I would now like to turn the conference over to Michael Sullivan, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Justin. Today, we'll discuss the results for our Q1, which ended on January 25th. 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 statements about Applied's performance, products, strategies, opportunities, announced business combination with Tokyo Electron and business and industry outlook. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied, and they should be interpreted in that light.
Information concerning these risk factors is contained in our most recent Form 10 ks and 8 ks filings with the SEC. Forward looking statements speak as of February 11, 2015, and we assume 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 Investor page of our website at appliedmaterials dotcom. Now, I'd like to turn the call over to Gary Dickerson.
Thanks, Mike, and good afternoon. Let me start by providing an assessment of our overall progress. First, our long term strategy. We are driving profitable growth by enabling major technology inflections using our precision materials engineering leadership to gain share and grow faster than the markets we serve. Major transitions in semiconductor and display technology create great opportunities for Applied.
We are making meaningful progress towards our long term strategic goals and this will be accelerated by our upcoming merger. In the midterm, we have been focused on those opportunities that move the needle for customers and for Applied. We have strengthened our R and D and field teams, while increasing investment in product development. We've also created a pipeline of new differentiated products that accelerate Applied's growth when customers move new technology into high volume production. And we're managing the effect on margins as we ramp these new products.
In the short term, the forecasted levels of investment by our customers provide a solid foundation for the year ahead. While there are challenges inherent in our spending mix and some uncertainties about timing, we remain firmly on our trajectory of profitable growth. At the same time, we are completing our preparations to merge with Tokyo Electron. The Applied and Tokyo Electron teams are very excited about the strategic opportunity this merger creates and share a strong commitment to work together to achieve our performance goals for the new company. We believe we are making progress with regulators around the world on a coordinated proposal that would allow us to move forward with our business combination.
We are working to secure the remaining approvals and complete the merger as soon as possible. Turning to our market outlook. Industry growth is fueled by evolving trends in mobility, connectivity, video and wearable devices. This is accelerating innovations in mobile processors, solid state storage and interactive displays. Our customers are focused on winning share in these inflections and this is resulting in a period of sustained investment by semiconductor customers.
We believe wafer fab equipment spending for calendar 2014 was approximately 15% higher than the previous year. And as we look ahead, we maintain our view that the market could grow another 5% or more in 2015. In Foundry, we expect investment to be maintained at the same healthy levels seen in 2014, with the potential to be slightly higher than last year. Our current view is that spending for advanced nodes will be heavily biased toward the second half of the year. While we see some timing uncertainty with the ramp of this complex technology, the FinFET inflection is highly beneficial for Applied, expanding the opportunity for our leadership products in epi, metal deposition, implants, anneals and CMP.
In memory, supply remains tight with a healthy pricing environment and robust investment. In the past quarter, we booked our highest orders from memory customers in over 7 years. This includes our highest quarterly DRAM orders since 2010. DRAM bit growth for 2015 is expected to be around 30% with mobile DRAM standing out as the most significant driver. While technology conversions are currently providing a large portion of the needed supply, increasing device complexity and additional process steps were required at the smaller nodes are reducing effective factory output.
In addition, mobile DRAM devices are typically larger than PC DRAM and the combination of these factors is leading to new capacity additions this year. The market for NAND memory is also expanding. Leading smartphone makers have doubled the average bits per box over the past 12 months and this added to growth in solid state drives supporting NAND bit growth in the range of 40%. Although we believe the majority of NAND investments will still be focused on advanced planar capacity, we see 3 d NAND spending for the year at approximately twice the 2014 level with more customers starting to move to this technology. The industry's transition to 3 d NAND has been slower than forecast.
However, it remains a positive inflection for Applied, expanding our served available market by 35% to 50%. The outlook for display also remains very healthy. Average TV sizes are growing faster than historic rates and we are seeing a surge in unit sales fueled by consumer spending on new 4 ks and OLED models. Demand for bigger, higher resolution, low power screens for mobile applications is also a key factor behind display growth. In TV and mobile, supply is tight and our customers are investing in new capacity and advanced technology.
This quarter, our display business delivered its highest revenue in the past 3 years. As we have said before, major inflections like FinFET, 3 d NAND and new displays represent unprecedented technology advances that are enabled by materials innovation. We are still in the early stages of these inflections. And as they play out over the next several years, they create great long term growth opportunities for Applied. To fully capitalize on these transitions, we have aligned our structure and talent around key areas of value creation.
