Michael Sullivan - VP IR Gary Dickerson - President, Director & CEO Robert Halliday - SVP & CFO

Toshiya Hari - Goldman Sachs C.J. Muse - Evercore Stephen Chin - UBS Timothy Arcuri - Cowen & Company Farhan Ahmad - Credit Suisse Patrick Ho - Stifel Nicolaus Romit Shah - Nomura Securities Krish Sankar - Bank of America Joseph Moore - Morgan Stanley Harlan Sur - JPMorgan Weston Twigg - Pacific Crest

Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in 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. In a moment, we'll discuss the results for our second quarter which ended on May 1. Joining me are Gary Dickerson, our President and CEO; and Bob Halliday, our Chief Financial Officer. Before we begin, let me remind you that today's call contains forward-looking statements including Applied's current view of its industries, performance, products, share positions, profitability and business outlook. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, and are not guarantees of future performance. Information concerning these risks and uncertainties is contained in Applied's most recent Form 10-Q and 8-K filings with the SEC. All forward-looking statements are based on management's estimates, projections and assumptions as of May 19, 2016, and Applied assumes no obligation to update them. Today's call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in today's earnings press release and in our reconciliation slides, which are available on the Investor's page of our website at appliedmaterials.com. Next, I'd like to share a calendar announcement. Applied Materials plans to hold it's 2016 analyst meeting in New York City on Wednesday, September 21. Those of you joining us in New York will have the option to attend technology sessions with our general managers. The main event will be webcast live. And now, I'd like to turn the call over to Gary Dickerson.

Thanks, Mike and good afternoon everyone. I'm very pleased to report that we are making great progress with all the major elements of our strategy and expect to deliver record earnings in fiscal 2016. We've are focusing our investments on key customer inflections that are growing Applied Materials today in creating exciting opportunities for future growth. Our record performance is made possible by the outstanding team we have at Applied. I want to thank our employees around the world for their tremendous passion to create value for our customers and shareholders. I'll begin today's call by summarizing our strong results and outlook in the context of our longer term strategy for sustainable, profitable growth. Then I will outline our updated view on the market environment and what this means for us. I'll conclude with a short summary of progress in each of our major businesses. After that Bob will provide additional details about our results and the improvements we're making to the company's operating performance. At Applied Materials, our strategy is to develop highly differentiated materials engineering, products and services that make technology inflections possible. In semiconductor and display, the substantial changes in device technology that are taking place require significant materials innovation. I believe this puts Applied in a unique position. We have the broadest and deepest capabilities in materials engineering and our technology is unmatched. These advantages are helping us deliver the innovations that enable our customer success and move the industry forward. In recent years, we shifted $400 million of annual spending to improve our organizational capabilities and accelerate product development. Today, these investments are creating significant value for our customers and for Applied. When I look at our results and outlook, there are five key drivers of our performance I'd like to highlight. First, in semiconductor, our leadership businesses are delivering key enabling technology for logic and foundry customers. These businesses have high market share and highly differentiated products and are benefiting from robust levels of foundry investment in the second half of the year. Second, our growth businesses are making significant market share gains as the 3D NAND ramp accelerates. Our combined Etch and CVD revenues for Q2 are at a 9-year high. Third, we are very well positioned in China. Domestic Chinese manufacturers are ramping up their investments and multi-national customers are expanding their footprint in the region. As a result, we are setting new records for quarterly semiconductor orders in China. The fourth driver is our sustained growth in service where we are building upon 10 consecutive quarters of year-on-year growth. And fifth, we are successfully applying our advanced materials engineering capabilities beyond semiconductor, specifically in display. New display technology such as OLED are enabled by materials innovation. This is creating significant new market opportunities for Applied. I'll now give you our latest views on the market environment. While we're paying close attention to the global economy, at Applied, we continue to see strong demand for our products and services. This is because our semiconductor and display customers are focused on developing and