Applied Materials 2Q15 Earnings Call Notes

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Outlook flat to last year with potential downside risk

“While progress towards our strategic goals and financial model remains on track, changes in the business environment over the past few weeks have created some near-term headwinds. Looking at the market as a whole, we now see 2015 wafer fab equipment spending being approximately flat relative to 2014, with potential downside risk. The most substantial revision to our outlook is foundry spending, where we have lowered our estimates for the remainder of the calendar year. This is primarily due to customers managing excess inventory, improving their yields, and reusing equipment.”

Foundries are aggressively pursuing 10nm technology

“While we see a pause in capacity additions, the leading foundries are still aggressively pursuing 10-nanometer technology, and we expect this to become a key battleground in 2016 with the buildout of pilot production”

In summary fab spending trending lower than expectations

“In summary, 2015 wafer fab equipment spending is trending lower than our prior expectations. Our focus on technology inflections and new products is producing revenue and share growth opportunities, notably in memory. But the demand mix presents gross margin challenges in the short term.”

Customers are getting higher tool utilization and more reuse

“You see our customers talking about it. We’re getting higher tool utilization. Samsung talked about it earlier in the year. TSMC has started to talk about that, higher tool utilization, more tool reuse. So that’s across – and even inventory in the channel, you see some data on that. So I think what you have right now is a problem in fuller utilization, more efficient utilization of tools.”

We’re seeing it more because we’re earlier and heavier in the cycle

“In terms of why do we see it and other people aren’t talking about it, we are a month later, number one. Number two, if you do look at the mix of Applied tools, sometimes they’re about a little bit earlier and heavier in a cycle”

We have two primary US competitors, one is more memory centric, the other more logic centric

“I’ll tell you another way you can triangulate on what we’re saying. We have two primary U.S. competitors. One is generally thought of as more memory centric; one is thought of as more foundry and logic centric. And if you look at it, the person who is more memory centric probably a month ago saw a little bit better outlook than we did. And the one who is more foundry and logic centric saw a significantly less optimistic, I believe, outlook than we did.”

Been positioning company around inflections

“we’ve been positioning the company around the major inflections. So if you look at the way we structured the organization, the way we move the investment within the company in patterning, for instance, in etch and CVD, we’ve got the highest CVD orders ever in the history of the company; etch, the second highest orders in the history of the company this last quarter. And our memory share is increasing.”

Despite macro, increasing capital intensity probably means it works out ok

“in listening to our customers, 10-nanometer is going to be a pretty big spend year for them next year. So the rough mathematics is that if you look node to node, so the 32-nanometer to 28-nanometer versus 2016 14-nanometer versus 10-nanometer, wafer starts might be down a little bit, maybe 10% per launch, but capital intensity per node is up about 20%, so the volume versus capital intensity is still not bad. I think the problem we have right now is we get this reuse.”

“the other thing you have to go look at is all the macro stuff, which is beyond my pay grade. What’s going to happen in China in phones and the next Apple phone? I don’t know that stuff. But in a reasonable demand environment, the increasing capital intensity and the importance of 10-nanometer to our customers and the fact they’re absorbing the tools at this point means it’s probably okay.

Customers are moving to 3-D it going to happen, it’s just timing

“3D NAND we’re pretty bullish on actually because this is a technology transition which is more akin to a wafer size transition because when they have to switch from 2D to 3D for both device performance. And you can’t keep shrinking; electrons in a cell, you can’t get any smaller, and so you can’t effectively. So they’re going to go to 3D. It’s like 300-millimeter, you knew customers were going to go; it’s just timing. So they waited a year or two, but it’s happening. You can see the numbers going up rapidly, and everybody says it. So I think if anything, you’ve got a solid baseline of predictable spending that’s pretty healthy in 3D NAND for a number of years.”

Data center positive for DRAM

“DRAM bit growth is pretty good, so I think DRAM is okay. And the other thing helping DRAM and memory in general is the whole data center, big data, cloud stuff is definitely a positive, definitely.”

Logic hasn’t been high growth in a while

“Logic hasn’t been high growth for a while. It’s mostly driven by PCs. And for Applied, it isn’t that big either. So that one, we don’t think about it every single day because it hasn’t been that volatile in the last few years.”

Foundry driven by mobile, IoT

“if you get pretty good consumption of mobile devices and related things like that, and even some of this Internet of Things stuff is picking up frankly, then you’ve got healthy foundry demand.”