We will continue to aggressively manage our product portfolio, so we can quickly shift resources to areas that are truly enabling for customers and generate the best returns for us. We are starting to see impact of these changes. In 2013, we won 1.4 points of share in wafer fab equipment, while delivering innovative and enabling new products to customers. In 2014, we consolidated our new product positions and strengthened our product pipeline. We believe we gained share or held share in almost all our businesses.
And based on our current view of customer spending, we expect to grow our overall wafer fab equipment share again in 2015. We are making our gains in areas where the market is growing rapidly, including CBD and etch. This past calendar year, we estimate that we won at least 3 points of share in CVD and 5 points of share in conductor etch. Etch is a business where we continue to build momentum. We have been focusing on key technology inflections in market segments, where we believe we have sustainable technology differentiation.
New wins in memory combined with our traction in foundry helped us deliver our highest etch quarterly revenues and orders since 2007. Our latest generation etch system has one of the fastest adoption rates of any new applied product in recent years. We shipped 3 times as many chambers in the Q1 than we did in the prior quarter, and we expect to double shipment volumes again in Q2. We also see great opportunities to grow our service business. We are bringing together capabilities from across the company to develop expanded service offerings that help customers ramp complex new device technologies faster and at lower cost.
At both leading and trailing nodes, wafer starts and fab utilization are at very high levels. We are winning new service contracts from a broad base of customers and growing faster than the market. Over the past two quarters, our service business booked its highest orders for any 6 month period in our history. In summary, while there are risks related to the timing of customer investments, our current view is that 2015 will be a year of solid market growth driven by robust memory spending in the first half and foundries ramping FinFET production in the second half. Applied Materials has a strong platform to gain share driven by tremendous customer pull for our enabling precision materials engineering products and services.
And across the organization, we remain highly focused on improving execution. We are driving alignment, speed and scale as we prepare to merge with Tokyo Electron and hit the ground running as we become one company. Let me now hand the call over to Bob, who will provide further details on our performance and outlook.
Thanks, Gary. Gary gave us an update on the market environment and the status of technology inflections. I'll begin by translating how we expect those patents play out in our business during the current fiscal year. First, you'll notice that memory spending is particularly strong in the first half of our year. In Q1, our memory orders topped foundry and logic orders for the first time in 5 years and we could see a similar mix in Q2.
Next, you'll notice that while our foundry customers are intensely focused on ramping FinFETs, the order pattern is shipping up to be back half loaded also for the first time in years. We expect this mix to put more revenue and margin in our fiscal second half. Gary indicated the calendar 2015 WFE could be up by 5% or more. The greatest swing factor in our model is how much of the expected foundry spending is captured by the end of our fiscal year From where we sit today, we expect a very strong fiscal second half. The high mix of memory and etch resulted in gross margins being below our expectations for the quarter.
Specifically, etch grew 90% sequentially, higher than our previous goal of 60%. Gary spoke about our focus on portfolio management. Let me discuss some of the results we're seeing in our efforts to generate profitable growth across our businesses. In AGS, we've strengthened the linkages to SSG and operations, invested in higher value offerings and focused on delivering long term service contracts that could help customers with uptime, yields and cost. After 2 years of declining sales, AGS posted 9% growth in fiscal 2014.
AGS delivered near record orders in Q1 and is on track for continued revenue growth and margin expansion. Our display business was the first one to fully deploy our product development engine best practices and received internal funding to capture share in CVD, PVD and new products based on large area precision materials engineering. In Q1, the Display Group posted a 2nd sequential quarter with operating margins above 25%. Display also had strong momentum with new Gen 6 PVD products for advanced mobile displays and new CVD encapsulation systems for OLEDs. In FSG, the increased investments we made beginning in the second half of twenty twelve are starting to pay off by giving us memory share gains during a period of renewed memory investment.
In calendar 2014, memory spending drove the growth of the etch and CBD markets at a higher rate than overall WFE. We believe Applied etch and CBD businesses grew more than 50% combined in calendar 2014, which is 1.5 times the rate of the etch and CVD markets and over 2 times the rate of our largest competitor in these areas. Our latest etch platform is generating traction in foundry as well as memory. We have a task force in place to drive our etch gross margins to higher levels as we mature our new chamber technology and increase our scale. In Foundry, our investment in advanced deposition techniques is enabling strong adoption of CVD cobalt for interconnects and new epi steps in emerging nodes.