ramping new technologies rather than simply building capacity. The inflection-driven investment our customers are making are highly strategic. They are battling for leadership and investing to ensure that they are ready as market demand shifts to these new technologies. In foundry, we expect investment levels for the year to be similar to 2015. We anticipate more than half of 2016 spending will be focused on the 10-nanometer node, as well as 7-nanometer pilot production. In addition, as new projects ramp in China, we see the foundry customer mix broadening and increasing investment in trailing geometries. This is positive for Applied because we have a 30-year history of leadership in China and we've built very strong customer relationships and a great regional team there. This quarter our revenues in China are at an all-time high. In memory, we expect overall spending to be more or less flat year-on-year. However, there are important changes in the mix that play well for Applied. Investment is shifting from DRAM demand and we see DRAM down at least 25% following very high investment levels in 2015. In contrast, we see NAND strengthening as the year progresses. Our latest adding [ph] will be 35% than 2015 as multiple customers accelerate their 3D NAND RAMs. 3D NAND is a great example of materials enabled scaling that plays directly to Applied's strengths. As I've said before, 3D NAND is all about depositing, removing and modifying materials with incredible precision. Because of this our available market at 3D NAND factory can be upto three times greater than for planer NAND. In the quarter we booked nearly $1 billion of NAND orders which is a record for us. In logic, we believe that spending levels will be very similar to last year and when we take all of these factors into consideration, we believe that 2016 wafer fab equipment investments will be similar to 2015 with some upside potential. I will now talk about the progress we're making in each of our major businesses. In semiconductor, I'm very pleased with our strategy and how our product pipeline is shaping up. We made solid wafer fab equipment share gains in 2015, even though the spending mix was not as favorable for us as it is in 2016. Based on the positions we're winning, I expect much stronger share gains this year. Across our semiconductor businesses, I see tremendous customer pull for our latest generation products. In CMP our new LK Prime System now has over 130 units at customer sites. This product is winning market share resulting in our highest quarterly CMP orders for a decade. We are also seeing a broader adoption of Cobalt in advanced interconnect schemes and this is driving demand for our Cobalt CVD systems. This is one of the factors that it's contributing to strong share gains in CVD this year. We continue to see rapid adoption of our SIM 3H platform launched at last year's SEMICON West. We project that we will ship around 700 chambers by the end of our fiscal year fueling strong conductor add share gains in 2016. I'm also very excited that customers are beginning to transition a number of our highly disruptive new technologies from pilot to high volume manufacturing. These include our selective removal products and Olympia ALD System. In service, we are making significant investments in our organization and capabilities so that we can deliver more value to our customers. These investments are generating a strong pipeline of new service products that help customers improve their device performance, yield and costs. We're on-track to grow this business for the third year in a row which I believe is strong evidence that our service strategy is working. In display, I'm increasingly excited about our opportunities and the unique position we have in this market. The major technology inflections that are taking place require materials innovation so our available market is expanding significantly. One great example of this is thin film encapsulation that protects an OLED device from air and moisture. The precision deposition of this film stack is incredibly challenging, and relies on Applied advanced materials engineering capabilities. Overall, we estimate that our opportunity in OLED is more than three times larger than for traditional LCD. I believe we're still in a very early innings of OLED but we're already seeing a significant impact on our business. This quarter our orders in display were an all-time record. To summarize, as I look ahead, I'm increasingly confident that we are in a great position to drive sustainable profitable growth at Applied Materials. Across the company, I believe we have greater opportunities and a stronger pipeline of enabling technologies than at any point in our history. We're investing more than ever to accelerate materials enabled innovations for our customers for our customers. We are maintaining a very positive outlook for 2016 because our customers aren't making inflection-driven investments as they race to introduce new technologies. These investments are both highly strategic and play directly to Applied's strengths. Now let me hand the call over to Bob, who will provide more details about our quarterly results, performance, and priorities. Bob?

