Michael Sullivan - Vice President, Investor Relations Gary Dickerson - President and Chief Executive Officer Bob Halliday - Senior Vice President and Chief Financial Officer

Tim Arcuri - Cowen and Company Romit Shah - Nomura Securities Farhan Ahmad - Credit Suisse Stephen Chin - UBS Securities Atif Malik - Citigroup Krish Sankar - Bank of America Merrill Lynch Harlan Sur - JPMorgan Patrick Ho - Stifel Nicolaus & Co. Weston Twigg - Pacific Crest Securities Joseph Moore - Morgan Stanley Edwin Mok - Needham & Co. Sidney Ho - Deutsche Bank Craig Ellis - B. Riley& Company Amit Daryanani - RBC Capital Markets Mehdi Hosseini - Susquehanna Financial Group Jagadish Iyer - Summit Redstone Partners Jerome Ramel - Exane BNP Paribas

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 third quarter which ended on July 31. 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 August 18, 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 remind everyone that Applied Materials plans to hold its 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 Applied Materials delivered record earnings in Q3. And with our orders also at an all-time high, I’m confident that we can beat this earnings record again in our fourth quarter. I want to thank our employees for all their hard work that has contributed to these outstanding results and their passion to keep raising the bar. I’ll start today by outlining the key factors supporting these record levels of performance and describe how our strategy positions Applied for sustainable long-term growth. I’ll also share our latest view on our markets in detail why Applied has a positive outlook for 2017 and beyond. I’ll conclude with brief updates on each of our major businesses. After that, Bob will provide additional details about our results and outlook. In both semiconductor and display, we see dramatic advances in technology taking place. We are in the early stages of large multi-year industry inflections that are driving growth in our business today and creating new opportunities for the future. First, foundry and logic customers are making significant innovations in transistor and interconnect for 10 and 7-nanometer devices. This plays to the strengths of our leadership businesses, including Epi, PVD, Implant, CMP and RTP, where we lead the industry with our unique capabilities and high market share. As customers move to 10-nanometer technology, the available market for these leadership businesses grows by around 25% compared to the previous node. The second key inflection is 3D NAND. This is a materials-enabled technology that significantly expands our addressable market with innovative new products we are providing customers with the advanced solutions they need for depositing, removing, and modifying materials with incredible precision. As a result, we are winning significant share gains as the industry shifts from planar to 3D technology. By the end of this year, we will have grown our share of total NAND spending by almost 7 points above our 2012 baseline. The third big wave of investment is China, which represents an important long-term growth opportunity for the industry. Applied has been working in China for 32 years, and during this time, we’ve established the strongest position in the region. While the build out of China’s semiconductor industry has only just begun, our semiconductor orders in revenue have already doubled over the past two years, and we’re on track for a record 2016. The fourth big driver for Applied is organic LED displays. OLED is also enabled by materials innovation and that makes our available market opportunity more than three times larger than for traditional LCD. OLED is the key for high resolution low-powered screens with faster refresh rates. We expect it to become the standard for virtual reality capable phones and headsets. At Applied, our strategy is to develop highly differentiated materials engineering products and services that make new technologies possible. As our customers technical challenges become more complex, it’s the breadth and depth of our capabilities that sets us apart. By building on these strengths, we are outperforming our markets today and creating a foundation for sustainable growth over the years to come. We are making great progress with all of the key elements of our strategy. First, we have strengthened our organization and processes in the field. In the past three years, we have increased the number of technologists and engineers directly supporting customers by 50%. This allows us to see inflections earlier and define winning products in a more repeatable way. Second, we have increased R&D to accelerate new product development to provide the materials innovations that our customers need. We have a strong pipeline of differentiated enabling technologies that are winning in the marketplace and extending our innovation leadership. Third, we’ve increased our focus on advanced service products. We are delivering more value to our customers, and as a result, our service business is growing to record levels. Fourth, we are successfully applying materials engineering beyond semiconductor. In display, we’re on track to deliver more than $1 billion of revenue in fiscal 2016 with significant opportunities for future growth. I’ll now provide our market outlook. In our discussions with customers, they describe near and longer-term drivers for their business that support sustainable growth and investments. These include increasing silicon content in smartphones to support advanced features, explosive growth of data for social media, 4K video, and IoT, that’s fueling demand for memory. And most exciting of all, emerging categories, such as virtual and augmented reality, artificial intelligence, and smart vehicles that create new platforms that demand high-performance computing, advanced memory, and better displays. Within this environment, we see customers battling for leadership and making strategic investments to ensure, they’re in winning positions as demand shifts to these new device technologies. This is especially true in memory, where we see a broad base of customers accelerating their 3D NAND road maps. As a result, NAND investment is getting stronger and we now anticipate that spending in 2016 will be 40% higher than last year. We’re also seeing foundry investments strengthening and now expect spending for the year to be 5% to 10% higher than in 2015. While more than half of the spending is focused on leading edge 10 and 7-nanometer technologies. The foundry customer mix is broadening, as investments in trailing geometries increase, particularly in China. In logic, we now believe 2016 spending will be marginally lower than 2015. And in DRAM, we still see spending coming down, at least, 25% from the very high levels of investment last year. Overall, we now expect 2016 wafer fab equipment investment to be slightly above 2015, and as we look further ahead, our early view is that 2017 could be higher. I will now talk about the progress we’re making in each of our major businesses. In semiconductor, we see strong demand across the Board. Our quarterly orders and revenue are a 15-year high. And for fiscal 2016, we expect our revenue will be around $770 million higher than 2015. This gives me high confidence that this will be a strong shared gain year for us. What I’m most excited about is our pipeline of innovative new products. Two great examples are the products we launched last month. Our Selectra system is the industry’s first extreme selectivity etch tool. This disruptive etch technology enables precision materials removal that does not damage the increasingly delicate structures in advanced logic and memory devices. Selectra has great customer poll and we see significant growth in applications at future technology nodes. By the end of the year, we expect to have shipped more than 350 chambers to a broad set of customers. I’m equally excited about our PROVision system, which is the industry’s most advanced e-beam inspection tool. E-beam is the fastest-growing segment in the inspection market. The market doubled in size from 2011 to 2015 and is set for significant future growth. We see very strong demand for PROVision and have already shipped more than a dozen systems. In service, our strategy is to deliver more value to customers with advanced service products that are focused on improving device performance, yield, and cost. Our team is doing a great job. In the third quarter, revenues were at an all-time high. When we look at year-on-year comparisons, we have grown our service business for 11 consecutive quarters. In display, our capabilities in large area materials engineering set us apart and we have tremendous momentum. The major display inflections are made possible by materials innovation and our available market is expanding significantly. We are in the initial phase of OLED investments and this opportunity is layered on top of solid demand for our leadership display products for TV and mobile. As a result, for the second quarter in a row, orders and display are at an all-time record. Looking further ahead, we’re increasingly excited about DR and AR, as it has broad implications, not only for display, but also for semiconductor. Leading companies in Silicon Valley and around the world are making big investments in this area, and our technologists are engaged with them as they develop their roadmaps. We will spend more time covering this topic at our Analyst Meeting in September. In summary, I strongly believe this is Applied’s time. We are performing better than ever delivering new records, and in a great position to sustainably outperform our markets. There are combination of factors that are contributing to our success. We identified large multi-year inflections early. We are making great progress with the major elements of our strategy, enabling us to unlock the full potential of Applied. We’ve made significant investments in our capabilities and products to extend our innovation leadership and we are executing well across the organization. Now, let me hand the call over to Bob, who’ll provide more details about our quarterly results and performance. Bob?

