Applied Materials, Inc. (AMAT) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the Applied Materials Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Michael Sullivan, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Dustin. Today, we'll discuss the results of our fourth quarter and our 2014 fiscal year, which ended on October 26. Joining me are Gary Dickerson, our President and CEO; and Bob Halliday, our Chief Financial Officer. Before we begin, let me remind you that today's call contains forward-looking statements, including our current view of the company's industries and our performance, products, strategies, opportunities, announced business combination with Tokyo Electron and business outlook. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied, and they should be interpreted in that light. Information concerning these risk factors is contained in our most recent Form 8-K and 10-Q filings with the SEC. Forward-looking statements speak as of November 13, 2014, and we assume no obligation to update them. Today's call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in today's earnings press release and in our reconciliation slides, which are available on the Investor page of our website at appliedmaterials.com. Now I'd like to turn the call over to Gary Dickerson.

Thanks, Mike, and good afternoon. In our fourth quarter, Applied Materials delivered revenue and earnings at the midpoint of our target range. This rounds out a strong year for Applied, where we grew sales in our semiconductor business by 25%, and expanded our overall operating margins by 6 points. These results reflect ongoing technology and capacity investments by our semiconductor and display customers, sustainable market share gains in growing markets and significant improvements in our operating performance that we've achieved while increasing investment in new product development. Our progress towards our strategic and financial goals is made possible by outstanding contributions from our employees around the world. This is a team with tremendous passion to create value for customers and investors. Over the past 2 years, we have placed Applied on a trajectory of long-term profitable growth and improving financial performance. In 2013, we aligned the business around our precision materials engineering strategy and took steps to shape a more competitive company. We increased our focus on areas that have the biggest impact for customers and generate the best returns for Applied. We shifted spending from low-growth businesses and corporate functions to field resources and product development. We built a stronger organization, bringing in top industry talent, strengthening our business processes for repeatable success and changing our structure to improve alignment and speed. We increased our market share with 1.4 points of overall gains in calendar 2013, and we invested in a pipeline of new products to enable our customers' roadmaps and drive long-term growth for Applied. In 2014, we accelerated this strategy and made strong progress towards our financial model. Our semiconductor business posted the highest revenue since fiscal 2007. And for the calendar year, we expect to gain share or hold share in almost all of our businesses. We anticipate our largest gains in areas of the market that are growing the fastest. In CVD, we believe we will win at least 3 points of share this year. And in etch, we are on track to deliver almost 2.5x the sales achieved in 2012. These results demonstrate that we have the right strategy and the right team, that we are improving our execution and carrying strong momentum into 2015. Our merger with Tokyo Electron will enable us to further accelerate this strategy. The detailed plans to bring the 2 companies together are now very well advanced. Our joint integration team is working closely together to make the merger a success, and the progress they've made has far exceeded our expectations. In terms of the regulatory process, we have been advised to not provide details or answer questions about ongoing discussions. However, I'm pleased to report that the German Competition Authority notified us today that we have received its unconditional approval for the proposed business combination. We are working hard to obtain the remaining approvals as soon as we can. However, we acknowledge that the closing could move into the first quarter of next year. Turning to our market outlook. Consumer demand for new and better mobile devices with more features and longer battery life remains the primary driver for the semiconductor industry. This is fueling strong foundry investment in leading-edge technology. Overall, foundry spending in 2014 is on track for 20% to 25% growth year-over-year, and these high spending levels are expected to be sustained in 2015. This year, almost half of the foundry spending was focused on 20 nanometer, and the build-out of this node is nearly complete at the leading customers. 2015 is shaping up to be the year of a FinFET leadership battle, and we anticipate strong investment from our customers as they focus on winning this critical transition. Memory spending has also been robust in 2014, and we expect higher investment levels next year. NAND bit growth is around 40% this year, driven by increasing bits per box for new mobile devices and strong demand for solid-state storage. The bulk of incremental supply has been provided by advanced planar technology. In 2015, spending on 3D NAND is expected to be broader and larger, although still not to surpass planar investment until 2016. DRAM investment was stronger than expected at the start of the year, driven by mobile and an enterprise-led PC replacement cycle. DRAM bit growth is around 30%, and with this demand being primarily met by technology conversions. In 2015, we expect supply to remain tight with strong potential for new capacity additions. Looking at wafer fab equipment as a whole. We maintain that 2014 spending will be up 10% to 20% over 2013. Our current view is that 2015 wafer fab equipment will be higher, driven by the foundry FinFET battle, more customers investing in 3D NAND and increasing DRAM spending. In addition, over the last 12 months, wafer starts and fab utilization have increased, a trend that we expect to continue in 2015. As the customers aggressively push factory output, we see expanded opportunities for our AGS business. The outlook for the display equipment market also remains very healthy. Attractive price points for 4K TVs are driving a TV refresh cycle, while average screen sizes are growing around twice as fast as historic rates. Demand for higher-resolution, lower-power screens for mobile devices is also a key factor in display, and we are seeing strong LTPS orders for this market. Our quarterly display revenues are at a 3-year high, and we believe we're on track to gain share in our served available market this year. In both semiconductor and Display, major changes in device technology provide a catalyst for our growth. As we've said before, FinFET and 3D NAND represent the biggest technology transitions in decades. These complex inflections are enabled by materials innovation, and that plays directly to Applied's strengths. They create new precision materials engineering steps, expand our available market and fuel strong demand for our enabling leadership products in transistor and interconnect. For example, our Epi business posted record sales for the fiscal year. Our metal deposition group delivered its highest annual revenues and operating margins since 2000. And we believe our implant group is on track to reach its highest ever market share. In logic and memory, the acceleration of materials-enabled scaling is a major driver for etch and deposition. These are large growth opportunities for Applied, where we are building strong momentum and gaining share. We now expect our combined revenues in etch and CVD to grow by almost 50% in calendar 2014. We see strong customer pull for our next-generation technologies. At SEMICON West, we announced 5 new products that are rapidly gaining traction, and we have now shipped more than 300 of these chambers. We have also been making improvements to our service and spares business to better support customers as they quickly ramp these new device technologies at the right yield and cost. Our service organization is building momentum and in fiscal 2014, delivered the highest orders and the highest operating margins since 2007. In summary, for Applied Materials, fiscal 2014 was a year when we grew faster than our markets and made significant progress towards our strategic and financial goals. We accelerated our product momentum and strengthened the organization in key areas. Looking forward to 2015. We expect a year of industry growth, where we are uniquely positioned to apply our capabilities in precision materials engineering and outgrow the industry. In order to take full advantage of the great opportunities ahead, we remain highly focused on improving execution. Let me now hand the call over to Bob, who will provide additional details about our performance and explain the steps we are taking to drive alignment, speed and scale across the organization. Bob?