Thanks, Gary. Applied Materials is extremely well positioned to deliver profitable growth this year and for the foreseeable future. In Q2 we generated orders of $3.5 billion, the highest in 15 years. Our strength is led by silicon systems which had $2 billion in orders with nearly half demand. And by display, which had record orders of $700 million. Our backlog now stands at $4.2 billion, and is broad-based with nearly half in silicon systems, and roughly a quarter each in services and display. Our silicon systems backlog is the highest in at least 9 years. Looking ahead, I'm confident that the investments we're making in differentiated products and services combined with our cost efficiency programs will drive record earnings. And I expect sustained performance as we help our customers drive their technology roadmaps forward, particularly in foundry, NAND and advanced displays. We have momentum in services, and we're improving our execution and operational performance across the board. Today I'm confident that we're on-track to achieve the earnings targets in our 2018 financial model. I'll provide a detailed update at our Analyst Day in September. But with the disruptive nature of our order strength, I'd like to give you some insights during this call. We're making very good progress growing our revenues. If recent demand trends continue, which seems likely, and by 2018 I believe we can meet or exceed our targets in Silicon Systems and Services. Through 2018 and beyond, we believe display, NAND and China will grow by more than we anticipated last year, and our positions in these growth areas are becoming stronger. I'm also confident that we will meet or exceed our goals for tax rate, weighted average share count and earnings per share. Relative to gross margins, addressed on our overall cost structure and on optimizing the gross margins within our product lines even as I display businesses strength in this year, I believe we can hold our overall gross margins flat with last year. Over the mode of horizon, we now see faster than expected growth in urgent display. The net profitability gains from this revenue growth should be very positive for us and we're committed to achieving our operating margins targets even with the impact of this mix change on our overall gross margin percentage. Regarding operating expenses, Gary outlined how we are gaining share in our existing markets and expanding our served addressable markets with strong customer pool. Today several of our customers are asking us to develop new technologies to support the Applied road maps and we are choosing to increase our R&D investments in certain areas this year notably in display. As we ramp up to support these new projects, we expect OpEx to increase by about $10 million sequentially in Q3 and stay at this level in Q4. At the same time we'll continue to be very aggressive in controlling and optimizing our spending to invest in sustainable revenue growth while increasing our profitability. Let me give you some insights into how we'd optimize our operating expenses. Between 2012 and 2015, we cut spending in G&A organizations by 27%. In the same period, we boosted the funding of new and disruptive products by $400 million. We did this by using G&A savings to fund R&D and by shifting spending from underperforming areas like found [ph], to areas where we can grow and gain share by enabling major technology inflections. Today our R&D to OpEx ratio is 67% which is up over 10 points relative to 2012. Now I'll comment on our second quarter results. Revenue of $2.5 billion was at the high end of the guidance range led by Silicon Systems. Non-GAAP gross margin of 42.7% was slightly higher than expected. Non-GAAP operating expenses of $575 million were within the range. Our non-GAAP tax rate declined to 14.4% as more profits would generate lower tax jurisdictions. We believe 15% is an achievable rate for the balance of the year. Non-GAAP EPS of $0.34 was the highest in four years, and the highest in eight years when [indiscernible]. Next I'll update you on our cash returns during the period. In Q2 we returned more than $1 billion to our shareholders. We used $900 million to repurchase over 45 million shares of our stock and paid $113 million in cash dividends. We ended the quarter with 1.1 billion shares outstanding which is the level we targeted in our 2018 model. We've now completed 95% of the $3 billion authorization we announced last April and we expect to complete the program in the current quarter. We remain committed to returning excess cash to shareholders using dividend and buybacks and we plan to discuss the buyback program with the Board of Directors at our upcoming meeting. Before I turn to guidance, let me share some observations and expectations surrounding our display business. Disruptive technology changes are happening in the display market that will increase customer spending this year and beyond. In the TV market, while there is sufficient overall capacity at this time, we expect additional investments in certain regions. In longer term, I believe that technologies now being piloted in mobile will be attractive in 3Ds as well. Such adoption would be very positive for us. Today customer demand for our display products is increasing, particularly in the mobile. As a reference point, over the past three years, our display orders were $750 million per year on average. Our display orders were $883 million in the first half of this year alone. The growth we're now seeing in display comes largely from new products we've funded and developed over the past few years. Based on conversations with our customers, we expect display order strength over the rest of 2016. Most display systems are very large, and also take two to three quarters to build, deliver, install in revenue. And customers are pulling for Applied to develop new display technology that I believe will significantly expand our market opportunities over the next several years. We will invest an additional new and disruptive products to capture these opportunities. And while our display orders and revenues will continue to be lumpy from quarter-to-quarter, I believe we will deliver sustainable growth overtime. We will have more to say about display opportunities at our analyst meeting in September. Now I will provide the business outlook for third quarter. We expect our overall med sales to be up by 14% to 18% sequentially. Within the revenue outlook, we outlook Silicon Systems net sales to be up by 10% to 15%. AGS net sales should be up by 5% to 8% and we expect display net Sales to be up by 70% to 90% to approximately $300 million. AES net sales should be flat to up slightly. We are modelling the non-GAAP gross margin percentage to be up by 50 to 100 basis points. Non-GAAP operating expenses should be $585 million plus or minus $10 million. The mid-point is up just 1.6% from the same period last year. And we expect non-GAAP EPS to be in the range of $0.46 to $0.50. The mid-point is up 45% from the same last year. This EPS guidance represents a new record that is significantly above any previous performance for Applied Materials. To summarize, while overall economic and semiconducting industry conditions are relatively flat this year, Applied Materials is uniquely well positioned. We plan to set new records in a number of areas including EPS for full year. We have significantly biased our spending to disruptive new products and customer support. And I believe we now have a great pipeline of new and emerging products focused on the key technology inflections. We also have strong customer pull in markets and regions that give us sustainable opportunities to deliver profitable growth in the years ahead. Now let me turn the call over to Mike for questions.

