Good afternoon, everyone. I'm Mike Sullivan, Head of Investor Relations at Applied Materials. We appreciate you joining us for our second quarter of fiscal 2017 earnings call which is being recorded. 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 those about Applied's current view of its industries, performance, product road map, share positions, revenue growth and business outlook. These statements are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks and uncertainties is contained in Applied's most recent Form 10-K and 8-K filings with the SEC. All forward-looking statements are based on management's estimates, projections and assumptions as of May 18, 2017 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 Relations page of our website at appliedmaterials.com. And now I'd like to turn the call over to Gary Dickerson.

Thanks, Mike. I'm very happy to report another record-breaking quarter for Applied Materials with the highest revenue and earnings in our history. We've now set earnings records for 4 quarters in a row and as I look across the company, I see tremendous momentum. Our markets are strong and getting stronger and we're sustainably growing faster than these markets by expanding our served opportunity and gaining share. In today's call, I will provide our perspective on the factors driving the industry and our strategy for sustainable, profitable growth within this environment. I will then describe the key inflections and investments within our markets before concluding with updates on our major businesses. Bob will then provide additional detail about our performance and outlook. Let me start with the big picture. This is an incredibly exciting period for the electronics industry, with a broader set of drivers and a wider spectrum of companies making very large investments to advance semiconductor and display technology. In the past, PCs were the dominant factor in semiconductor demand. PCs drove the technology road map and enterprise refresh cycles drove industry upturns and downturns. More recently, global adoption of smartphones, combined with social media, have created a much more pervasive consumer demand, expanding the market and making it substantially less cyclical. Today, many new demand drivers are emerging that layer on top of traditional computing and mobility, technologies like the Internet of Things, big data and artificial intelligence are transforming industries, including transportation, health care, entertainment and manufacturing. The way these industries create value is increasingly dependent on capturing, transmitting, understanding and storing data. In turn, this means they are more and more reliant on advanced semiconductors. The impact for Applied is twofold. First, our markets are growing and becoming more stable. Second, this is a period…

Thanks, Gary. Before going into the details of the quarter, I'll touch on 3 things that are sustainably better for Applied, one, our markets; two, our improving position in those markets which is enabling stronger gross margin performance; and three, our profitability and free cash flow. First, our markets are more attractive. We believe wafer fab equipment spending will be higher and less volatile for the foreseeable future. Display equipment spending also looks higher and more attractive, for Applied Materials in particular, because we're greatly increasing our served addressable market. Many of you have added valuable insights as to why WFE has become larger and less volatile. I believe it boils down to three things, one, the semiconductor market is growing and becoming more diverse; two, equipment intensity is increasing; and three, capital investment is measured and rational. This better industry environment is sustainable. As Gary mentioned, the semiconductor industry we enable has also become larger, more diverse and more critical to big innovations in the global economy. Today, we're seeing the emergence of new silicon-rich devices needed to enable the Internet of Things, cloud data centers and artificial intelligence. Data is becoming more valuable and harnessing the value requires silicon. For Applied, this translates to higher demand for logic and memory capacity at both the leading edge and trailing geometries. I believe the industry has seen a new wave of sustainable growth with economic value creation that justifies the cost of investment. Next, Applied's position in the markets in sustainably stronger. The changes we've made since 2013 in strategy, capital allocation and business systems, like the product development engine, have given us our strongest product pipeline in many years. I've been invited to an industrials conference this month to explain how our products are enabling big changes in manufacturing…

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

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

I guess question around sustainability. You're guiding WFE $40-plus billion here for '17. And curious, what gives you the confidence to be so upbeat looking into '18 and beyond? And I guess as part of that, would love to hear your thoughts in terms of the contributions from areas like AI and public cloud investments versus, I guess, more traditional areas like smartphone and PCs in the past.