Thanks, Gary. In Q3, Applied demonstrated that we are growing faster than our markets and accelerating our profitability. We delivered the company’s highest earnings per share surpassing our record set more than 15 years ago. Gary talked about the strategies that are helping us to anticipate major inflections, deliver more valuable products and services and grow in attractive new markets. I’ll describe some of the benefits that our strategies and execution are having on our financial performance. And I’ll do this by comparing our most recent quarter to Q2 of 2011. I think this is an interesting comparison, because Q2 of 2011 was our best quarter since 2000, because revenue was nearly the same in both periods. Under our new strategy, we’ve increased our semiconductor systems revenue by 23% to the highest level in 15 years. We’ve put our services business on a growth trajectory and increased our display net sales by over 50%. We have significantly reduced our investment in solar, which is down from 22% of revenue to only 2% today. And we’ve increased our non-GAAP gross margin by 1.8 points. We’ve also cut our tax rate and reduced our share count. As a result of these and other improvements, we delivered a 32% increase in non-GAAP earnings per share this quarter versus Q2 of 2011. And we did this while investing 30% more in R&D. In short, we demonstrated momentum in Q3 delivering higher earnings power at similar revenue even while investing significantly more in new products for future growth. And today, our momentum is accelerating. In Q3, we generated record orders of $3.7 billion and we now have record backlog of $4.9 billion. We’ve grown our semiconductor orders and backlog to the highest level in 15 years, and our display orders and backlog to the highest level ever. We’ve grown our service orders by 9% year-over-year and our backlog by 18% year-over-year. We’re also making excellent progress towards our 2018 financial model. We’re approaching our targets for revenue across semiconductor, services, and display. Today, we feel even more confident that we can hit or exceed our goal for WFE market share. We’re making additional progress in gross margin coming in at the high-end of Q3 expectations. We’re improving our efficiency even as we significantly increase R&D funding for new products. In fact, we’ve reduced our OpEx to sales ratio to the lowest level in five years. We increased our non-GAAP operating margin by 3.6 points this quarter to 22.8%, which is the highest in five years. We’ve made further progress with our tax structure. If our geographic sales patterns continue, we now believe that we can sustain a non-GAAP tax rate of 12.5%. We achieved our share count objective ahead of schedule. And we remained opportunistic with the buyback program, repurchasing 9 million shares in the quarter at an average price of $21.88. I hope you’ll join us for the Analyst Meeting, where I’ll give you more insights into our progress and momentum. Next, I’ll explain our segment reporting changes. Effective in Q3, we expanded our Display segment to include roll-to-roll web coating systems, which were previously in ES. The segment is now called Display and Adjacent Markets. We’ve also moved display equipment upgrades from AGS to display. These changes will enable us to realize technology market and management synergies. Applied’s remaining solar business is now included in corporate and other and we no longer report ES as a segment. The Semiconductor Systems segment is unchanged and 200 millimeter equipment continues to be included in AGS. Our earnings release includes the information you’ll need for your models. Here are some of our segment highlights for Q3. We grew semiconductor systems revenue to the highest level in 15 years. We increased the non-GAAP operating margin by more than 5 points sequentially to 31.1%, which is the highest level in four years. In Applied Global Services, we set a new revenue record of $657 million. In display, we recorded record orders of $803 million with more than half coming from projects in China. Compared to last quarter, we increased display revenue by 67% and display operating margin by 3.5 points to 20.1%. Moving to the balance sheet, we generated $981 million of cash from operations. Profitability and cash flow management were stronger in the quarter and our year-to-date operating cash flow was $1.7 billion, or 22% of sales. In the quarter, operating cash flow was 35% of sales. Now, I’ll provide our fourth quarter guidance. We expect our overall net sales to be up by 15% to 19%, sequentially. Within this revenue outlook, we expect semiconductor systems to be up by 19% to 23%, sequentially, AGS should be up by 3% to 6%, and display should be up by 30% to 40%. On a year-over-year basis, each of our businesses is on track for strong quarterly revenue growth. Using the midpoints of our Q4 guidance, we forecast that semiconductor systems revenue will be up by 45% year-over-year, with AGS up 12%, display up 80%, and the total company up 39%. We expect Q4 non-GAAP gross margin to be approximately flat sequentially. Non-GAAP operating expenses should be $600 million plus or minus $10 million and lower as a percentage of sales. And we expect non-GAAP EPS to be in the range of $0.61 to $0.69. This earnings guidance represents a new record for the company and a doubling of last year’s Q4 performance. In closing, I believe our momentum is sustainable. Let me explain why? Our Q4 guidance reflects how uniquely well-positioned the company is a major inflections, including in 10-nanometer and 7-nanometer, 3D NAND, OLED and the Chinese market. While customer spending patterns will continue to vary from quarter-to-quarter, we are growing faster than our markets and accelerating our profitability. And we’re just beginning to see the positive effects of a stronger product pipeline and better execution across the company. Based on customer polls for our products and services, I believe we’ll have strong orders in Q4 of 2016 and Q1 of 2017. And while it’s too early to know our earnings in Q1 of 2017, I believe we can double our Q1 non-GAAP EPS year-over-year. 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 limit yourself to one question and feel free to reach you later if you have any additional questions. Let’s please begin.