Thanks, Bob. To help us reach as many of you as we can, please ask just one question and no more than one brief follow-up. Let's please begin.

[Operator Instructions] Your first question comes from the line of Toshiya Hari from Goldman Sachs. Your line is open.

Hi, thank you for taking my question and congrats on a very strong guide. My first question is on the display outside of the business. In the past you guys have talked about increasing your stand by 3x over the next couple of years. I guess my question is how much have you realized already and how much is still coming going forward?

Sure, let me see if I can start and Gary can jump in. what we are seeing is two or three things helping us here. One, the overall market is going for spending. Two, opposition is growing. I don't think we have reached the culmination of our ability to grow and I think that's going to go on for the next several years.

Okay. That's helpful. My follow-up is on the core SSG side of things. In the quarter you just reported obviously NAND orders were up sequentially and I was surprised to see foundry down a little bit. On the NAND side where are you picking up share and on the foundry side is it starting to assume that orders start to pick up in the current July quarter? Thank you.

Yes, on the NAND business very strong pull from the customers as NAND moves from Litho enabled scaling to materials labor scaling so we see very pull for edge we are gaining new steps and very strong performance. Overall we believe this will be a strong year for Etch business will gain share and certainly in 3D NAND the growth there is significant. Deposition is another area, CVD is an area that's very strong in NAND. We have additional epi-steps in NAND. There are many additional CMP steps so there are number of areas where there is significant growth for us in 3D NAND and we look at this as a wave that will continue over the next few years. So it is really a great opportunity for Applied where our TAM is going up as you are moving up from Litho to materials and we are also significantly increasing our share in 3D NAND.

Thank you very much.

Your next question comes from the line of C.J. Muse of Evercore. Your line is open. C.J. Muse: Yes, good afternoon. Thank you for taking my question. I guess first question is on the Silicon front, couple of parts, first one is you talked upon upside potential till you flagged WFEL look. I would love to hear your thoughts there and then as you think about growing Share and Etch, very favorable mix in terms of Foundry as well as China and what you are doing around 3D NAND and how should we think about your growth in calendar 2016 relative to that flat to slightly up WFEL look?

Yes, I will try if I can jump in. we agree it's flat up this year. The year hasn't unfolded as we had hoped last November it's gone better and better for us frankly. If you look at it NAND has picked up, we now think it's up about 35% year-over-year. While DRAMs is probably down about 25%. Foundry is not up a lot this year, up somewhat but if you look at our position within foundry, it is really strong and then DRAM also gaining so if you go look at our position with each we are gaining share. I will give you a fact you may not have picked up on. Pre-2012 we were only over 15% in one of the four major groups when you look at NAND, DRAM, foundry and logic. This year we project to be over 20% so if you look at the NAND spending at $9.2 billion, our share is going up to probably under 15% to north of 20% this year and he spending is up to $9.2 billion whereas in the base shift 2012 was about $4.2 billion. So the market is up and our share is up significantly. And the NAND strength goes on for a number of years as you know by the end of this year we are only going to have about $375,000 wafer stacks converted. There is another a million wafer stacks out there playing on. If you go look at foundry, we anticipate being a reasonable year in foundry, but our positions done really well. Whether it's in Taiwan or lot of the activity going on in China. So we are gaining, we are doing very strongly. And then also logic we are doing well, leading into logic so the way the years laid out our positioning of our products in the market is at fastest growing whether it is NAND, strength in leading edge in foundry, strength in China and also strength in display is playing very well for Applied. So we expect within same gain shares.

Thank you, I will take the Etch question. So as I said earlier, we think that 2016 is going to be a really strong year for us in growing our Etch share. We have a very strong position, very strong position in 3D NAND conductor edge. So, as that business continues to grow, as that wave moves forward over the next few years, we are in a really great position and we have some of the most exciting products in this group that I have seen in my whole career. The same three, tremendous poll from customers in 3D NAND and also in other segments, we are winning new steps and really across the board for same three so very strong position there and also in selected material removal. We have very strong focus from customers and that business is also growing for us at a strong rate. So overall, we think 2016 is going to be a great year for Etch and again some of the strongest products I have seen in my career. C.J. Muse: That's very helpful, thank you. Sneak one quick one on OLED in. I thought your commentary on the TV set was interesting. When do you think you will start to see your first Gen 8 plus orders for OLED?

Right now what's driving the market in 2016 as we said earlier in the year, we sad earlier over 60% in our orders in revenues this year were going to be Mobile versus TV, in fact that's probably turned up to now over 70 now in terms of order rate. If you look at the big inflection that's taking around mobile and OLED, that inflection may come sometime in TVs but it's not unforeseeable to me in the future. C.J. Muse: That's very helpful, thanks.

Your next question comes from the line of Stephen Chin from UBS. Your line is open.

Thanks. Hi Gary, Bob, congrats on the execution. Question Bob on the comment that there may be display orders strength for the rest of 2016. Is the display visibility from a follow on order to a big Korean customer or do you have visibility from other display customers, perhaps in China who are constructing a lot of new display fab? It just sounds like the message is AMAT's total orders could be strong in the second half of the year. Just trying to get some color on that, thanks.

Well I think as Gary sort of referred to the waves, things that are happening for us now are not one quarter advanced, there is several inflections going on. In display it's around OLED, in NAND it's around V-NAND even in the China thing this has been going on for years and in the foundry strength we have seen on severance going to go on next couple of years. So these big inflections are going to go on for a number of years. For instance, in display we think it's going to go on for a while, it's not a one quarter event and we see the concentration in mobile in terms of your specific question on TVs I guess in China, was that the specific question? Yes, we think the display order rate will be fixed around for this year.