Thanks, Gary. In the fourth quarter, we delivered strong year-over-year improvements across many areas of our business and achieved our guidance for revenue and EPS. Since this is the end of our fiscal year, let me begin by framing 2014 in the context of where we have been and where we are going. We continue to believe that the market environment looks good, particularly for Applied Materials, and remains good for some time. This environment gives us a great opportunity to make money and efficiently return it to investors. There are 3 levers to making more money in our industry: first, understand customers' high-value problems and develop disruptive new products, as Gary described; second, achieve scale around our opportunities. We are doing this by focusing on our biggest opportunities in SSG and Display, winning share and merger with Tokyo Electron; and third, relentlessly grind away on efficiency, execution and cost. In 2013, we shifted money to our biggest growth opportunities, primarily in SSG and Display. We also gained share in the overall WFE market, primarily by focusing on key battlegrounds, customer support and rapid product iteration. Our new and disruptive products were still early in the development stage. In 2014, we further accelerated our funding of products that give us the greatest opportunities for growth. For example, we increased the combined funding of our conductor etch and CVD opportunities at 3x the rate of our overall investment. This past year, we began to see strong momentum from these products, as our combined revenue in conductor etch and CVD grew by 60% in fiscal 2014. Thanks to our employees' efforts, we also kept grinding away on efficiency, execution and cost. For example, in 2014, we shifted an additional $200 million from our corporate functions and lower-return programs to fund our strongest opportunities in 300 millimeter and emerging technologies. We also achieved our 2% of materials cost savings for the year. As a result, we began to see signs of progress toward the target financial model we introduced in 2013. In fiscal 2014, the company recorded revenue of $9.1 billion. Excluding solar, this was the highest company revenue in 7 years, which demonstrated our strong momentum in SSG, Display and AGS. On a non-GAAP basis, we increased gross margin to 44.1%, which was a 7-year high. This gross margin for the year did benefit from 0.5 point of non-run rate items. We increased operating margin by 6 points even as we maintained elevated R&D investments in our new product pipeline. We also achieved a 3-year high in both operating margin and net income. Our tax rate of 22.7% declined by 1.8 points as we implemented our more efficient structure, and we boosted our earnings by over 80% to $1.07 per share. Now let's take a look at some of our 2014 segment results. SSG revenue grew by 25% to the highest level in 7 years. NAND orders were also at a 7-year high. In AGS, orders were at a 7-year high, which reflects customer pull for advanced service offerings enabled by our tighter collaboration between SSG and AGS. AGS operating margin was the highest since 2007. In Display, orders achieved a 6-year high as the group took advantage of technology inflections and panel-size increases in the TV and mobile display markets. The Display group gained share and increased its operating margin to its highest level since 2011. EES generated a modest profit for the first time since the solar downturn. Now what do see entering 2015? Our industry outlook is positive, and while it is too early to know the effects of timing and mix, we expect continued year-over-year growth and progress toward our target model. In 2015, we plan to introduce some of the new and disruptive products from our product pipeline investments. These products will drive share gains in 2015 and over time, but have lower margins initially. In 2015, we are working to further improve our gross margin even with aggressive new product ramps. In the first quarter, we expect gross margins to be lower sequentially, primarily due to share gains in our conductor etch business. Specifically, we expect our etch revenue to grow by almost 60% sequentially in Q1. We expect to increase our gross margins from Q1 through the balance of 2015. Overall, 2015 provides us with a further opportunity to systematically gain share in the fastest growing markets; drive scale in semiconductor display and services, both standalone and in combination with Tokyo Electron; and grind away at execution, efficiency and cost to improve the profitability of the company. Now I will provide more color on our fourth quarter results as compared to the prior quarter. Orders of $2.3 billion were down 9% sequentially, with decreases primarily in SSG and Display, partially offset by an increase in AGS. Net sales of $2.3 billion were in line with our guidance. Non-GAAP gross margin decreased to 44.2%, which included a 0.5 point of non-recurring benefits. Non-GAAP EPS of $0.27 was in line with our guidance. Our operating cash flow was $407 million or 18% of revenue. Next, I'll comment on our segment results as compared to the prior quarter. SSG orders of $1.3 billion were down 15%, with decreases in memory and foundry more than offsetting increases in logic and other. SSG net sales of $1.4 billion were down 3%, in line with expectations. AGS orders of $747 million were up 35%, led by service contracts, and were the highest since 2007. AGS net sales of $592 million were better than expected. Display orders declined to $130 million, and we expect the pattern to remain lumpy. Display net sales of $190 million were up 60% as we began to ship the large orders received in the last 6 to 9 months. This quarterly revenue performance is also a 3-year high. EES orders were $44 million, and net sales were $48 million. Now I will provide our first quarter business outlook. We expect our overall net sales to be flat to up 5% sequentially. Our normal seasonal pattern would be for revenue to increase in our second quarter. Within this outlook, we expect SSG net sales to be approximately flat. AGS net sales should be down by a couple of points. We expect Display net sales to be up by about 40% and EES net sales should be up by about $20 million. Non-GAAP gross margin should be approximately 43%. Non-GAAP operating expenses should be in the range of $560 million, plus or minus $10 million, which includes 1 month of annual merit adjustments and the holiday shutdown. We expect non-GAAP earnings per share to be in the range of $0.25 to $0.29. In summary, 2014 was a year of growth and improved profitability across all of Applied, including 25% revenue growth in SSG and 6 points of non-GAAP operating margin improvement for the whole company. In 2015, we believe we can increase revenue across all of our segments, gain share in SSG and further improve operating margin. Now let me turn the call back over to Mike Sullivan for questions.