In Logic, we have nearly doubled the number of D2R wins in the past 2 years, which is a good leading indicator of share gains in next generation transistors. And finally, over the last 2 years, we have tripled our Corporate Technology Group's funding of disruptive new products and markets for our longer term growth. In short, we are seeing strong early returns from our growth initiatives within SSG, Display and AGS that will allow us to grow revenues AGS that will allow us to grow revenues and profitability, particularly as our customers ramp new nodes into higher volumes. Next, I'll summarize our Q1 results as compared to the prior quarter. Orders of $2,300,000,000 were up 1% sequentially with increases in SSG and EES offsetting decreases in AGS and display.
Although AGS orders were down from our Q4 record, they were the 2nd highest ever and up 16% from Q1 of 2014. Net sales of $2,400,000,000 were near the high end of our expectations. Non GAAP gross margin was 42.3%. Non GAAP operating expenses of $552,000,000 were near the low end of guidance. As a reminder, many of our groups had a holiday shutdown during the quarter.
Non GAAP EPS of $0.27 was at the midpoint of our guidance. Operating cash flow of $60,000,000 reflecting high revenue from display tools that were previously secured with cash in advance. In Q1, we also had annual incentive compensation and withholding tax payments. Absent the timing of these items, operating cash flow remains strong. Now I'll comment on our segment results as compared to the prior quarter.
FSG orders of $1,400,000,000 were up 7% with increases in memory offsetting decreases in foundrylogic. SSG net sales of $1,400,000,000 were slightly above the midpoint of our expectations. SSG non GAAP operating margin decreased slightly to 24.2%. AGS orders of $690,000,000 were down 8% and remained at near record levels. AGS net sales of $583,000,000 were in line with our expectations and AGS non GAAP operating margin increased by 1.7 points to 26.4 percent, reflecting favorable product mix.
Display orders declined to $107,000,000 and we expect the booking pattern to remain lumpy. Display net sales of $275,000,000 were up 45% as customers began to ramp the new TV capacity booked over the last 6 to 9 months. Display non GAAP operating margin was 26.5%. EES orders grew slightly to $50,000,000 and net sales of $55,000,000 were below our expectations. EES both posted a small non GAAP operating loss and we continue to monitor the solar market closely.
Now I will provide our 2nd quarter business outlook. We expect our overall net sales to be flat to up a couple of points sequentially. Within this outlook, we expect SSG net sales to be up by about 4% to 8%. AGS net sales should be up by about 5% to 10%. We expect display net sales to be approximately $160,000,000 and EES net sales should be approximately $75,000,000 Non GAAP gross margin should be approximately flat.
Non GAAP operating expenses should be in the range of 570 plus or minus $10,000,000 We expect non GAAP earnings per share to be in the range of $0.26 to 0 point
Thank you, Bob. And help us reach as many of you as we can, please ask just one question and no more than one brief follow-up.
Our first question comes from the line of Tim Arcuri with Cowen and Company.
Thank you. Bob, can you give us the specific SSG order breakout by memory foundry? And then maybe within memory, can you give us DRAM and NAND?
Sure. Let me dig it out. 2 quarters here. In Q1, foundry was a little under 500, memory total was about 700, a little over and logic and other was about 200.
Okay, great. And then Bob, I just wanted to ask about margins. You talked about the second half being stronger. It sounds like fiscal second half revenue is going to be up versus fiscal first half. But the margins in the fiscal first half have been a little bit under pressure.
Can you speak to why that's been the case? And will the margin pressure lift during the fiscal back half of the year? Of course, this is a standalone basis ex the merger obviously, but will that margin pressure lift during the fiscal back half of the year? Thanks.
Yes, it should. The biggest thing that's going on is mix for us within SSG. So SSG we're doing very well in gaining share in etch, particularly in memory. So if you look at memory, I think over 50%, 52% of orders in the first couple of quarters are memory related, which is a high point for us. And a lot of that drive is etch and CVD.
Etch, we're shipping new tools. Our C3 chamber is doing really well. So that's dragging margin a little bit. And what we usually see is we see foundry picking up around a little stronger, a little sooner. And the mix of tools there is a little better for us on the margins.
So the mix is hurting us a little bit. We had some of this in the first early part of last year, but finally picked up a little earlier last year. So it should go better in the second half, but that's what's going on.
Yes, Tim, one other thing I would say is that I think the good news is that we're getting great traction with some of our new products, including products in etch and CBD and some of the fastest ramp rates that we've ever seen for new products. But the start off costs there are also higher and then over time we can work those back down. Thanks Tim. Thank you.
Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch.
2 of them. First, Gary or Bob, if I look at foundry spending over the last few years, it has always been front half loaded, which kind of makes sense given end consumer product release in the second half. What is this different this time around that foundry is actually back half loaded?