Okay, thanks Bob. Just a follow-up question on the foundry orders. Just to clarify do you think second half foundry orders because foundry orders are up in the second half, it is possible aim at total orders remain quite strong in the second half of the year too?

We think in our fiscal year, we think our orders in foundry remain quite strong. We think in the calendar year, split for the business we think foundry has second half weighted also. So we think second half is pretty good on foundry.

Okay. Thank you, Bob.

Your next question comes from the line of Timothy Arcuri from Cowen and Company. Your line is open.

Thanks a lot, I have two. I guess I am just looking at the upside to the orders and it really seems like it was driven from purely OLED and it looks like China memory stuff, so it seems like you are finally beginning to see these China memory projects move within your 12 month shipment window. So I guess my question really is how much can China add to WSE say next year because if you book like an income of $400 million to $500 million this quarter from those projects, that would argue that you could add maybe couple of billion to WSE next year. So I am wondering if that math works with you.

Yes, let me give you, you said have two questions. Let me strike them both. First in terms of the second quarter just ended we were pretty strong across the board in orders. We had a very strong quarter, almost a billion dollars as Gary mentioned. And in terms of the other devices foundry, D-RAM and logic we were reasonably strong actually across the board and display was very strong and services did well too. So our strength was pretty broad in terms of the China impact, the Chinese talk about spending $20 billion to $30 billion of over 4 to 5 years. We are seeing record revenue for ourselves in China this period and it's gone up and our expectations have gone up every quarter basically so in terms of they spend $20 billion to $30 billion over 4 to 5 years. How much is incremental? That's about $4 billion a year roughly, $5 billion a year. I would say for the next three years you could see some maybe half of it incremental. I think it provides an underpinning for overall demand so that you feel pretty comfortable that next year is probably a good 32 year if you guess because you got this underpinning of good NAND, good China, I think the second wave of 10-7 is okay. D-RAM I am not sure about.

Yes, one other thing I would say is China is probably our strongest region relative to our position with both the domestic companies and multi-national companies and as Bob said the momentum just keeps building. We have doubled revenue in china over the last 2 years and I am spending a fair amount of time there myself and certainly you look at what's happening there now and discussions for future projects. As Bob said, multi-year wave opportunity in terms of China. Hard to say exactly what the number would be but it is definitely going to be up a fair amount.

Got it. Thank for that and then I guess follow-up is I know previously you guys talked about 3D-NAND installed target of 350,000 and 400,000 industry-wide actually this year, so it seemed like maybe the industry was going to add roughly 200,000 this year. So my question is how much of that is conversion versus how much of that is Greenfield? Thanks.

Sure. This year we came in to the year with 150,000 installed. We think the year goes up to 350,000 to 400,000. In terms of the mix we think ads, capacity ads probably a 100 to 150 converts to 100 to 150 in a year.

Great, thanks so much.

Your next question comes from the line of Farhan Ahmed from Credit Suisse. Your line is open.

Hi guys, congrats on the great quarter. One question on your spending pattern on NAND. Do you still think it's a first half dated this year or do you think it will go away in second half and the incremental strength in the NAND is stronger in the, is it more in the second half you are seeing the uptake or was it already captured in the bookings in your first half?

Yes, in terms of the NAND split the first half is stronger for the NAND but the second half is pretty good so we think it's more first half weight but does fall for second half, pretty good. What was your second question?

Just the global uptake you are seeing in NAND, you mentioned the NAND spending is now, you expect it to be stronger than your last quarter call and I just wanted to understand is I take more in the first half or the second half?

Yes we are up to $9.2 billion on NAND right now and I think last quarter we brought half a billion less may be. We are seeing broad based spending, some stuff was pulled into the first half and second half is staying strong.

Got it. And then regarding China like obviously it's the strongest region this quarter but even going back it seems like it's tracking to the second strongest region for you guys for a while. I just wanted to understand in terms of your exposure to China how much of that this quarter was display versus semi-conductors, if you can provide some color on that it would be really helpful?

Yes, we were particularly strong in semi-conductor this quarter in China. We see despite has been very strong but right now the TVs in China the order rates are not as high as it was.

Got it, that's all I have. Thank you.

Your next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open.

Thank you very much. First, Gary and Bob in terms of the foundry orders and outlook that you have, have you started seeing any pick up in 10 nanometers or are you still seeing like the first quarter, some of the orders coming in from the 28 nanometer nodes?

Yes, we are going to have a strong 10 year and then going to have some 7 also. In terms of the split we think you came into the year with 10 & 7 at about 10,000. We think you would go out of the year maybe 60, some may add 50 concentrated in Taiwan and then if you look at it, what's unusual about this Patrick is some of the trailing edge stuff is pretty strong. You see fair amount of over 40 and above and you see pretty good 28 year also and a lot of that is Chinese impact.

Great. And your shareholder return you mentioned that you are completing your shareholder stock buyback this current quarter. Can you just give perhaps a little bit of update of what do you think you will do on a going forward basis?