[Operator Instructions] Your first question comes from the line of Tim Arcuri with Cowen and Company. Your line is now open.

Thank you very much. So guys, obviously, great, great quarter, and obviously big opportunity in display. I guess, I want to ask a question on SSG. So if I take the orders you booked last quarter and I take this quarters orders, it’s about $4.2 billion. And if I use your SSG share model of roughly 22%, that implies that the overall WFE market is sort of run rating in the first-half of roughly $40 billion. So that begs the conclusion either this year is pretty front-half loaded or you guys are gaining a lot more share and that you’re going to end the year quite a bit higher than 22%, and it has to be several hundred basis points higher than 22%. So, I guess, I’m wondering if you can comment on whether the numbers imply that the year is a little front-half loaded, or whether it’s just implies that you’re gaining that much share? Thanks.

Sure. Tim, let me see if I can help. In terms of the loading of the year, historically what you see is that the foundry is particularly good and kind of calendar Q – end of Q1, Q2 in terms of shipments, I’m doing shipments and bookings is close for them. And then this year, though, it was later in the year as you remember, so we’ve been strong in foundry as they’re wrapping things like 10 and early 7. And then memory was stronger in the beginning of this year. So if you look at Applied, specifically, we benefited earlier in the year, because we’ve gained share in memory. We’ve gained share in DRAM. We’ve gained share in NAND, and that kept us strong. For instance, historically, the last couple of years, we were about 38%, 40% for full-year numbers for foundry, but we were only about 37% in Q2. We’re up over 50% now in foundry in Q4 and Q1, okay. So what you’re seeing is, we’re betting from secular improvement in Applied, but also some seasonal strengthening in foundry. So both things are working for us. So we will gain share this year pretty significant, we don’t want to say the specific number. In terms of WFE, the $40 billion run rate, I don’t think WFE is that high, I think we’re having some strength now. Last quarter, we said it was sort of $31.6 million plus, and this quarters it’s probably up close to $32.6 million my guess. But what you’re seeing is secular gains for Applied across, particularly memory, strong positions in foundry, and also the China thing is helping us, a lot of things are working for us, that secular stuff is working for us, and also the seasonality in foundry is helping in the next couple of quarters.

I guess, what I’d add also is that in 10 and 7-nanometer foundry, we have – while our TAM is growing significantly, if you look at those two nodes together about 30%. And we have the initial adoption of many new platforms. We’re actually winning more market share also in 10 and 7-nanometer, and we’re still in the early innings of some of these new platforms that are being adopted, the Selectra product, the Olympia, PROVision, LK Prime, Precision CVD, very, very strong adoption of those new platforms. And then in memory, as Bob talked about, we’re gaining share in memory. And especially in 3D NAND, 3D NAND is materials-enabled, not litho-enabled. So our TAM is expanding significantly, and there also we have many new innovative products, including the Sym3, which is the fastest ramping product in history of the company. So overall, this is going to be a great share gain year for Applied Materials and we’re incredibly well-positioned going forward.

Thanks, Tim.

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

Thank you and yes congratulations on the excellent results. Bob, you mentioned that you expected orders to remain strong in Q4 and Q1. Does that mean that, we shouldn’t expect orders to decline from these levels. And I was hoping you could talk specifically around your expectations for display orders seeing them at $800 million here?

Sure. We – I think at the end of last call, when we had orders in Q2 of 3.451 billion that I said our orders would sustain and that we would continue to have strong orders. In fact, we beat this order with $3.658 billion, $36 billion, $37 billion. I think Q4 and Q1 are both pretty strong. I’m not sure that quite as strong as we were the last two quarters. But they’re bigger than probably any quarter we had last year, yes, it’s going to be pretty big still. So, it’s probably to have a 3 handle on it, frankly.

And your next question comes from Farhan Ahmad from Credit Suisse. Your line is now open.

Thanks for taking my question. I just have a quick one. In terms of 2017 outlook, Gary, you mentioned that the WFE is expected to be up year-on-year. Can you just provide us some color in terms of the overall spending by the transition system in terms of flat memory versus foundry, and on NAND, if you see those – how you see they’re expanding in those segment and also for display?