Thanks, Bob. [Operator Instructions] Dustin, let's please begin.

[Operator Instructions] Our first question comes from line of C.J. Muse with Evercore ISI.

I guess, first question on gross margin side. In terms of the downtick in the January quarter and then your positive outlook for the rest of the year, specific to January, is that particularly the new products on the conductor etch side? Or is that also reflecting a mix to only a handful of customers? And then, as you look beyond that, what gives you the confidence that you'll see that gross margin uplift through the end of the year?

Sure, I'll take that one. Most of it's due to the heavy etch shipments. We're shipping some new tools, frankly, so typically, the installation, warranty costs, material costs are higher. As you look at the mix through the year, etch is strong throughout the year, but as a percentage of SSG sales, it goes down later on the year, and we start to get better on the cost side of the equation also.

Okay, that's helpful. And then, I guess, as my follow-up -- and I understand you can't talk too much on the regulatory part. But are there any lateral implications that we should be taking from Germany's sign-off, particularly around talk around them working with the DOJ as well as the fact that it was an unconditional approval?

Yes, we were pleased to get signed off in Germany. Each country is -- does an independent process. And we're working constructively on the whole process. And today was a good event for us. The rest of them, we're in process frankly.

Our next question comes from the line of Jim Covello with Goldman Sachs.

Your target model for 2016, I think, is on $33.5 billion WFE, doing about $1.70 in EPS on just under $11 billion of revenue, if I'm not mistaken. How -- understanding you're ramping new products, which are a little bit lower margin, and there's some share gain in some lower-margin areas and also, that that's a 2016 model, not a 2015 model, it does look like we'll be at, at least $33.5 billion in WFE in 2015 now. So how much lower than that 2016 model do you think we'd be in 2015 if we do get to the $33.5 billion, given the pushes and pulls on the target model?