Yes, we are going to talk about this at the Board of Directors meeting. Share is obvious. We are very committed to shareholders returns, cash returns in fact in the last year we have returned 250% of free cash flow so we can't stay at that level. We are already committed and we also said in the call we will beat our targets of weighted average share in the model in 2018 so you know we are almost there now so we will continue to get better on that. In terms of the magnitude of the debt we have to talk to the board but we are committed to the shareholder returns. We are committed to beating away average shares in the model and the details of it will have to go through with the board in June.

Right, thank you.

Your next question comes from the line Romit Shah from Nomura. Your line is open.

Yes, thank you and congratulations on the success here. Bob you have kind of given us in bits or pieces but obviously just hoping you could overall give us a sense of how you are thinking about second half calendar revenues over the first half on one hand with the strong July guide you have got, arguably a tough comp. On the other hand, I did notice that your revenue growth guidance for July is well below your growth in your backlog which kind of implies that sales should be strong for the balance of the year. So just how are you thinking about second half calendar year versus first half overall?

Well, a piece together data you already have just to give you some more pieces to the puzzle. Our backlog at the end of the quarter was $4.2 billion and we said in -- if we're going to stay [ph] right now in 73% of the backlog is shippable in the next six months. And then if you look at it on the semi side, the lead times and that stuff typically not so long, on display we've said that the lead times historically been six to nine months, now we're able to increase our outlook for display revenues next quarter because we're trying to pump a little bit in the supply chain, so we're optimistic that display can continue strong in revenues for the rest of the calendar year. So we are feeling pretty good that our second half will be up from first half and it will be well in the year. And the underpinnings that we talked about our strength and display where we have the orders in backlog and figured that strong, in semi it was till we think that share gains goes up this year and as this in semi equipment, and services will get strong for the rest of the year, it will continue to be strong. And -- so we feel pretty good about the second half.

Great. And then just on display, as the revenues improve how do we think about incremental margins on this business, I think it's averaged about 20% but we know that it does bounce around.

Yes, we think the operating margins prospectively for display are pretty positive. Right now we're ramping a lot of things, we're ramping new products, we're ramping production. So we think over the time as we basically said or implied in the financial of the company, the display operating margins for the company will be similar to the overall average for the company. Now both display and AGS have slightly different business model in FSG and that the gross margin tend to be little higher in FSG but the operating expenses metrics are less in AGS and display. So your net-net come down about the same operating margins.

Okay, thank you.

Your next question comes from the line of Krish Sankar from Bank of America. Your line is open.

Hi, thanks for taking my question, I have two of them. First one either Bob or Gary, out of the $700 million in display orders, how much of them was for OLED specifically? And would most of these be revenues in fiscal '17. Can you give some color on that and then I had a follow-up.

Sure. What we said earlier in the year that of our display business this year, over 60% was going to be mobile and in fact it's probably over 70% now and the vast significant majority of that -- the great majority of that is focused on the OLED market this year in terms of the order rate. In terms of when it revenues, we anticipate as we guided that our revenues will be up next quarter, we are positive out of revenue opportunities for Q4 and we think we'll do very well in display next year too, there won't all obviously revenue in next six months -- three to six months but we feel good about our opportunity on a long-term basis in display.

Got it. And then as a follow-up question for Gary, you guys are getting some traction in Etch, especially on the 3D NAND side. Can your current Etch tools actually do 96 or 128-layer 3D NAND or do you need to develop new tools? I'm just trying to figure out the R&D profile on Etch or FSG like two years down the road.

Sure. So let me first also add to Bob's comments on display and then I'll get to Etch. So I really think it's important for people to understand where are the early innings of this opportunity in terms of the OLED wave. And relevant to the questions on sustainability, if you look at the waves that are really driving our business in display, NAND, China; we're in the really innings of all of those different ways. We are continuing to invest and we've expanded our TAM by a factor of 3, we have an opportunity to expand our TAM more in the future. So that went out really, very optimistic that we're going to continue to drive significant growth in display going forward. And then in Etch, we're in a very strong position in Etch to gain share in 2016 and beyond. As I said before, the products that we have; SIM3, selective material removal products, it's almost on a weekly basis I hear new opportunities, very strong poll across the board all customers for these new technologies and so relative to 96-pairs or over 100-pairs we have poll from customers in some of the most critical applications were PTOR/DTOR in some of the most critical applications. So I'm extremely optimistic that we're going to continue to gain share in Etch in 2016 and beyond.

Thank you.

Your next question comes from the line of Joe Moore from Morgan Stanley. Your line is open.

Great, thank you. I'm wondering if you can give us R&D as a kind of puts and takes on gross margin in the back half. I would think that the ramp will display in 3D and Etch in the make shift towards memory, all will be sort of headwinds in gross margin, just -- anyway we should think about that?