So, this is Bob, I can kick it off and then Gary could jump in, too. In terms of this year, what you see is trends that are helping us a lot frankly. You see strong spending in NAND, whereas last year NAND was about, and I’ll go into 2017 for you too. In 2015 rather, NAND was about 6.8, this year it’s up 40% to 45%, about 9.7. And that is 90% for V-NAND. What we see next year is, NAND is going to be up a little more actually, and is going to be like 98% V-NAND, and our position is very strong. In fact, some of the share gains we’re seeing this year, you didn’t quite see them last year, because last year was about 50% 2D, and our gains are really strong on the transition to 3D. So that will continue for us next year. So NAND up some next year, almost all being in our position very strong. In terms of foundry, we think foundry could be p flat-to-up 5% next year. We think it’s going to be very good for us in the leading edge, and we also think it’s going to be good for us in the trailing edge in China and things like that. DRAM, we think it could be up a little bit. This year it was down 25% to 30%, I think maybe 25% we said on the call. Next year, it maybe up a little bit, but it’s the smallest of our numbers pretty much now except for logics or less, so it’s about 5.9 this year, up a little bit next year. And then logic is probably up a little bit next year also. So overall, we see an opportunity to go up some next year. But it’s a particular place for us around NAND and foundry. And the second thing you asked about was display. Display CapEx you guys don’t follow it closely. 2015 display CapEx and there’s not as good as estimates, but we think it’s little over $8 billion maybe. This year, it could be around $14.5 billion. We think next year continues at similar numbers, maybe a little bit more.

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

Thanks. Hi, Gary, Bob, also congrats on the results. My question is on the memory orders. So the memory orders declined pretty meaningfully in the July quarter. I was just wondering if you think that was just timing related, or do you think it’s a function of the more rational spend by customers, and could we see a snapback in memory orders in the October quarter? Thanks.

Yes. So the – I think that stuff is lumpy. We still see very strong demand for customers, particularly around V-NAND stuff. So we had a huge number in Q2 for V-NAND, because people frankly want to get in our production queue. In Q3, we have reasonable NAND orders, but not as big as they were in Q2. So I’d say, the demand is still strong. We’re getting a lot of pull in NAND still, and I wouldn’t read too much into the orders lumpiness.

Yes, I think the demand for 3D NAND is certainly extremely strong. Customers can sell everything that they can build. And if you look at where we’re at in terms of that transition to 3D NAND, we’re still not that far along in the overall transition. And so, every customer is moving as fast as they can from planer to 3D. And so, our thinking for 3D NAND going forward is still very strong certainly in 2017 still very strong.

Thanks, Stephen.

Your next question comes from Atif Malik with Citigroup. Your line is now open.

Thanks for taking my question and congratulations on a good quarter. Bob, on the gross margins, I understand that great job from Q2 of 2011. But if I compare it to your 2018 financial model like flat gross margins versus 44.6% at 33.5% in WFE, a little bit below that mark. What will get us – what will get the gross margins higher from these levels? I understand the display mix helps the gross margins, but the foundry mix helps them?

Sure. I think, we’re actually making progress. I thought earlier in the year, we would stay sort of flat to last year were up a little bit. Last year was 42.9, we were about 43.2. And this was a particularly strong year for display and also etch very well to. Now, let me just say display and etch are adding a lot to the operating profits of the company. Their model is a little bit different. For instance, display has a little lower gross margin, very comparable as they mature operating margin profile. And then etch has significantly grown their operating profit for the company over the last several years. And their operating margins have gone up a fair amount. In terms of the specific question of 44.6, we said we’d do 44.6 in 2018. If you took, I think, I said last quarter, if you took the mix we had and if you took the gross margins we had by individual product and compared it to 2014 mix, we’re like 44.7. This quarter we did the same analysis, we’re like 44.9. So we’re beating it if the mix didn’t change, what we’re facing is mix. We can offset a bunch of the mix. I don’t know if we can offset all of it. So I think we’ll make progress to the 44.6 next three years, there was a 44.6 was a 2018 number? Where we get there? I’m not quite sure, because of X, but I feel very good about the top line, the gross profit dollars, the operating profit and the EPS of the company, the main issue is just the mix on the gross margin, because things like cost reduction are doing well, our negotiations are doing well. It’s just the mix is the issue. And the operating margin don’t – doesn’t get impact as much as the gross margin with those businesses.

Thanks, Atif.

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

Thanks for taking my question. I just wanted to follow-up on the gross margin question. With the second-half with more foundry logic investments coming up with 10-nanometer, I was under the assumption that should be extremely positive for your gross margin profile. So I’m just curious if that is going to be more back-half loaded and into 2017, should we, at least, expect gross margins to improve into the fiscal Q1, given that it’s flat in fiscal Q4? Thank you.

They might depends on the mix. Remember in Q3 and Q4, we’ve been growing a lot very strong in terms of revenues for both display and our etch business and memory, for instance. So if in Q1, we probably are going to be strong pretty much across the Board. So foundry, I think, has a potential to be strong. But I also think we’ll be strong in display and probably in revenues in memory, because some of the revenues we ship into NAND in Japan are delayed about a after the shipment. So my guess is a little bit of upside opportunity in Q1, but I don’t want to be too specific now.

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

Hey, guys, congratulations on the solid quarterly results and execution. Another focus by the market on display has been on OLED, but it seems like even in the core or large screen LCD segment, there’s a lot of Board opportunity. There’s still a lot of focus on 4K UHD. I think one of your peers recently in their call talked about three customers that have plans for gen 10.5 LCD plan investments in the not too distant future. So I’m just wondering, if you’re trying to see that in your pipeline? And is it something that you would expect orders for this year, or is this something more kind of 2017, 2018 timeframe?

Yes, I’ll start and Gary can jump in. Actually, the core display orders for LCDs and related TVs have held up probably a little better than we thought and it looks like there might be an opportunity there. Now, what’s the big inflection is the OLED stuff. But I do agree with you that the LCD and the TV stuffs held up a little better than we expected.