Yes, it's a good question, Jim. Let me walk through it little bit. If you go look at the revenue line, we're actually making pretty good progress on the SSG share. We were probably, a year ago, a little behind on the AGS business, but we're picking up now. We had one of our strongest orders quarters ever. I think we're making real headway. So as you look through '15, '16, I can see reasonable revenue growth there. So we're going to get closer to the model and feel better there. The Display business is doing great, so that feels good. We got market share opportunities there. We're gaining. We have new products, so there's a lot of momentum there. And solar is even picking up a little bit. So I think the revenue line versus '16 is in the ballpark. Some of the new growthy stuff, we got to manage, but that's kind of lower-margin stuff, too. So the rev line's okay. Gross margin, we're kind of ahead of plan last year a little bit. So if you look at the $33.5 billion, I think we're supposed to be like 44.5%, I think, gross margin. We did about 44.1% on the year last year, up from about 40.9% back in '12, the base year. So I think we'll hit the gross margin model, maybe do a little better if we're lucky. So we'll do better I think. And then on expenses, we're a little bit above the expense line right now. I think we're going to work to manage that. We're investing real heavily in products, which drive the revenue line. If you look at where we're spending money, it's all in investment areas, not so much in overhead or cost areas. So overall, I'd say we're in the ballpark. The tax rate, we're making good progress. We should -- we hit 22%. We're probably -- might be a little bit of opportunity there. So net-net, we're in the ballpark. And we got a bunch of cash that we haven't done buybacks with, so the share count will come down, too.

That's really helpful perspective. I appreciate that. For the follow-up, relative to the AGS orders, they were up a lot in the October quarter, and I think you said revenue would be down a little bit in that segment in the January quarter. Is that just kind of a seasonal uptick in orders in AGS? Or is there more of a structural component to that as well in terms of the big uptick in orders?

Yes. I think, really, 2 areas of focus for us within AGS. One is the value that we provide for our customers. And there's been huge improvement in helping our customers get -- providing value for our customers as they ramp these new device technologies. You look at the FinFET or 3D NAND, these are really tough transitions. And getting the tools to the defect level they need to be, uniformity, stability, to the entitlement that the tools are capable of achieving, is really huge value to our customers. So we've actually seen an uptick in our contract revenue. We're combining labor and parts, and that's more sustainable from a service perspective. And there's been a huge focus on the value in helping our customers move through those transitions. The other thing is we're really driving cost. We're driving cost from a parts perspective, labor delivery perspective. So that combination, we think, the value as our customers are moving through these tough transitions and are driving and lowering cost, we think it creates a great combination for sustainable growth in the service business that, frankly, we didn't achieve in the past. But we're pretty optimistic that we can keep driving that going forward.

Our next question comes from the line of Krish Sankar with Bank of America.

My first one is, Gary, you said that you expect WFE to grow 10% to 15% this year. When I look at the SSG revenue, it's probably growing somewhere in the low teens. I'm kind of curious, if you're gaining share, where is the disconnect? Is it because rev rec is going to take a while? Or is there something else happening? And then I had a follow-up.

Yes. If you look at it overall wafer fab equipment share, last year, we gained 1.4%. What we said is SSG revenue's up 25% in -- from fiscal year to fiscal year. We haven't given any color certainly in terms of the calendar year. But I also had said earlier that we were pretty optimistic about wafer fab equipment increasing next year and that we would outgrow the industry. So if you look at the data points, kind of what's driving market share, these major technology transitions with FinFET and the memory transitions are really good for us relative to the TAM growth. We have TAM growth in those areas, very strong products. You see this in the foundry business with the record Epi sales, the metal deposition, the implant share. A number of those areas are extremely strong. And really -- so if you look at that, as customers are transitioning to these new transistors, these new FinFET devices, that's good for us. And also, in memory, we are also very well positioned. The etch and CVD share gains this year are going to create momentum for us going forward. As I talked about earlier, we have about 50% revenue growth in etch and CVD that we anticipate this year, and that provides, really, a great opportunity for us. So as these technology transitions happen going forward, we think we can build on the momentum that we have right now.

Got it, got it. That's very helpful. And then a question for Bob. I know you can't answer questions on the merger, but just curious, there were some rules on the inversion path. Post merger, can you do buybacks without repatriating income back to the U.S.? And how much of your cash is onshore versus offshore?

I'll do the second one first. We're about half offshore, half onshore, and a little -- and some of the offshore stuff has already been provided through the tax provision. So it's -- the P&L impact's a little less than that. The second thing is, in terms of repatriation, we think we have a plan with our structure that we'll be able to efficiently return cash to investors and not have the substantive problem that you're talking about.

Our next question comes from the line of John Pitzer with Crédit Suisse. John William Pitzer - Crédit Suisse AG, Research Division: Gary, I was hoping you could maybe help quantify your comments around calendar year '15 WFE. Is there a range of up that you should expect to see? Kind of what's the puts and takes around that range? And I guess, importantly, a lot of your peers have been talking about a pretty good start to the first half of calendar year '15. I would love to kind of get your perspective on what half-on-half growth might look like from the second half of this year into the first half of next year at an industry level.