Yes. Well, that's a question we talk about a lot too. I'll tell you my opinion. Typically, it's first half loaded. And last year, it was even a little earlier than previous years in my opinion, because a leading foundry had the Apple business and they want to ramp very effectively.
So things like our Epi tools, they took a little earlier even to make sure they're working well and they had a good ramp. This year, it's not clear how many when the cut over to FinFET devices are. So all the customers are saying they're going to ramp FinFET, spend a lot of money, but it looks like the ramp of that is a little later and part of that is also impacted by what is the relative rate of reuse of tools too. So it was probably a little bit earlier last year and it seems a little bit later than the average this year.
Got it. Got it. All right. And then as a follow-up on the conductor edge side, you guys mentioned significant wins last year. I'm kind of curious, when you quantify wins, is it by revenue share or is it by unit share?
And also, which specific segments? Was it more on the DRAM NAND side or was it more on the foundry side? Thank you.
It was revenue dollars as measured by Dataquest and it will be in memory. We did pretty well in DRAM and NAND and we're pretty optimistic we'll do well again in calendar 2015.
Yes. We also have traction in foundry. But as Bob said, the majority of the share gains right now are in memory. And if you look over the last couple of years in etch and conductor etch, we talked about 5 points of conductor etch share gain this year. We had 6 points of share gain last year in 2013.
So we have really significant momentum. Certainly, memory is where we see the largest revenue now, but we also have traction outside of memory that provides an opportunity for growth going forward. And the other thing is we talked about the etch and CBD revenues combined increased greater than 50% in 2014. So if you look at the growth rates of those markets, in both of those areas, we're significantly
Ramesh Shah with Nomura.
Yes. Thank you. And I appreciate your comments on the transaction. Having said that, a lot of people are sort of stumped as to why the transaction is taking so long. And I realize that you guys are limited in what you can say, but kind of hopeful that you can provide us some additional color.
And I guess just what gives you confidence that this process isn't going to continue to drag on beyond the first half of the year? That's my first question. Yes.
I think the reason it's complicated is because we have a very complicated business. If you look at between us and Tokyo Electron, many, many different segments, many different products. And so I think that's a higher degree of complexity than you normally see in this type of situation. What we said earlier was that we're making progress with regulators and we're going to close the merger as soon as we can. We really can't talk any say anything more at this point beyond that.
Okay. Thanks for that, Gary. And then I guess my other comment is on mix. You mentioned that memory is really strong here in the first half. Are you guys I guess, how should we think about memory in the second half?
Is there concern that we may see a sharp fall off and maybe offset some of the growth that you're expecting in foundry? Thank you.
Well, we all have our opinions on it. I think you have to look at the fiscal halves and the calendar halves. As you know, our fiscal half is we end the fiscal year on October 31. Our belief is that the second half foundry is stronger than typical, as I said before. We think memory is stronger in the first half, although I think there's a little upside to the memory outlook frankly.
So I don't think memory is going to fall off if you look at pricing. I'll give you another data point. Utilization across all the fabs is running pretty darn high right now. So that I think that the forecast is pretty good, just timing and mix issues really.
Our next question comes from
the line of Farfana Ahmad with Credit Suisse.
Thanks for taking my question. My first question is regarding the foundry investment this year. I just wanted to make sure I understand the linearity of it a little bit better. You mentioned that stronger in the second half. Just given the timing of the end consumer devices and the ramp associated with it, Is it fair to think like that the strength would be more stronger in the July quarter than the October quarter?
Yes, I'll try and take that one. Right now, we think that the July October quarters are pretty strong. We think right now that they're pretty close actually, looking at the data. July might be a little stronger than October, but they're pretty close.
Got it. I think the other
one other thing I would say on the foundry business is that this is a huge competitive battle for our customers. So I would expect there's going to be more technology buys also than we would normally see. There's certainly the race to the 1st generation FinFET, but there's also in parallel tremendous pull from customers as they drive to 2nd generation FinFET from a technology perspective. So that's another thing that we see very strong pull from customers that could play out. And we're talking about second half of our fiscal year, so it could play out a little bit more in the second half of our
fiscal year. Got it. And then one question on the market share. You mentioned that EMAT gained share in WFE this year. But when I look at your revenues, they are up 12% year on year like just for the calendar year and I'm kind of using the Jan ending revenues for the last 12 months.