Sure. Let me see if I can try to give you context. I think context rather than point answer is useful, give you context over time and context over breadth. So if you look at context, we thought back at Analyst Day last September that 2016 WFE would be about $33.7 billion. And in fact, it ended up a little over $35 billion. We thought at Analyst Day last year, this year would be $34.5 billion. And in fact, it started with a 4 number this year and it looks very healthy. So it's trending up. So then you say, well, where is it trending up? It's kind of up across the board. Earlier in the year, we thought it was kind of 5% up across the board. Now we think the whole thing is up 15%. We're seeing in DRAM, NAND, foundry. Tactically, we're seeing high utilization in all the fabs. We see no diminution of ordering patterns. We don't see double bookings or anything people might fear. So we see -- when you see strength across virtually every customer and virtually every device type, that goes to some root cause questions. So in my opinion, we're facing what we've been talking about for a while which is, there is more root cause demand drivers for devices. Now longer term, those root drive cause factors are going to be things like cars and AR/VR. What we're seeing now is tactically more content in the phones. We see a lot more content in the phones around NAND, DRAM and we also see strength within the processor side on both the cutting edge and the lagging edge. Lagging edge, again, this year, will be over 40% of device types. But the cutting edge is pretty strong, too. So we're seeing broadscale demand. My belief is that in the intermediate term, there's more content going in phones and more going into the big data centers which are both driving this which will help us. So then the question is, why is there more going in? We believe that there's, what I call broadly speaking, more applications for processor technology, more apps on top of it that are driving systemic demand. And I think, frankly, we're in the early innings of it. So if you ask me, okay, is the second half good? Yes, we're okay. If you ask me, is '18 good? Yes, I think it probably starts with a 4 again. It's pretty good. If you ask me long term which is what I spend a lot of time on, I see more root cause drivers for growth in semiconductor and silicon growth than I've seen in years and I think it's sustainable.

And C.J., this is Gary. If you look out over time what drove our business in the past were the enterprise and PC upgrade cycles, then it moved to mobile, social media, very pervasive and driven by holiday season new products, where all of the consumer electronics companies had to have those products ready for Christmas or Chinese New Year. And as you go forward, we talked about AI and the importance of capturing, transmitting, understanding and storing data is really going to disrupt big industries, transportation, health care, entertainment, manufacturing. And when you look at AI chips, almost every week, somebody's announcing a new AI chip, that it's at the -- logic devices that are at the physical limits of how big they can build those chips because there's so much value in these changes that are happening in these major industries. And of course, that's great for us. If you're building these big logic chips, you need better transistors, you need much better interconnect technology and you also need more memory which is materials-enabled and another area that's in the sweet spot for Applied Materials. So longer term, these inflections really create even more sustainability in terms of our markets going forward.

Our next question comes from Harlan Sur of JPMorgan.

On the China domestic semiconductor market and the outlook there, especially as we think about looking into 2018, I think conservatively, we're tracking 3 to 4 domestic foundry programs and about 4 to 5 memory programs. Foundry, obviously, is a bit more mature. Memory, we're kind of early innings, like Phase 1 kind of development. But especially on sort of memory in China and we get this question a lot from investors which is, is the team starting to get pipeline visibility into some of these programs actually starting to fire the confidence level that these programs are going to contribute to potentially a growth outlook for 2018? Love to get your views here.

Yes, thanks for the question. China's one of our strongest regions for both semiconductor and display, very deep customer relationships. And what we're looking at for 2017, if we compare to '15, it's about 2x growth in our semiconductor business, 50% growth in service, 50% in display. And the business is really driven by a couple of different strategic factors. One is, there's a big gap between supply and demand and there's this large drive to try to close that gap and then also building a secure supply chain. When we look into 2018, what we're seeing right now is that the overall wafer fab equipment spending could be meaningfully up, more than $1 billion, maybe $1.5 billion from '17 to '18 and the domestic part of that increase is also up a meaningful amount in 2018. I don't know, Bob, if you want to add anything else?

Yes, I think that's pretty accurate. And if you ask us to look longer term, we see the domestic -- we see the total going up basically every year and the domestic part, in particular, going up every year.

Our next question comes from Timothy Arcuri of Cowen and Company.

