I think the V NAND thing is going to pick a momentum because I think you're going to see more and more go to 3 d.
Patenting doesn't play there. So in fact, if you look at the mix of etch and deposition, it plays particularly well for us. If you go to DRAM, patenting does play an increasing role there. I agree with that. Now if you look at DRAM prices are down a little bit.
So they're very driven by economics in that business. So the cost is getting a little higher to make those devices. So the patenting is positive for them, but the cost is an issue in the pricing. So I think the DRAM capacity adds will be moderate.
Okay. And my follow-up question is now that the deal is over and the reason being future product roadmap, can you talk about what areas within edge and deposition that you are not currently strong in, but you're
expecting to gain share in the future?
Well, the DOJ
Yes.
Yes. I think as we've talked about last year, we had just tremendous momentum in etch and CBD with 50% revenue growth. And we really are optimistic about the momentum we have in both of those different areas. And so we continue to believe that the opportunity for us for share gains growing those businesses is very good. Another area that we see as a great opportunity is ALD.
We've been investing in new technology there and we believe that that has potential for significant future growth. We have very strong pull from customers for this new technology that we've developed, but we're not in a position really to give any more color at this time, but that's certainly another area on top of the momentum that we have in etch and CVD where we see a great opportunity.
Okay, great. Thanks.
Your next question comes from the line of Mark Heller from CLSA. Your line is open.
Thanks for taking my question. Gary, I didn't quite catch it, but the display mix in I guess fiscal 2016, did you say if that's LCD or OLED related?
The 2016 mix is much I'll start at the higher level. Most of it's weighted towards smaller feature sizes that'll be the cell phones versus TVs. And when you look within it most of those are all OLED and it's particularly LTPS a lot of it.
Yes, the mix as Bob talked about, the mobility mix versus TV is really up about the percentage of the mobility is up about 2x if you look year to year and then it goes back down to kind of a normalized mix between the 2 different markets for us. So that particular year is we see the mix of mobility up a significant amount, double what it was the year before and we think the year after it will go back down to this more normalized mix that we've seen for a number of years.
Okay, got it. And then going back to this WSE question, I remember in 2013 you gave the financial model before the Tel deal was announced. Talking about WFE maybe as high as 37,000,000,000 dollars Now I know you're not giving official forecast for next year, but is there something that's tempering your how high WFE can go in a given year, I guess? Has something changed there?
Well, I'll give you my observations. When we put the MARL on July 13, one of the biggest reasons for that number was that was Dataquest number basically at that time. We didn't know '17 'sixteen rather. And then we put up three numbers at that time, 30%, 33.5% and 37%. And a fair amount of our focus was on the 33.5.
In terms of what next year will be, we really haven't spent much time. I think it's a pretty healthy year. Could be north of that. I honestly don't know. I don't even know what DataCris says.
Do we know DataCris actually? It's up a little bit more than that. I think DataCris is maybe 34 or something.
Yes. I think what certainly what we can see relative to our business, if you look at what's going to happen over the next 2 or 3 years, this transition in 3 d NAND, as we said, by the end of this year, you only have 10% of the capacity with 3 d NAND. So that transition is really a good one for us. And the 10 nanometer transition, we believe, is a great opportunity. So those are going to be some of the major drivers for us over the next 2 or 3 years.
And we try to size the business relative to kind of a normal run rate on WFE. And certainly there could be drivers to make it higher than that. But from a planning standpoint, we're sizing it around $33,000,000,000 $33,500,000,000
level.
Thank you.
Your next question comes from the line of Mahesh Sankanariya from RBC Capital Markets. Your line is open.
Yes. Thank you. I just want to have a follow-up question on 3 d NAND. Right now you have a couple of customers adding capacity for production and the yields are probably not at the highest level and they're working different customers are working on different structure. My question is that at a maturity on 3 d NAND, 48 layer TLC, what kind of bit density do you get on the wafer compared to planar?
Are they closer to getting 3 to 1 or they're far behind that?
Well, I'll do what I've I'll do from memory. I don't have this in front of me Mahesh. Our take on it was the initial transition from planar to 3 d. They got traditional type of bit growth that they get in the planar shrink. They got the bigger capital efficiency and bit growth going from 1st generation to 2nd generation 3 d.
Now what we used to run-in models was a lot of 32 to 64, right? So at 32 to 64, you get over 100%, right, because you get the scaling and also the size, I don't even know if the shrinks are 40, 50 nanometer stuff. So I think the big opportunity for them is 64. At 48, it's sort of a midway, I'd say. So I'd say it's moderate.
It's better than 1st generation not as good as 64.
Okay. And then on your WFE number, I suppose the last quarter you had a little bit higher number than now and of course there are a lot of changes has happened since last quarter. Can you articulate what you have seen changes in the segment wise from last quarter to this quarter in terms of DRAM Flash and Logic and Foundry?