They are up 12% year on year and you mentioned that the WFE was up 15%. So I just wanted to understand like if WFE is up 15% and your revenues are up 12%,
13 and that's in the Dataquest data, I think about 1.4 whatever it was on WFE. I think we held share in calendar 2014 on WFE. I don't think we gained. I think we gained or held share in every single product group in which we competed, but some of our large share product groups didn't outgrow the WFE. So in WFE, I think we're flat.
Across all the product groups, we gained a held except one we lost.
Our next question comes from the line of Atif Malik with Citi.
Hi. Thanks for taking my question.
Yes. Let me just on the last question one final point. We also had a strong November December, so that will help you understand it too.
Okay. Thanks for taking my question. Bob, if I look at your outlook for up 4% to 8%, is pretty much in line with your peers given your mix is a little bit more foundry centric. But the non cement markets are like you said a bit lumpy. So can you provide a bit more color on what's happening in the display market near term?
Is it seasonality? And then on the EES, is that being impacted by oil prices being lower? And then I have a follow-up.
So the first question was the foundry spending mix. Is that what you asked, Mativ?
No. What's going on with the non semi market in display and EES?
Okay. Thanks. Can you
provide a little bit more color?
Sure. Non semi, I'll just solar first. On solar, we're managing that pretty darn well. In the market, the end use market for solar panels and solar cells is pretty good, but there still is an overhang of excess capacity out there that's being eat up. So it's sort of a neutral market, it's treading water.
And so it's just quarter to quarter variations on small numbers. In the display market, our position has been very strong in display. We've gained share. We've come out with new products. Execution has been very good.
And that market is made up of 2 primary customer types. Display equipment, we sell for TVs and display equipment, we sell for smaller form factors like iPhone cell phones and pads iPad type things. So if you look at it, this year, it looks like bookings will be a little bit more swinging towards the smaller form factors. And so what we're doing is the build out of TVs which are helping revenues and we got really big bookings last year, if you remember, that was shipping those. This year, we think the bookings on TVs will be a little less, but the bigger the smaller form factors will be greater.
So that's the transition that's going on there.
Okay. And then you had $53,000,000 in adjustments in your backlog on FX. Can you talk about the headwinds from here on FX and your exposure?
Yes. That's a good question too. So as you know the yen is down significantly and the euro softened up so no. The yen is the bigger impact for us. Now as a practical matter, the way we sell, most of our costs are in dollar denominated and our revenues are fundamentally dollar denominated.
Now when we priced in Japan, we are somewhat competitive to Japanese competitors, but we largely price in dollars and translate that into yen and largely hedge the impact. So we can somewhat defer the impact. So I'd say that the yen to apply it alone is not a big impact. It's a little bit more impactful to Tokyo Electron who bills in yen.
Our next question comes from
the line of Harlan Sur with JPMorgan.
Good afternoon. Thanks for taking my question. I know you talked about a stronger second half driven by foundry and continued memory and within that a strong July quarter. So just to clarify, you guys are seeing foundry and memory being strong contributors in July? And if foundry is indeed starting to become stronger in July, is it more than just one customer?
Is it a little bit more broad based than that?
Yes. We see that the foundry is picking up in the second half. So the mix of spending by half. Foundry is more heavily weighted to our to the calendar second half and our fiscal second half. Memory is more weighted to the calendar first half and to our fiscal first half.
So that's the mix. If you ask me, I think there's a little bit of upside to what we think on memory in the second half, particularly DRAM. In terms of absolute dollars, I think because the mix is heavier on memory in the first half, the dollars are probably a little bigger in the first half. And then the other wild cut is 3 d NAND could be an opportunity later in the year.
Got it. Okay. Thanks for that. And then you typically have a step up in OpEx in Q2 as you just guided to. How should we expect that to trend in Q3 and Q4, especially as the team continues to invest heavily on growth opportunities?
Yes. Last quarter, I talked about our spending is up a little bit this year. I thought we might even get up closer to 5.70, 5.75. We're trying to manage that tightly. We have the benefit of a shutdown this quarter.
We guided to 570 plus or minus 10 in Q2. Q3, I think, and Q4, we're sort of in the same range, up a few million in the $570,000,000 is my guess.
Our next question comes from the line of Weston Twigg with Pacific Crest.
Hi. Yes, just had a couple
of questions and this is probably beating a dead horse. But just on the foundry demand, I'm really just trying to reconcile what I heard from TSMC, which is that they raised CapEx by around 24% and Samsung, which said that foundry CapEx would be up year over year. With your view, the foundry spending should be kind of flat or maybe up in 2015. And is there a way to reconcile that? Are you hearing I assume you have good visibility into this, but are you hearing maybe something a little different than maybe what the companies are indicating?