Okay, yes. Overall, what we see for 2015 is still continued strong foundry investment and really heavily weighted to the FinFET transition for customers. That's a really big battle for all of the different companies. We're also seeing some really strong pull even into 10-nanometer pilot. That's a small amount, but really focused on these technology transitions is really, we believe, will sustain strong foundry investment in 2015. Looking at memory investment as being up next year. And so we -- that, we believe, will be a positive, and then logic, we think, is relatively flat versus '14. On the question on first half, second half, we're not really giving any guidance on first half, second half, unless Bob wants to do that. But what we do see is 2015 up. Really, we think increased investment in memory and a really sustained strong investment in foundry, really focused on technology transitions. John William Pitzer - Crédit Suisse AG, Research Division: Gary, that's helpful. Maybe as a follow-up for you, Gary. Some of your peers have talked about where we -- where they think we are in sort of the 2014 16-nanometer kind of build-out. I'd be curious from your perspective of what inning do you think the industry is in and where you think that might be by the middle of next year.

Well, what we think is that 2015 is really going to be focused below 20 nanometer in terms of the majority of the investment. The -- it really is a huge focus. Every one of our customers in terms of coming out with lower-power, higher-performance devices, but power is a big driver, and so FinFET is a huge focus for every one of our customers. We -- there's always this war for mobility leadership. Every Christmas season, you see everyone competing for those slots in the new consumer devices, and FinFET is really the big focus for customers. So we see, from a CapEx standpoint in '15, that really being the majority of the investment.

Our next question comes from the line of Tim Arcuri with Cowen and Company.

A couple of things. First of all, Gary, there was some confusion recently around the amount of capacity for 2016 and '14 that'll be installed by the end of this year. There's different companies giving different numbers. So I'm wondering what your number is for the end of this year. It seems like the consensus is maybe 120,000 to 140,000 wafers a month, something like that.

Yes, about 120,000 by the end of the year.

120k. And then, Bob, I just want to go back to a prior question about the September 2013 just from treasury. They really went after hopscotch and decontrol. But -- so I just wanted to be very clear that, that doesn't change your ability to get the tax synergies that you highlighted or to buy back the $3 billion that you indicated post the deal.

Pretty much. I think there might be a tiny bit of money on that margin that gets delayed a little bit, but fundamentally, yes, we're okay.

Our next question comes from the line of Atif Malik with Citigroup.

The first question for Gary. Gary, you talked about the joint integration team has progressed faster than expectations. If you can provide a bit more color on what were the expectations and what metrics they've exceeded expectation? And relative to the $500 million OpEx synergies for the target model for 2017 for the combined companies, if we should be thinking of a higher synergy number? And then I have a follow-up.

Yes, relative to the progress for the integration team, we've really focused on the areas that need -- the things that need to happen to hit the ground running on Day 1. So we've aligned around the organization structure, especially focusing on the areas of highest value creation within the new company. And when we're aligned there, the culture, the mission, vision, values that really guide the behavior for all of our employees, we've aligned around that. And also, the operating rhythm, how are we going to drive the business, all aspects of the business, our strategy, our execution, our decisions around portfolio planning, all of those kinds of things, all of those areas have -- are aligned and ready to go for Day 1 for the new company. And what I would say is that the more that we're together, the more excitement there is and the more opportunities we see to provide better products faster and at lower cost to our customers. And so again, on the organization, culture, operating rhythm, all of these areas, very, very strong alignment and strong alignment to create value for our customers and for our shareholders. So there's a lot of excitement within the team.

In terms of the $500 million, couple of things. One, if you look independently at Tokyo Electron, it had a really good year. I mean, they're doing well in their operating margins. Their share looks like it's in good shape. So you got to give them great deal of credit for really good execution themselves this year. In terms of the $500 million, I think that it's in the ballpark of the right numbers. That was a '17 number. I'd like to -- I think what we're going to plan to do is get the deal closed. Then, we'll have an investor meeting within a week after is my guess and update people on the model in more detail.

And as a follow-up, foundry orders have been tricky to call in terms of timing as your customers are waiting for their customers to decide on the next processor. Is it fair to assume that the flat guidance for January and then in April, the outlook that could be higher than January, that the swing factor is predominantly on the foundry side?

Yes, if you go and look at it, I think it's a pretty strong DRAM period right now. I think that foundry has an opportunity to pick up. So I think your read on the situation's in the ballpark.

Next question comes from the line of Harlan Sur with JPMorgan. Harlan Sur - JP Morgan Chase & Co, Research Division: On your higher WFE spending outlook for next year, as you mentioned, it does appear that it is weighted towards inflection technology spending. Can you just give us your view on the percent of the total mix that will be for inflection technology, FinFET, 20-nanometer DRAM, 3D NAND? Is it going to be 30% of WFE spend? 40%, majority of the spend? Any insights here would be appreciated.