I guess, I could also add that display is a great opportunity for Applied Materials. We’re still in the early innings and this smartphone transition to OLED. And the display is a key differentiator for mobile devices. So in the near-term, near-term being over the next couple of years, this is going to be a great driver for us. If we think longer-term, we also see large technology companies making huge investments in new areas like VR, AR, and automotive, where display can be significant. We’re also developing new innovative products that will significantly expand our served market over the next several years. So normalized spending in display could be higher than in the past and also our TAM is expanding on top of that. And last thing on this one, I’d like to say is that, really the display is an example of where we can take materials engineering into a new market and adjacent market and Applied is really unique in our ability to enable this big inflection and drive growth. So really overall great, great opportunity for the company.

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

Thank you very much and also congratulations. Gary, as you look at the 3D NAND market share gains you have made to-date, which process segments do you believe you’ve made the most gains? And as the industry goes to say 64 layers and higher, where do you see incremental gains for the company on a going-forward basis?

So I think the most important thing for people to think about on 3D NAND is that, this is an materials-enabled inflection, not litho-enabled. And it’s a biggest change in memory technology in decades. So when you think materials-enabled, it really the products that we have targeted for 3D NAND, the Sym3 etch tool is the fastest ramp we’ve ever had for any system in Applied Materials, and we’re still in the early innings. One of the things that I believe is that, we can grow as fast as we can qualify. We have so much pull from customers on Sym3. There’s still an opportunity for growth there. Our CVD business is growing significantly. This year, we expect strong revenue growth in CVD gaining several points of overall share very, very strong position in 3D NAND. So that’s another area where when you look at the 64 layers or you’re going forward, there is a tremendous opportunity. The number of CMP steps also double in maybe 2 even in some cases 3X number of CMP stuffs. So that’s another area, where we have really, really a great position. And this is the first time also for us to introduce Epi into a memory device. So there are a number of different areas, where we have innovative platforms, innovative new products, and really tremendous pull from customers that give us a great opportunity as 3D NAND goes forward.

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

Yes. Hi, thanks for taking my question. Just – I just wanted to touch on the logic spending being down this year, wondering why you think it’s down if that’s related to slowing node transitions, and just maybe gauge your conviction in it being up next year, like you commented. And if the softness is related to slowing node transitions, so I’m just wondering if you could comment on any risk that that spills over into the Foundry segment?

Yes. We have – the numbers we have now, remember we have in logic, we have a major U.S. company and also some Japanese companies and things like that. So our numbers show, it’s down 5% to 10% this year, and up 5% flat to 5% next year. Let me pull up the detail.

So let me take the second part of that while Bob is pulling up the information on the – on logic. Relative to foundry, what we see is that, all of our customers, all of our customers are targeting 7-nanometer as a big node, very big node. There’s a lot of customers – their customers that are taping out. And so that is a big opportunity and every single one of our customers are in a race to be in the right position as that node ramps. So the pull we’re getting for customers on 10/7 is extremely strong. And as Bob said earlier, we see strong business in the trailing nodes also in foundry. And we see that, China being a big part of that, but we see that also continuing going forward in the future. So, at least, from what we’re seeing today, our customers in terms of advanced foundry and also relative to the trailing nodes in foundry, it looks like and what customers are saying is that, the business will be good for the next few years.

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

Great. Thank you. Bob, I think your comments are making good progress towards the 2018 model where you stated, your Silicon Systems business is kind of approaching the size that you talked about for 2018 on the type of WFE number that sort of midpoint that you talk about. So is that – are you doing better earlier, because you’re taking more market share at the TAM expanding faster, could you just talk about that? And if obviously, we’ll wait till next month to get the full forecast, but any thoughts on will that continue to move higher from here on both share and TAM? Thanks.

Yes, on the semi stuff, two things have really compounded for us. So and in fairness to us, we kind of predicted, that’s what we’re positioned. But one, the market changes have really come out frankly as we expected in terms of the transition from 2D to 3D, and also the products they need and the transition on foundry has been going that way. And also China has helped somewhat, and we’ve always been strong in China we kept our strength there. So those market inflections in semi and also we’ll talk about display market inflections. We kind of had a pretty good feel for those coming, but we didn’t have exactly the right products there. So we strengthened our product positions in places like etch, CVD, ALD inspection, we’re going to be talking about more, because we think you need more and more of that particularly e-beam, as you get through foundry and logic and places like that. So it’s a compounding of the market turned out pretty close to what we expected, and we have the right products there. And the reason you’re seeing acceleration this year, frankly, is the market inflections are happening this year. For instance, this year you’re seeing a big spend increase in NAND and it’s 90% V-NAND, that’s where the share opportunities are. And we’re seeing a fair amount of spending in 10 and 7, were strong, interestingly OLED spending in display. And we’ve introduced new products in each one of those markets to capitalize on it. So, we’re probably ahead of plan, frankly.

Your next question comes from the line of Edwin Mok with Needham & Co. Your line is now open.

Hey, thanks for taking my question. So, I guess, I have a question about sustainability of or how sustainable this ramp of multiple areas. And I guess, it specifically relate to customer concentration. So it seems like leading edge foundry 10/7-nanometer foundry and also OLED are big drivers now or definitely a big driver for you this last quarter you said those are sustainable. So I was wondering, are you seeing like broadening or increased number of customer, both from leading edge 10/7 in foundry, as well as got the increased number of display customers are all placing order for OLED, or just still concentrate at one or two customer of those – just that those customer aggressively ramping? That’s all I have. Thanks.