And then I have a follow-up.
Yes. I think global foundry is probably down year on year is my guess. And UMC is up a little bit or flat. And then the other issue so I think the other thing is the calendar fiscal, we sort of a little bit conservative just because our fiscal year ends in October. So it could be slipping to November, December too which makes us a little worried.
But overall, we're saying it's up a little bit overall foundry.
Okay, good. And then just on the other side, back to the currency question. It seems like you should get maybe a little bit of gross margin uplift from some of your foreign production. But yet you're modeling gross margin kind of flattish. And I'm wondering why you're not getting a little bit of uplift maybe from the foreign exchange or currency discrepancy?
In terms of our Corn manufacturing
and selling in current dollars.
Yes. We don't do heavy manufacturing overseas. Most of what our product cost is, is materials. The vast majority of our material cost is dollar denominated. So we haven't got a lot of benefit there.
We're trying to get some more benefit, but the vast majority of our product cost is dollars.
Our next question comes from the line of Patrick Ho with Stifel Nicolaus.
Gary, maybe just first from an industry perspective, given some of the uncertainty in the timing of this foundry FinFET ramp, do you believe it's weighted more towards the uncertainty in terms of the customer allocation of the capacity to the foundries or the yield challenges that the industry is facing right now?
Well, Patrick, that's a very good question. Certainly, this is a major competitive battle for our customers and everybody is focused on, as I said before, not just 1st generation, but also 2nd generation FinFET. So for us, when we I think one of the other callers, maybe Wes, had talked about announcements from around allocation, where are those dollars going to go. They're going to go to one of those different companies. And so there's still some uncertainty around that.
I think that for all of these companies, this is a huge bet. This is biggest change in terms of the transistor technology that we've seen in a very, very long time. So all of these companies are extremely focused.
They're investing a lot also
in technology, so they can shorten their good to us because as we've said before, our total available market increases a significant amount and we're very leveraged around the transistor. Our businesses like epi and PVD are extremely strong, implants, a number of different areas. So for us, we're in a very good position no matter who that business goes to because the TAM for us is so much larger. But when we talk about the uncertainty, it's really what I just
discussed. Great. That's helpful. Maybe for Bob, just kind of following up on some of the uncertainty with the foundry ramp. How are you managing the supply chain as well as the inventory given the uncertainties out there.
How are you going to I guess with the pulls and pushes on the levers on that front?
Yes, that's a good question, Patrick. We actually think our demand on the supply chain is going to be pretty high for two reasons. 1, our sales of spare parts are pretty strong as you can see in our AGS business and with fab utilization running pretty high, we think the spare parts that we ship a lot of will be pretty high. So we'll buy those from suppliers. And the second thing is, if we get this steep ramp in the second half, we'll get a lot of pull.
So our overall demand on suppliers is going to be pretty high. Some of those tools and inventory we've brought in now to mitigate the risk of the ramp. So you see our inventory is up a little bit. And then the third thing we're going to take a look at is we're spending a lot of time handholding working closely with suppliers to make sure the ramp goes okay.
Our next question comes from the line of Mahesh Sankaranarajah with RBC Capital Markets.
Hi. This is Sean Yang from Mahesh. Thanks for taking my questions. First, I think you mentioned WFE up 5% or more this year. This is relatively lower than some of the peers are commenting and it's certainly lower than I think people are thinking about 5% to 10 percent up 5% to 10% range.
So are you guys seeing anything differently from your peers? And then do you think in the long term model you guys are thinking about $37,000,000,000 WFE in 2017? And do you think in this year or next we may see maybe 1 or 2 quarter WFE run rate may reach that level?
I think we're pretty close on the WFE. We're sort of around $34,000,000,000 number. I think everybody else is pretty close to that. Yes.
I think what we said was 5% or more. I think land was 0% to 13% if I remember correctly. So we're really in the same range. Okay.
2014 level. And be about twice of 2014 level. And some of your customers in their earnings indicate that they are planning to reuse some tools for 3 d NAND development. I'm just wondering, can you talk about your assumptions on your 3 d NAND spending for 2015?
Yes, that's a good question. So 3 d NAND is really for us really major opportunity from a growth perspective. It is very focused on etch and deposition and not so much on litho. So the feature sizes are actually increasing as they go from planar to 3 d NAND, but there is a lot of spending on etch and deposition systems. And the process is very different than the planar NAND.