Yes. On the foundry investment, we think over 50% is going to be for sub-20 nanometer. And as I said earlier, that is a huge battleground for all of our customers. And there's some spending even all the way down to 10 nanometer on the pilot that is being pulled in by some of our customers. In NAND flash, the 3D NAND ramp has been slower than what we had anticipated. This year, the majority of the investment has been for planar NAND. And where we're looking at right now, we still think that in 2015, that the majority of spending will be in planar NAND technology, and the transition to 3D NAND in terms of majority of the CapEx, we think, is more in 2016. What we do see from customers and talking to multiple customers is very good performance with 3D NAND technology. And also, the potential for bit scaling in 3D NAND is pretty significant. It is a tough technology transition, so it's happening slower than I think some of the customers had anticipated. But still, from a performance and cost standpoint, there are very good reasons to make that transition, but we think that one is more in the 2016 time frame, where that becomes the majority of the CapEx spending. Harlan Sur - JP Morgan Chase & Co, Research Division: And then, Bob, you delivered on your target to drive a 2% reduction in materials cost. Can you just kind of help us understand? Is it more procurement driven or better platform design or a combination of both? And as you drive towards your 2016 model, how much more efficiencies can you drive in your COGS?

Yes, the way we measure that is off the released bills of material pretty much. We get an incremental benefit through design, so most of that's engineering and purchasing working together. And AGS, everybody works together now. But the way we measure cost down is off a base number and how much we get off of that. Now what we're trying to do with new products is trying to introduce them more cost effectively also, but we measure that separately.

Our next question comes from the line of Weston Twigg with Pacific Crest Securities.

One question. Just you sounded very bullish regarding the foundry FinFET ramp, but I'm wondering if you could give us your view on FinFET yield progress at the foundries and whether you think that there's some risk that yields might impact the ramp timing and overall 2015 demand outlook.

Yes. Based on what we're hearing right now, I would not anticipate that, that's going to -- will impact the perspective on the foundry investment for next year. What we see today and what we're hearing from customers is continued strong investment in CapEx next year and more heavily weighted towards those next-generation technology nodes.

Okay, good. And then just as a follow-up, I'm wondering if you could comment on demand in China and whether you're beginning to see visibility in the pipeline for new 300-millimeter fabs. And do you expect those -- that demand to pick up in 2015?

It's Bob. I think we see moderate amounts for that 300-millimeter local stuff. I think it's in there. We see it growing, but it's not a big number for us.

I think our overall position in China is very good, but as Bob said, that the -- it's not a large driver for us next year.

Our next question comes from the line of Patrick Ho with Stifel, Nicolaus. Patrick J. Ho - Stifel, Nicolaus & Company, Incorporated, Research Division: Gary, first one, the CVB and etch share gains that you've mentioned to date, can you comment a little in terms of the customer segments that you've seen the most gains? And perhaps, more importantly, going forward, will there be additional incremental gains in both of those segments?

Thanks for the question. Relative to both of those different markets, the gains for us are weighted, I would say, a little bit more in terms of memory than it is in the other market segments. We have very strong growth, as I talked about earlier. The etch revenue we're forecasting for 2014 is up 2.5x where we were 2 years ago, so very significant growth in terms of etch. And as I had mentioned earlier also, the combined revenue growth for etch and CVD in calendar 2014 is around 50%, we believe, those areas will grow. And we made -- as Bob talked about earlier, we made a lot of investments in new products, and those new products are really helping drive the share gains in both of those different markets. We're very well positioned as our customers are transitioning to new technologies. Part of the gross margin pressure also that Bob talked about is really significant ramp. We talked about 300 chambers for new products that we announced at SEMICON West that we're shipping and really significant growth in those new products right now, which is great from a share standpoint, really positions us well around those technology transitions, providing some gross margin pressure as we're introducing these products to new customers. But overall, we're very optimistic about our outlook going forward in those markets.

Let me give you some more color if I could, Patrick. I was kind of joking with the guys around here that sometimes we're off on timing, but let's be right -- let's be on the -- we could be on the wrong side of timing once in a while, but let's be on the right side of inevitability. So if you look at the opportunity for us, it's really big on inflections. That's where you make penetration. So if you look at inflections, we've talked about flash storage [ph] around FinFETs, VNAND, very positive for us because that's where we push through the windows with those tools. So if you look at etch and CVD, we're making a lot good progress, gaining a lot in memory, in particular on inflections. And in fact, if the VNAND had been a little more robust this year, we might have gained up to another 0.5 point of WFE this year. So that means it wasn't quite as robust this year, but everybody says it's coming, right? Is it '15, '16? But kind of on the right side of the inflection, right? So -- and then within the specific question you asked about etch and CVD, etch is making great progress. Look at the numbers, up a lot, up in Q1. And the other thing is if you look at -- and memory is where the revenues are, but we're making good progress in qualification at more complicated places like foundries, too. So again, going back to timing and inevitability, if you get the penetrations, get the market share, get the products right, you can also get the gross margins right over time. So you want to be on the right side of the trends, the inflections, the inevitability of these things and then grind out cost and profitability stuff, and that's what we're doing. Patrick J. Ho - Stifel, Nicolaus & Company, Incorporated, Research Division: Great, that's really helpful. And Bob, maybe specifically for you. You've obviously made improvements on the services business front, particularly on the operating margin line. Can you give a little more color in some of the specific tactics and moves that you guys have done that have helped drive the higher operating margins in that business group?