Sure, that's a good question. We are working a lot on gross margins. Let me give you -- year-end analysis you might find interesting. So the company gross margins as you know were 40.9 in 2012, 42.1 in 2013, 44.1 in 2014, and then we went down a little bit around 43 last year, I think it would be probably about the same next year. I guess we're 42 last year. And so I feel when we're making a traction or not, so I have the guys run all of our BUs and all of our segment with current gross margins by BU segment with 14 mix. And if you take the 14 mix, when we are in 44.1, the gross margins this year would be 44.7 which is up six times from NAND and north of our committed model 44.6. So what you see is within virtually all the product groups, and within -- exercise the cost reduction and negotiation, we're doing pretty well actually, and it is in fact mix the challenge for us. So I do think that as I said earlier, for instance display is a similar operating margins to company but lower gross margins. In Etch we're doing great in terms of growing profitability and market share, it was all lower gross margin also at this stage. So those are headwinds in our phase this year but we think we'll offset them and still hit the roughly 43% on the end as we said earlier in the year.

Okay. And can you give us some idea how much different the display gross margins maybe just qualitatively and does that change when you're sort of three times on NAND that you've been?

Yes, we haven't gone into that level of detail. We think overtime that gross and operating margins in display will trend up but we haven't been specific on the numbers.

Okay. Thank you very much. Great quarter.

Thank you.

Your next question comes from the line of Harlan Sur from JPMorgan. Your line is open.

Hey guys, good job on the quarterly execution on the strong guide. Getting the personal environment in DRAM, there seems to be more pressure on your DRAM customers to move to the 1X nanometer node. So I guess question here is, are you starting to see of the early spending for 1X in your second half pipeline? And how do you see DRAM spend second half versus first half?

I'll start and Gary can jump in if he wants. We think DRAM was front-end loaded, first half loaded on a calendar year, softer in the second half. In terms of our outlook for DRAM specifically, we think it's stronger in the first half than second half. We have speculation about some of that early spend in DRAM but it's not in our line of sight yet.

Got it, thanks for those insights. And then on OLED, the team obviously has been talking about $3 to $4 opportunity versus the more from silicon, you've also on this call have been talking about some new tools that couldn't even drive further increase in your OLED term opportunity, thin film encapsulation was a good example of that. So I guess the question here is, are you guys already sampling some of these new tools? And when should we hear about formal introduction of these tools and when could they start to add to your revenue streams?

Thanks for the question. So you mentioned thin film encapsulation, and certainly that's a great example, materials engineering enabling new capabilities for our customers and also growth for Applied. So as you said, we talked about that being a great opportunity and that part of what we're seeing in terms of very, very strong opportunity in display. We do have other areas that we're working on but we're not really ready to forecast or signal when those technologies will be ready but I would say that that team in display is an incredible team of people, they've demonstrated that they can grow in these major inflections and I'm very optimistic that this way that we're seeing in display OLED is a multi-year wave and then I really believe that we have a great opportunity to not only ride that wave but expand our TAM and share in display. So very, very optimistic about that business.

I'll just add, the team's done a great job, number one. Number two, the market is going to grow for a while and are going to capture with products we're still pushing down the pipe and look very optimistic it's going to grow. So self-addressable market looks good too.

Thanks, Gary. Thanks, Bob.

Your next question comes from the line of Athis Mallick [ph] from Citigroup. Your line is open.

Hi, thanks for taking my question and good job on the quarter. If I look at your foundry orders were -- the last six quarters have declined on a year-over-year basis and I'm just trying to reconcile that with your expectations of second half being better for foundry and given the few sentence you said on the call that 10-nanometer could be a shorter demand node as customers are keeping out more products for the 7-nanometer. So I just want to understand the risk in the second half foundry expectations, is it more China weighted or more Tier-1 foundry weighted? And then I have a follow-up.

You've got three questions; and the annual trend going back a few years half of this projections in the next year. So if you look at the trend maybe you're correct that total foundry spending from 2014 was down to 2015, down -- sort of flat, up a little bit in 2016. I don't have 2013 in front of me, I think it was similar to -- here is 2013, not too much total though [ph], there it is -- 2013 was about the same. So 2013 and 2014 was about the same, down a little bit 2015, down a little bit 2016. So that's the annual trend. If you look at the year, we're pretty confident that foundry is strong in the second half based on the timing of the specific summit. Now what you have going along which is a little different than a lot of people were concerned about sort of the dynamic of what happened in 2014 going to 2015 and what could happen in 2016 going into 2017. So if you don't look at 2014, when we turn down to 2015, this sort of had a latent excess capacity, right. You had 28-nanometer business have been purchased a year or two before capacity for big foundry manufacturer. And then a lot of the capacity was added very aggressively in 2014, so 20-nanometer for the same found-customer. So that you had latent potential capacity there that hit us in 2015. And that also hit us a little bit with another foundry customers who thought they could get some of the business. You don't have the same type of dynamic this year because you're in the very early stages of the buildup, 10-7 to the overbuild you had from the previous note, say 28 in this case, you don't really have that as much from 2014-2016. And thirdly, they haven't ramped that much on at this point. In 2014, at the end of 2014 they had about 100,000 wafer starts total installed of 20, then in this year on PAN alone, they might have 50,000. So that would 55,000 or 60,000. So you're in the early stages; so one, it's been trending down over years, primary because of there is capacity issue there and growth is little bit down. Second, is the second half good this year, yes it is, because we can see it. Third, do we have this big capacity issue next year? Not so much because it's different and related to that, an unusually high amount of spending in foundry this year is at 40 and above and 28 is pretty strong because of the China problem. So I think catching all on the foundry, sort of a floor is the China problem with adding to foundry floor.