So it is true that there is reuse, but for us in our business, there is a huge opportunity for TAM growth.
Our next question comes from the line of Tom Diffely with D. A. Davidson. And Tom, your line is open.
Yes, I'm sorry. Thank you. So just a longer term question here. Curious what you think the current spending patterns are in China and if you expect them to go up materially over the next couple of years and then what your percentage of that market is on a relative basis?
So we thanks for the question. We don't really see a significant change in the CapEx spending in China. Actually, our position there is very, very strong. The leading foundry in China, we have a great relationship. Our share there is very high.
In general, foundry is an area where we have high share at all customers. But in China, we have a very, very good position, very good relationship. So if that spending would ramp, that would be a good thing for us. But we really don't see a big change there in the next year or 2.
Okay. And then maybe switching gears to the display business. If the manufacturers were to switch to OLED TVs, does that materially impact the equipment market size?
Yes. OLED is basically, if you look at the number of deposition steps and the number of steps that we participate in, if you compare amorphous silicon to OLED, it's about 2x the total available market opportunity for us. So certainly OLED ramping would be very good for our display business. Overall, there was a question earlier on display. That group has really done an incredible job.
They are gaining share in the market. And when we look at our model for the company, display really is pretty much on model versus what we had discussed a couple of years ago. Growing share, really focused on how we help customers make these technology transitions from amorphous silicon to LTPS, oxide and OLED really is the best opportunity for us when that technology ramps.
Our next question comes from the line of Edwin Monk with Needham.
Hi. Thanks for taking my question. So just quickly follow-up on the gross margin. I think you guys guided for flattish this quarter. And I noticed you have very strong DRAM order.
I mean, DRAM is a very concentrated space now. Does those big orders have effect on gross margin for this quarter? And also this how the timing of Chinese New Year maybe have effect on timing of shipment which impact gross margin?
Sure. The biggest single swing for us within the SSG business is what tool types we ship. So etches, we're gaining share in etch, particularly in memory, we're getting more DQR positions making progress in foundry and places like that. We get a lot of sales in etch, high aspect ratio etch and also all types of etch steps and deposition steps in NAND and DRAM. So it's that tool mix that's different for us in memory versus foundry.
Foundry, we tend to be very high shared strong positions in tools like FDPVD implant things like that. But it's a tool mix between the 2 that's the biggest
driver. Okay.
That's helpful. And then on your commentary about etch plus CVD growing by 50% this last year, right? And I think someone asked you about what happened to other business. You mentioned that your house share with some of the market may have shrink a little bit. That I'm trying to dive a little bit into that.
Is it just because of the type of spending that caused that? Some of those other product market has shrunk? Or is that something else going on? Or is it just customer investing in other areas? Can you give us some color on that?
Sure. We held overall WFE share. We gained a net CBD. We lost some in wafer defector inspection frankly that will come out in a month or 2. So we'll share that with you.
And then some of the others we held share or gained share, but the TAMs didn't grow as fast as Etch and CBD. So we're gaining share in Etch CBD holding very high share in some other strong markets. But a couple of the other markets like implant did grow quite as fast as some of the other markets. So it's a mix within the businesses as much as anything?
Yes. One of the things relative to the overall market, the overall wafer inspection business actually grew less than we had thought it would in 2014 and slower than the overall market growth. So that was a negative. Optical wafer inspection, 2014. E beam, where we have technology leadership, we actually gained share in e beam review, about 15 points of share, we think, in e beam review.
We gained share in CD metrology and we think that e beam inspection is also an opportunity for us. So in 2015, what we think is that the mix will be more favorable for us. And really the area that is growing the fastest in e beam technology, we have a very, very strong position with some new products and we look at that as a growth opportunity for us in 20
15. Our next question comes from the line of Sidney Ho with Deutsche Bank.
Thanks for taking my question. You and your competitors in the past have talked about, I guess, over the next few years, FinSat and 3 d NAND are the bigger incremental opportunities than more like than DRAM than advanced packaging. Yet most of the upside in recent quarters have been coming from DRAM. So do you think this is just a timing issue because FinFET and 3 d NAND is being pushed out? Or do you think the capital intensity for DRAM is higher than you previously thought?
Well, I think DRAM is certainly up and we talked about what the drivers are for the DRAM business. But the timing for 3 d NAND is later than what some people had expected. I think everyone is seeing very strong pull for 3 d NAND. There is compelling pull from customers around the performance of 3 d NAND technology. And when you look at bit scaling over the longer term, that is the direction for every single one of our customers.