Well, it's not me. It's the SSG and AGS guys. I mean, AGS has worked really hard this year, and really, we're seeing some real progress. And they've work really collaboratively with SSG. I kind of think -- I'll go offline for a second. I kind of think we historically thought like equipment guys. We didn't think about the aftermarket, so we got much tighter alignment between the 2 groups this year. They shared bonus plans. They co-located. And you're starting to see real momentum with the teams. So I think getting people to work closely together, shared objectives, think about the service business has been a big plus. And I think they're just starting to turn the corner on that. I mean, you're starting to see the numbers. We saw it in the behavior, the tight relationships. So what are they tactically doing? They're doing some lower-cost sourcing. They're also doing some much more service contracts. You get sticky service revenues. So I think the strategy and execution in AGS and AGS working with SSG has been a big improvement on multiple fronts.

Yes. I would tell you on the cost front, as Bob said, Patrick, we are really focused on trying to drive lower cost in our parts, in our -- and also the delivery of our service to our customers. So that will -- that is sustainable, and we really think that we're in the early phases of what we can do there. As Bob said, we've reorganized the service groups so that there's a tighter connection between the SSG business units with our service teams to really focus on, as we're ramping Epi for FinFET or the CVD products for deposition on a VNAND type of device, so the VNAND stack, these are tough processes. So to the extent that we can have service together with our business units and a tighter alignment, as customers are moving through these transitions, defects are harder. Uniformity is harder. Stability is harder, all of these different things. And certainly, they're very focused on cost. So that focus on value is really changed, and the alignment between the groups is much better. And we really believe that the growth that we're seeing there is sustainable into the future.

In terms of the -- let me give you a little more color. I think we made real good progress now. I think I can see it on the revenue and on the margin line. The margins did benefit a little bit in '14 from some onetime stuff I talked about earlier, but over time, we're systemically making more progress.

Our next question comes from the line of Mark Heller with CLSA.

Gary and Bob, I was wondering if you -- there's been some more positive commentary lately on EUV. I'm just wondering if you're seeing any changes to your customer roadmaps in terms of potentially integrating EUV into the roadmap sooner.

Yes. As of right now, we really don't see a major change in terms of impact on our business until kind of post 10 nanometer. So for us, I think over the next few years, we don't see a major impact.

Okay. And Bob, a quick question on the OpEx and maybe earnings leverage. How should we expect OpEx to trend over the next few quarters? And also, the EPS has been sort of in this $0.25 to $0.29 range for the past few quarters. When can we expect sort of better earnings leverage? Is it just from sort of the buybacks? Or should we expect other things to drive the EPS leverage as we look forward?

Sure. So on the OpEx, I'll say what I said at the beginning -- almost exactly a year ago this time. We tend to have a little bit of OpEx pressure early in the year because we give everybody a raise on the same date in early January. So we got about almost a month of that in this quarter, and then we have 3 months of it in the following quarter. And we do have the benefit of the shutdown in this quarter, and we're not planning it on into the second quarter. So there's a little bit of OpEx increased pressures typically for us in Q2. So we have to manage that. But I feel like there's a little bit upward pressure there, and we have to manage it to get within a tolerable range. The other thing is we have a lot of new products coming out, so that's driving the top line growth. In fact, give you more color on that, we think there's an excellent chance that we're going to gain -- grow revenue in every one of our segments last -- next year in '15. But we really have a lot of new products coming out. We have the R&D pipe, and even in AGS, there's some investments in revenue growth. So what's the point? I think expenses have a little bit upward pressure through the year. Part of it's the raises. Part of it's the number of new products coming out. So we have to work on that. In terms of the operating margins, EPS, as you start to get these products, and if you're in a decent WFE environment and we're making progress on the lines below that, including tax, we're starting to knock on the door, getting those higher numbers in terms of EPS.

Our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

A question on your order -- segment orders. Your -- that looks a little different than what your peers have reported in general, foundry orders down significantly and DRAM up pretty significantly. Is there something different about your order pattern? Or it's just the 1-month offset that is causing that variation with the peers?