I’ll start and Gary can jump in again. So there are several inflections we’ve noted. One is NAND, one is OLED, one is China, and the other one which is going on right now is foundry leading edge, in particular, so let me speak to those. NAND is – there’s about $1.4 million wafer starts in the world, by the end of this year, it’s going to be about 400,000 transition to V-NAND. We think the vast majority of those get transition for many reasons. We think the spending on NAND probably is up next year and our position is strong. And we think that that transition remains strong for a number of years and plays very well for us. We think in OLED, they’re in pretty early innings on the transition to OLED on the phones. In fact, the orders we’re showing that we’ve been booking and we have some more to come, those things will ship through 2017 and to early 2018. So we’re going to see reverence for that for a while and that’s just what we’ve been booking, okay. And we believe there’s more down the road, okay. So this OLED transition is going to go on for a while and we have enriched the opportunity for us by developing new products there just as we have in semi. In terms of China as an inflection, I mean, just listening to the Chinese government, they’re in this for a long-term and their interest in investing in the semiconductor is probably only going to increase, okay, and our position is strong. And then finally, the foundry one you asked about, Edwin, which is particularly focused on. Right now, the leading edge is strong and it’s strong into early next year, and that one does have some seasonality. But if you look at the longer-term trends there and just listen to the voice of our biggest customer, about 50% of their growth is going to be come from more features in phones, and about 50% is everything else that you see in Silicon Valley, whether it’s a autonomous cars, virtual reality, machine learning, AI, all these things are driving about 50%. And it isn’t just one big thing, it’s a whole slew of things. And I think we’re going to do at Investor Day a very interesting discussion about virtual reality and not just what it drives in display, but what it drives in memory and what it drives in advanced processors. So in foundry on the leading edge, it isn’t just phones. 50% of leading edge customers is content in phones going up, but 50% is all those other stuff which you can see, okay. Now, in terms of the other things going on in foundry is the trailing edge is very strong and that’s kind of a China phenomenon, but there’s also the content in phone when you’re talking about all the cameras and sensors and things like that. So I think, foundry is in pretty good shape next year. And I think it’s got probably more sustainability overall than people said a few years ago. In terms of other companies at the leading edge, I think others will need – want to compete, because it’s a big market they want to be at the leading edge. And the timing and magnitude of the spending on that we haven’t disclosed.

Thanks, Edwin.

Your next question comes from Sidney Ho with Deutsche Bank. Your line is now open.

Hi, thanks, and congratulations on very strong orders. I think, you have two consecutive quarters in China over $800 million of orders. I understand that some of that comes from display. I think, Bob, you mentioned display was half of the orders this quarter from China? So if you back that out, do you feel that the $400 million to $500 million per quarter of order run rate is the base case now and start moving up from here, or do you think there’s still some lumpiness in orders in China?.And have you seen much order activities from local foundries, or are they mostly still coming from the multinationals at this point?

Sure. Well, again, we have a strong semi business in China and a strong display business. So I do display first. We see the trends where the Chinese are heavily invested in display business and want to share there, probably continuing for a number of years. They are not heavily into OLED yet, but their interest in display is very strong. In terms of semi, the government has obviously said, their interest is very strong and sustainable. So that I think that you may have lumpiness, but I think you’ve raised the baseline, particularly in semi and the display baseline has already been going up for a while now. So I think that you’re going to see pretty sustainably strong orders in China.

Yes, let me add on this one. We’re in a very strong position with both multinational and domestic companies. Relative to share, China is one of the strongest regions for Applied Materials. Relative to the investment, you hear the word strategic when you think about China, there’s a focus on growing the percentage of domestic content and building a secure supply chain. And as Bob said, there has been announcements around huge investments over the next decade in China. So again, we’re in a very strong position. We think this is a multi-year wave. Certainly, we see strong growth in 2016, but we think it’s a great growth opportunity also going forward.

Your next question comes from the line of Craig Ellis with B. Riley. Your line is now open.

Yes, congratulations on the results and outlook and thanks for sneaking me in. I wanted to switch from a more model intensive question maybe two or more qualitative question. Bob it was helpful to get a lot of the longer-term context on the financial performance of the business. And the question as we look at the ability of the company to redirect to some new opportunities like OLED is. Relative to the longer-term history of the company, where do you think the product development engine is? And how much further upside do you have, as we look ahead for SAM expansive type of products that would be on the roadmap? Thank you.

That’s a really good question. Let me just spend a couple of minutes, if you don’t mind. If you go look at it, our guide for Q3 was frankly significantly north of the street. I think we guided to $0.48 and the streets three months ago was at $0.36. Now, we’re guiding to about $0.65, roughly, and the street was $0.48. And now we’re saying we’re going to – we have 3.5, almost $3.5 billion of orders last quarter, almost $3.7 billion this quarter. Next two quarters, we’re hoping to have around three each. So there’s something’s changed here. So the question you’re really asking is, what’s changed disruptively either in the market or at Applied Materials? I think there’s really three answers. One, I think the market has changed and it really has in terms of what type of equipment people need to make leading edge devices and leading edge displays. For instance, in 2012, 53.5% of the CapEx WFE spending by semi customers was in places, where we competed. Now, this year we think it’s 63.5%. And in those markets, where we compete in semi, we’re gaining share where we had weaker share. So in the market changes to make leading edge devices they need to buy different sets of leading edge equipment. And frankly, they need from very strong big capable suppliers, because the problems are just getting harder. They’re putting things in the production earlier than ever before and ramping faster. In display, you say the same thing, make an OLED display is harder to make an LCD display. So having the right products, we’re introducing new products. So in the marketplace, there has been big inflections V-NAND devices totally different architecture. So big inflections number one in the market. But number two, the products are very well-positioned now for us. So I can see it is going on for a while. Now, the third thing is, well, how you’re doing at Applied? I honestly believe that we will all grow by several points the markets in which we’re competing. You might be saying, well, how can you possibly know that for several reasons. One, we defined the financial model here right. The spending we put into products is significantly more than we used to relative to our total spending. So we invest more than we used to in product versus just maintain the lights in the building and operating the place. So the investment relatively speaking is heavier in product development and the batting average on new products is going up. We’ve put 50% more technical guys in the field, I think, who’ve invested in R&D and the products we’re coming out with are not not just iterative products, they’re disruptive innovative products. And if you go and get leading edge, logic and foundry customers,the number of DQR positions we have. The number of new platforms we have. We’ve changed the model, the investment model, and the batting average on the new products. And the other reason, I’m pretty confident, I can see the products coming down the pipe. So I think that Applied is going to outgrow the markets that we compete in for the next several years, 5, 10 years, now I can’t see. For the next number of years, I feel good about where we’re investing, how we’re executing in the market opportunities.