We haven't actually changed a lot. Part of it, we were sort of about a 33.5% last quarter, kind of about a 33% now. Some of that's just FX as you run it through the euro and on WFE, it doesn't euro does affect us much, but euro and yen, right? So then the second thing is there's been some announcements like TSMC seems a little less. But I'm actually kind of feel like maybe NAND is a little stronger later in the year.
So net net, I'm kind of neutral on the year. In terms of how we feel specifically by space, we're a little higher on DRAM now than we were last quarter, a little higher on NAND than we were last quarter. We're a little lower on Foundry and Logic. We're probably a little negative too from last quarter.
That's very helpful. Thank you very much.
You're welcome.
Your next question comes from the line of Tom Diffely from D. A. Davidson. Your line is open.
So, as it pertains to growth, you talked a lot today about 3 d NAND and talked about the 10 nanometer transition. What about DRAM? DRAM in your mind a growth market for you in
the next couple of years? Yes, I think so. I mean, I think so. I think that if you'll look at it, what's driving it? 1, wafer studs, 2, capital intensity, 3, our position there, right?
So if you go look at 2015, we think overall spending is up, I don't know, 15% or something like that, 15% to 25%. And if you look at our position there, it's been improving. We gained share in DRAM in the last year or 2 and we think that will continue this year. So we go ahead, Jay.
No, I think DRAM mobile DRAM especially has been driving incremental investment and we're happy that our share of that market is increasing. And so that is a positive driver. But you don't have the same inflection in the DRAM business going forward that you have in 3 d NAND and you have certainly in the FinFET technologies. Now there are the 3 d NAND, the litho CapEx is declining and the areas that we're participating in are going up a significant amount. And so we have an opportunity there with not only the CapEx increase, but more of the CapEx being spent on our area of the market, a significant change from what was there in the planar technology node.
And the same thing is true on the FinFET technology. Again, that really leverages our materials engineering, some of our strongest products as those technology inflections are happening. So the DRAM opportunity is a good one for us, but it's not the same order of magnitude driver for us as the transition to 3 d NAND and FinFET.
Yes, I agree with you. I mean most of what they're doing this year is conversions versus capacity adds.
Okay. That's helpful. And then on the display side, is the move of OLED to TVs, is that the sweet spot
for you going forward? Or do
you think margins might be an issue at that point as well?
Yes. We think the OLED is more focused on mobile right now. These smaller screens for mobility types of applications, not so much on TV.
It's pretty expensive for TVs. Yes.
And I was just thinking that next couple of years when it does ultimately move to TVs if that is more
of the sweet spot for you versus next year.
Yes. There's no question. OLED in general we've said, if you look at amorphous silicon compared to OLED, our TAM grows about 2x. So certainly as OLED is adopted both in mobility and in the future in the TV market, that is a really great transition for us. And you really can see it also in the thin film encapsulation.
We talked about the incremental opportunity there, but there are more deposition steps as you go to OLED technology. So the adoption in any of these different markets for us is a really good driver.
Okay. Thank you.
Thanks, Tom. And Kyle, we have time for just one more question, please.
Your last question comes from the line of Edwin Walker from Needham. Your line is open.
Hey, thanks for squeezing me guys. So first question in terms of just directionally maybe on the second half of the year versus first half, how do you kind of see your booking trending between the DRAMfoundry and logic buckets?
We think foundry is up in the second half. We think that's bookings. Yes. FOD is up. Yes.
DRAM is down a little bit. NAND is up. Logix is flat.
Okay. Great. That's helpful. And then I guess a question on PDC. So we saw some of the data from Gartner, they published around kind of market share.
And it seems like the PDC maybe down a little bit last year. Can you maybe help us with that a little bit? Is it due to mix? How do you guys see your position? And I think you talked about 10 nanometer being an opportunity and obviously that's much higher process control intensity.
How do you think you position there? Do you think that could drive some incremental growth there potentially starting in 2016?
Yes. Again, relative to the intensity of the last couple of years and it's not relative to some of the other inflections that we're focused on, we don't see this as being as large an inflection in our markets as some of the other areas. But as I talked about earlier, our business is really, if we look at 2015, more heavily weighted towards the e beam segments, where we have a lot of strength, really great technology, that segment of the market is growing fast and we really see a great opportunity for us to leverage that strength in growing that part of the market. In the optical inspection area last year, certainly the mix of customers worked against us, but we recently had a really strong quarter relative to orders from a couple of large foundries. And we look at our technology position there as incrementally better than where we were at before.
So we're optimistic overall PDC growth in 2015 will be good for us and then really being positioned from a technical standpoint going forward in PDC where we think this can be a growth driver. I wouldn't say this is on the same scale as some of the other opportunities we have on the inflections in the 3 d NAND and 10 nanometer FinFET. But certainly incrementally, it's a positive for us. And the incremental profit from that business is also very good overall.
Great. Thanks.
Thank you, Edwin, for your question. And we'd like to thank everyone for joining us this afternoon. A replay of this call will be available on our website beginning at 5 p. M. Pacific Time today.
Thank you for your continued interest in Applied Materials.
What do we do aftermarket?
This concludes today's conference call. You may now disconnect.