There's a huge focus there. And we although it's later than what we had expected, we start we see the second half of this year, the switch over to 3 d NAND being more significant. And FinFET is also a great opportunity. It is the number one competitive battleground for all of the foundry customers and we certainly see that all of the customers will move to that technology. And we look at that being more heavily weighted toward the second half of this year and into 2016.
Okay. Then my follow-up question is, given the slow ramp FinFET, how would you characterize the industry investment in capacity of 28 nanometers and 20 nanometers relative to what you think, let's say, 6 months ago?
Well, we think this year is heavily weighted towards FinFET versus 20 28. In terms of 2020, some of the tool sets are the same for 2020 and FinFET. So it's a little hard to make clear delineation of that, but we think it's mostly FinFET 16 nanometer to 14 nanometer ramping, but some of the tools you could use between 2016 or 2014. So we think this year is heavily weighted towards FinFET. The issue is I think it's a little later in the year than last year.
Last year was a little earlier than normal. This year is a little later than normal, I'd say.
Yes, 28 nanometer was the majority of the spending, 28 nanometer the majority of spending in 20 14. If you look at 2015 spending, what we're projecting, it's by far very heavily weighted to 14 nanometer and 16 nanometer technology.
Our next question comes from the line of Srini Sundar with Summit, Hamburg.
Hi. My first question is what gives you any confidence that the merger will go through? And based on the prior approvals, what were the main points that you had to win to get the approval? Assume that I have not gotten the memo that you cannot talk on the merger.
Well, thanks for the question. As we said before, we really can't give you any more color than what we had discussed before. What we have said is that we are making progress with regulators. We believe that this is the right strategy for our companies to come together. We think there are it's a great strategic opportunity.
All of the people involved are very excited, but unfortunately, we really can't say anything more than that.
Sure. No problem. Second thing is on the what are the basic differences between the 1st generation FinFET to 2nd generation FinFET? And how would you guys be advantaged by going to the next generation of FinFET?
Well, the FinTech technology is really very heavily weighted. If you look at EPI for instance, the number of EPI steps continue to grow and that's just a tremendous opportunity for us. MVP steps also are that's a great TAM for us in FinFET. We're also seeing actually a next generation FinFET technologies, more opportunities in areas like implant. The customers are very focused on trying to drive down the cost of multiple patterning, but the number of steps are certainly increasing.
We have some technologies we talked about selective material removal being an area that we see very high growth and that's another area that we believe is going to be a big focus for our customers, certainly as they go to 2nd generation FinFET. So our strength is really around the transistor and that's what FinFET is all about. And so that leverages many areas where we have technology leadership.
Thanks, Srini. And Dustin, I think we have time for one more question, please.
Our last question comes from the line of Mehdi Hosseini with HIG International.
Yes. Thanks for letting me ask the question. Gary, I want to better understand your assumption for 3 d NAND. When I talk to your customers, they all argue that when 3 d NAND is scaled and commercialized, the CapEx per bit is actually going to go down because the density per wafer is going to go up dramatically. So how can I reconcile your growth expectation with what your company what your customers are saying, especially when we think about CapEx per wafer compared to bits of NAND manufacture per laser?
And I have a follow-up.
Okay. Yes. Thanks for the question. As I said earlier, when you look at I think we've shown also in Investor Days and there's been at least 2 customers that have publicly talked about CapEx spending and the breakdown of CapEx spending for planar versus 3 d NAND. The big change is that for the litho area, the CapEx spending is going to be lower.
The etch deposition and even epi for us, we're seeing growth in 3 d NAND. So the shift in the CapEx spending is going to be very significant we see very strong pull as they go we see very strong pull as they go to the 1st and second generation FinFET technologies.
I think related to that is it's a tool mix. It's more etch and deposition versus litho. The second thing is because of that and you have a different tool set, the level of reuse is less. So if you look from a reuse model, which they've been pursuing pretty effectively to basically a pseudo greenfield model with a different device type, it. And then one
Got it. And then one follow-up. Based on the filing information, it seems like the merger agreement is going to expire March 24. And given how FX is favoring Tokyo Electron, wouldn't they be more enticed to maybe change the details of the agreement because the exchange rate is going to their favor?
Yes. We really can't unfortunately, as I've talked about before, I think both companies strongly believe in the strategy. I think if anything, as we work together, we're more there's even a stronger belief that this combination will create value for customers and be just really a great opportunity. The working relationships are tremendous. And as I said before, we're making progress.
We can't unfortunately give any more color on the merger.
Well, thanks Mehdi 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.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may