Yes, I guess, let me add to this one. The fundamental driver for our businesses today from a market standpoint is materials innovation. So if you look at 3D NAND, its materials-enabled scaling. If you look at how people are trying to solve etch placement errors in litho, there’s a lot of materials innovation that can dramatically reduce etch placement errors, and that’s a big deal for our customers going forward in multi-patterning. And so that’s the core competency of Applied Materials. We’re broader, deeper, have more competencies, more technology, more talent than anyone in the world. And relative to semi, you see today, we’re in the early adoption of some great innovative products, not incremental products, innovative products. And the pipeline we have there is also tremendous. We have great products in the pipeline. If you look at display, Applied is unique and our ability to take these technologies into large areas and into new markets. And we’ve also innovated with new TAM growth. Thin film encapsulation is an example, where we have hundreds of millions of dollars in business enabling the transition to organic LED and mobile. And we have other capabilities they’re also in the pipeline that are as significant relative to growth drivers for us longer-term outside the semiconductor industry. So this is personally what I love about Applied. This is what where I love to spend my time. The company has so much talent, so much capability. I really believe that we’re still in the early innings relative to innovation in semi, in materials-enabled scaling, with disruptive new platforms, and also outside the semiconductor business into adjacent markets.

Thanks, Craig.

And your next question comes from Amit Daryanani from RBC Capital Markets. Your line is now open.

Thanks. Congrats on a great quarter, guys. I guess my question is on the gross margin trajectory as you guys see from here for the next few quarters. It seems like a lot of the growth drivers you’ve talked about on display or in CVD and etch. It seems like they might be somewhat headwinds to your gross margin expansion. So can you just maybe talk about what are the offsets of the leverage you might have to negate the mix headwinds and enable the margin expansion as you go forward from here over the next few quarters?

Sure, there’s several things. One is the cost reduction, which is the best we’ve done in years. The second one is, we just hammer away at every single product to get better and offset the mix that might be a little harder. And then the third one is continuing it through disruptive products. For instance, we think we’re going to grow our inspection business in terms of market share this year and probably next year, and we have new products coming out, and those products tend to be strong gross margins. So we do have – we have mix that’s pushing back us a little bit, but we have other things that could cover that.

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is now open.

Thanks for squeezing me in. I have a very short question for Gary. You talked about display CapEx kind of flattish next year. In that context, I see the growth for AMAT coming from share gain, especially in capsulation. When do you think we’re going to learn more about this? Is it something that you’re going to discuss at Analyst Day, or are we going to learn more as those share gains are materialized?

Thanks for the question, Mehdi. Yes, we will definitely talk more about display at the Analyst Meeting. And really also focus on some of these longer-term opportunities, where some very large technology companies are making huge investments and where we have great opportunities in display going forward. So we definitely will cover that in more detail at the Analyst Day.

Thanks, Mehdi.

And your next question comes from Jagadish Iyer from Summit Redstone. Your line is now open.

Yes, thanks for taking my question. So if I look at your display revenues growing about well over 50% year-over-year in calendar 2016 versus calendar 2015, what percentage has come from OLED? And how should we think about it as we look at calendar 2017?

Sure. The revenue growth has been obviously very strong, and the bookings we have, we believe we have momentum into 2017 on the revenue line. If you look at the bookings the share in display, they’ve been probably about two-thirds or more around OLED and about one-third roughly around LCD stuff. So then if you look at the revenue split, it’s probably about 30%, 40% LCD and about 60% OLED this year. So last year was probably closer to two-thirds LCD, I think, and one-third are not too big OLED. And here it is, yes, it’s probably at 70% last year was LCD, so it’s flipped. So it was 70%, 30% one way last year and this year it’s probably 60%, 40% roughly 65%.

Your next question comes from Jerome Ramel with Exane BNP. Your line is now open.

Yes, thank you for taking my question. What kind of capacity are you modeling for 10-nanometer node and 7-nanometer node in foundry going forward? Total installed capacity with start amounts?

Yes, so capital intensity 10-nanometer is up over 25% from 16/14. And at 7, we think it’s up again, but we haven’t set a specific number yet.

Yes, Bob was referring to our TAM opportunity, and I think the combination 10, 7 something like 30% somewhere in that range.

Yes, I think it’s actually more than 30%.

Yes.

And your next question comes from Toshiya Hari with Goldman Sachs. Your line is now open.

Hi, this is Charles on for Toshiya, thank you for taking the call, and congrats on a great quarter. You guys, given that you guys seem to be firing on all cylinders. What are maybe a couple idiosyncratic risks that we should be monitoring?

Well, that’s a good question. Let’s think. Where we’ve…

I think for us we have tremendous opportunities. The key for us, I really do believe, we can grow as fast as we can qualify. We have great platforms, where we’re totally targeted on major inflections very, very innovative products, where we have tremendous customer pull. So I think the tension for us really is to make sure that we can qualify with customers, work with customers, because there’s just incredible pull for us in a number of different areas. So I would say that, we for sure are going to grow share. The rate of that growth is really up to us relative from an execution perspective.