Thanks, and I have a follow-up. Is your ability to ship revenue display if it being constrained by other display makers ability to capacity ramp? For example, we've heard some of application tools might not be able to ramp capacity as quickly as the market is demanding?

I've said right now, it's dependent on that.

Thanks.

Your next question comes from the line of Weston Twigg from Pacific Crest. Your line is open.

Hi, thanks for taking my question. Just wondering if you could help us understand the 3D NAND customers migrated from adding some Greenfield capacity this year to more planar NAND conversions. Can you give us an idea of what you're revenue opportunity is, maybe per 10,000 wafer starts of Greenfield 3D NAND versus planer conversion 3D NAND capacity?

Sure, so this is confusing as hell and I am going to try make it half a confusing as hell. So, I am going to give you really simple numbers first. In 2012 total NAND spending was $4.2 billion. We think total NAND spending is just $9.2 billion. Applied Materials share that spending in 2012 was a little under 15%. Applied Materials share that spending over 20% this year. So our revenues are going to go from about $600 million a NAND to close to $2 billion for its share. So the market has more doubled but our revenues have more than tripled because our share is up 50%. Next observation, I will give you is if you compare Greenfield to Greenfield, I am happy to do that for you. A $100,000 wafer stock last planar Greenfield is $3.5 billion. A 3D Greenfield 48 per is $5 billion. But what you kind of have to model is what would they actually buying? So in 2012 there was a mix of ads and converts right and so if you go look at the data, it's actually fair amount of adds oddly enough in 2012 but for us as a company we mostly were getting the shrink money. Mostly that money was more weighted on converts for Litho so do you go look at it and you go to a 50-50 model now roughly between converts from planar in 3D, our revenue opportunity for where we were in the three days is up more than 3x. And the simple math of what's going on was is 3x yields, it should be even more because the total spending is up. It will be more but there is unusually high spending on planar adds in 2012 so our revenue opportunity apples to apples was kind of over 3x.

All right, I think I got all that. And the other piece of the question or the follow-up question is how much 3D-NAND capacity industry can realistically absorb each year. I would flooding the market with 3D NAND since you get more bits on a wafer.

Well, what's going to happen is I believe and I think many people believe that is 3D NAND matures and becomes even more reliable and reduces its cost point particularly going to 48 an 64-layers, it's going to significantly expand its market so you kind of grow these drives. So right now we have, I think we had 1,394,000 wafers found in the world of man and through the end of last year 150,000 converted to about 375,000, I think the vast majority of it is converted over time because they are not going to be able to sell that 2D device very well and it's not going to be competitive. One other thing I will add on 3D NAND overall, our position in 3D NAND is better than any other company. If you look at our strength in Etch the share gains will become evident this year very strong. We are number one in deposition. We have additional CMP staffs, Epi staffs. So again, if you look at our opportunity in 3D NAND. Really we are in a unique position so as those Greenfield factories ramp or the conversion happens. If you look at the spending profile, the spending profile is completely different than it was at 2D NAND.

Funny thing you wouldn't intuitively say is that in 2D our market share of conversions was less than our market share of adds. Because they are mostly litho tools. If you go to V-NAND our market share is high in adds but even higher in converts because they don't have to buy new [ph], okay. So they will convert model the total comes down but our share is pretty good actually.

All right, makes sense. Thank you.

Your final question comes from the line of Jerome [ph] from BNP Paribas. Your line is open.

Thank you for taking my question. Could you just give us a little bit color on your…

Yes, we have a very strong momentum with ALD and we are pretty much on track with what we have previously communicated. Very strong position and leading logic and foundry customers. They are seeing device advantages as they are going to the most advanced technology nodes so we look at this as a very good opportunities. One of the areas that will fuel our share gains in 2016.

Thank you.

Okay, great. Jerome, thanks for your question. We would like to thank everyone for joining us this afternoon. A replay of this call will be available on our website beginning at 5 PM Pacific Time today and thank you for your continued interest in Applied Materials.

This concludes this conference call. You may now disconnect.