Yes, I would say that there's a couple of thoughts there. I think the 1-month thing throws it a little bit. The other thing is -- some of it -- even within our products, some of them have a little bit different phased purchase. For instance, our Epi tools at foundries tend to be about -- earlier in the cycle than later. So you got to go through all the mix. I don't think there's real fundamental difference in what we're seeing.

Okay. And a question on AGS. You had the revenue -- if I look at the calendar year or January quarter, January quarter revenue will be probably up close to 10% on AGS, about 22 50 [ph]. Where do you see that run rate? How should we look at AGS run rate over next couple of years?

Yes. Our goal is to grow that 6% to 8% type of numbers, which is in our strategic plan we gave you a couple of years ago. And we're starting to see that. The services were strong in the past quarter or 2. We're putting a little bit more money into the OpEx line to invest in some basically product type stuff in AGS. So sort of 68% is what our goal is.

Our next question comes from the line of Tom Diffely with D.A. Davidson. Thomas Diffely - D.A. Davidson & Co., Research Division: So first a clarification. Why is it that etch is growing so much faster than your other products in the first quarter? Is this simply just share gains off of a smaller base? Or is there more to it?

We think a couple of things going on. If you look at it, we believe we gained share on the year in '14. We gained share on the year in '13, and we're optimistic we'll gain share on the year in '15. Secondly, if you look at some of the timing of some of the places where we're gaining share, we talked about memory looking good for us, and it's a pretty good early part of the year for memory. Everybody's talking about places like DRAM and some NAND. So I think it's a trend over years, and then in the quarter, it's strong also, but it's probably ongoing trend.

And also, it's the -- I think in the etch case, as we talked about earlier, we have some new products that have very strong pull from customers. So as those products are ramping, that also gives us a tailwind. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then you talked about '15 being another very strong year for the foundries. Are you going to see a broadening of your customer base, the number of players participating in the foundries in '15, do you believe, over '14? And if so, what kind of impact would that have on your overall share in the space?

Well, foundry is a really strong position for us. We have many of the transistor and interconnect-enabling technologies. That's really driving our Epi, our metal deposition, implants, some of the areas that we talked about earlier that were extremely strong. So foundry spending is really very good for us. We have very good share in really all of the different foundries, so there's not a tremendous difference from one to the next. We do see some broadening relative to the investment in 2015, but the key thing for us, and as we've talked about before, especially in FinFET, as FinFET ramps, our total available market opportunity goes up 25% to 35%. And those are the areas where we have many leadership products. So that is very, very good for us from a growth perspective.

Our next question comes from the line of Edwin Mok with Needham & Company. Y. Edwin Mok - Needham & Company, LLC, Research Division: So first question on -- just clarification on the commentary about higher memory spending in 2015. Is it mostly driven by DRAM growth that you talked about and less so from NAND? And is that more to do with just, call it, timing of the 3D NAND spending more like in terms [indiscernible] ? I'm just trying to understand if there's more DRAM, less NAND. Or is it pretty balanced for you in 2 buckets?

I think, Edwin, it's pretty balanced based on what we see today and what we're hearing from customers. In both cases, we see memory spending up next year. As I said earlier, the 3D NAND transition is happening slower than we anticipated, so we see incremental investment in planar NAND. 3D NAND is broadening and is increasing in 2015, but we see both the NAND and DRAM investment up in 2015. Y. Edwin Mok - Needham & Company, LLC, Research Division: And then just kind of going back to etch. I'm trying to understand how much of that is just TAM expansion. It sounds like there's always a little bit more option maybe [ph] there? And I think you mentioned that at least initially, you guys have stronger position in memory, which helped you in etch. I'm thinking your product is -- have higher productivity than your competitor and that is one differentiation. Is that a big driver for customer to adopt that? And is that because -- because, I think, historically, memory customers tend to be more cautious there. Is that -- is productivity a big issue the customer is facing and you guys are able to win on that?

Yes. I think, productivity -- overall cost of ownership is a big focus for everybody with more patterning steps. That's certainly a big focus. We actually have in the new products some very strong technology. If you look at areas like microloading, for instance, we've -- we have some very good capability there. CD uniformity is always a big issue for our customers. So we are seeing, not only on the cost of ownership side but also on the technology side, some really good opportunities for us to grow the business. We've strengthened that team a tremendous amount. It's really an outstanding group, tremendous passion in solving problems for customers -- high-value problems for customers. And as Bob talked about, we've increased investment there, both in R&D for the new products that are ramping now and in the field technical support. So we see very good pull. Certainly, in memory, we are gaining in logic, and we see pull on cost but also on the technology side.

Thank you, everyone, for your question, and we'd like to thank everyone for joining us this afternoon. A replay of this call will be available on our website beginning at 5:00 p.m. Pacific Time today. Thank you for your continued interest in Applied Materials.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may all disconnect.