Yes, maybe I’ll pile on a little bit. You always have, it’s not idiosyncratic the macro risk, which I think is moderate, but that’s a risk. I think the other one to add what Gary said, there has really been a change in my opinion at Applied that we didn’t have as much growth stuff being considered a few years ago. So we have really built a funnel of great ideas with customers, customers are pulling for us big time now. So our issue is how do we optimize all the opportunities. So it’s like how good can we be and that’s a tension we have every single day, which projects do we follow up, which ones we push faster, which ones so becomes how many different things we realize how fast. So it’s optimizing the portfolio really.

Thanks, Charles. And Shawn, we’ve got time for maybe two more questions, please.

Your next question comes from Tim Arcuri with Cowen and Company. Your line is now open.

Thanks a lot. Gary, I’m just looking at these numbers and I’m sitting here listening to you talk about all the market share gains. And I guess I just wanted to give you a chance to sort of talk about how this has happened, because was some of this in the pipeline before the Tokyo Electron merger, or did the merger fall apart and you just completely decided to totally reposition the company. And I guess just give us a sense of sort of the genesis of this success to maybe help people deconstruct how this might look going forward? Thank you.

Yes, thanks for the question. So we focus on big inflections where and I think Bob talked about this earlier. We could see the big inflections a few years in advance and we made a decision that we would shift hundreds of millions of dollars in spending in the company. So we cut G&A a significant amount. We significantly dramatically reduced our spending in solar. And all of those – all of that money we shifted keeping OpEx relatively flat into areas, where we have great opportunities Applied has great talent and great competencies and great technologies, but we needed to make the investments and fuel the growth. So that happened, frankly, maybe three or four years ago, where we started that shifting of resources and really focused in the areas where we knew that we had great opportunities. We also have added talent into the company to help us execute on those opportunities. And that’s really the playbook and I would – we’re still driving that playbook today. So I look at the semiconductor business in the pipeline. We have some phenomenally valuable and disruptive products still in the pipeline, where we have great opportunities going forward. And also outside semi, we have some great opportunities that are sizable opportunities, where we can still drive growth for the company. So those are the things we did. It wasn’t something that frankly with the Tokyo Electron merger, we kept our eye on the ball, we were laser focused on these opportunities. All through that process and we were ready basically when these inflections were ramping with the right products and the right team to execute. Bob, if you want to add anything.

I think that’s true. I think you have two-part question there, Tim. One is, how come the stuff so apparent now? And two, did Tokyo Electron have any impact or at the end of the merger have an impact? I think the answer to the first question is, if you’re going to gain share in an equipment business like ours with the semi display, the opportunity is on inflections, big changes in how they make chips or they make displays. And you’ve got to have the right product that inflection or change an older or new OLED device. So you can look at stuff, we even did in the public domain. There were a number of people who said that, we should be less aggressive investing in display and solar. We decided there were two very different business models and so we increased our investment display, because we saw the inflection. But you’ve got to wait two or three years for the inflection or the product won’t be ready. You can’t shoot behind the duck, right? The ducks got to be two years ahead of you, three years ahead of you. And then second what we saw coming was NAND. And in fact, maybe even at your conference in 2014, I thought being NAND at the end of the County was going to be a little bigger than it ended up being, because we saw the inflections. We were betting on it even if you go back to your conference event 2014 early 2014. And we had the product that’s doing pretty well. So now what you have is, these inflections, products will take two or three years to come along. The hard part frankly was bridging this period. And now what’s going to happen is the products, where the pipeline inflections are happening and we have more products in the pipeline for more inflections, if you go look at areas like inspection and things like that. So the momentum is building up. We had to get through a two or three-year period. In terms of Tokyo Electron, Gary forced everybody to stay focused on the business.

Thanks, Tim.

And your final question comes from the line of Atif Malik with Citigroup. Your line is now open.

Hi, thanks for taking a follow-up. I have a question for Gary. Gary, given your background in process diagnostics and control, what is Applied strategy moving forward in terms of integrating the e-beam success you’re having as well as other products with etch and the process reactors we’ve seen Hermes and ASML getting together Kelly LaMar [ph] still trying to get together, just wanted to get your thoughts on how much closer control and integrated metrology can you benefit from in your process and etch reactors?

Yes, let me talk a little bit about the inspection business. So this is going to be a very strong year for us. In that business, we could have a record year – our fiscal year 2016 revenue in this business and very, very strong pull from customers. As you said I have a lot of history relative to this business. And what I would say is that, e-beam what I hear from customers is that, e-beam is really at an inflection point. If you look at the changes in the devices, the device structures, there’s a bigger problem with systematic types of problems, where e-beam is the best solution. So we see tremendous pull from customers really an inflection relative to e-beam technology, especially focused on these systematic defects. So that’s what we’re seeing from a market perspective Applied Materials over half of our revenue is e-beam. We have the strongest technology in the market in e-beam. We are the leader in e-beam review. We’re gaining share in CD SAM. And we’ve just launched this PROVision product, and I think there’s just tremendous opportunity with PROVision in the first year of launching the product. We’re already getting reorders from leading foundry and memory customers. And I believe what we talked about before was achieving 20% share in e-beam inspection in the first year. So we see tremendous growth opportunities in e-beam, in an area where Applied is the strongest relative to technology. So overall, in PDC, we have a great – we have great technology, very strong customer pull, and a great opportunity to drive growth.

Well, thank you, Atif for your question, and we’d like to thank everyone for joining us this afternoon. We do hope to see you at the Analyst Day in New York on September 21. And in the meantime, thank you for your continued interest in Applied Materials.

And this concludes today’s conference. You may now disconnect.