Bob, I actually have 2 questions. Number one, just on the recent debt raise. I know you paid down $200 million of debt with that money. But I'm surprised that there's not kind of a new capital return that was announced with that. So I guess that's my first question. And then I wanted to also ask about SSG in the back half of the year because if I run the numbers on calendar first half of the year, you're sort of annualizing to like $42 billion WFE roughly. And if we're going to be at $40 billion for the year, then that would sort of say that the back half has to be down like roughly 10%. So I'm wondering if that math's right.

Yes, 2 complicated questions. The first one, we raised money frankly from an opportunistic point of view and frankly a shareholder perspective. So if you look it, we raised $2.2 billion, now we had to repay $2 billion -- $200 million, so it's about $2 billion net. And it was about 50% of it was 10-year money, about 50% was 30-year money. And the 10% money, maybe like 3.3% and 4.3%, okay? So the average rate is about 3.8%. So basically what we're bringing into our capital structure is long term debt at low rates that's pseudo-equity at low cost of capital. So that's pretty attractive. The second thing we're doing, many people believe that there'll be some type of tax policy change this year or next which will ease and facilitate the return of cash from overseas locations. Well, we're kind of hedging our bets. We're not sure about the timing and we want to stay committed to shareholder returns and keep our tax structure in place until there are any substantive changes. So I think this raise, if anything, was to continue to support meaningful returns of capital to investors. And as we said on the call, we've returned over 100% over the last 5 years. In this past quarter, the total was over $380 million, I think, between dividends and buybacks. So I think we're very committed to shareholder returns. We will hit the model which is shrinking the share count. And if we get more line of sight to what's going to happen on the tax policy, then we'll clearly react more effectively and more efficiently to how to maximize those shareholder returns. In terms of the -- how's the year look, we gave in the call a few data points. One, we said that our revenues in '17 fiscal year versus '13 were going to be up 90%. So you can see, we're going to have a good year. So my take on it is, the year is a good year. Our take on it is the year will continue to strengthen throughout the year. Our take on it is that we're going to gain share this year. So it's going to be a really good year for us. And that's just semi. Display, we're going to do well, too. We believe those drivers that drive the market and our share continue for a number of years. So is the number a $40 billion number or north of a $40 billion number? All we want to say now here in early May is it starts with a 4. It's up significantly from last year and it strengthened all year.

Our next question comes from Farhan Ahmad of Crédit Suisse.

My question is, you've already talked about it quite a bit. Generally just wondering if you guys have done any sort of analysis if one particular segment would benefit more than the other in terms of logic, NAND or foundry?

I think relative to AI, as I mentioned earlier, you see announcements almost every week of new logic AI chips going to the physical limits of the reticle field, so the physical limits or the ability of the semiconductor companies to build those chips. So a tremendous amount of transistors, vias, interconnect technology, all of that is in the sweet spot for Applied Materials. Our Transistor and Interconnect Group, all of those different products, epi, PVD, CMP, thermal processing, implant, are really unique and very strong positions for Applied Materials. So that growth is really exactly aligned with the products that we have in logic and in foundry and give us really a great growth opportunity. The other part of it's the materials enables memory scaling. More and more you're seeing devices going from 2 dimensions to 3 dimensions. And as they're going to 3 dimensions, really, the ability to scale the performance and also the cost is all about new materials, new deposition, epi, new etch technology, selective removal, all of those areas. And personally, I'm increasingly optimistic that we have very innovative, highly differentiated new technologies that will not only enable further scaling in 3D NAND technology, but also enable new memory technologies. Our position there is very, very strong. The relationships and the engagements that we have with customers are broader and deeper than we've ever had in the past.

Our next question comes from Atif Malik of Citi.

I have a question on the display part. So at the Analyst Day last year, you guys talked about expanding the TAM on the display products from 15% to 30%, 40% over the next 2 years. Just curious, how are your engagements going with those new display products so far?

So we have very broad and deep relationships with all the leading companies in display and also the leading consumer electronics companies that are using those displays. So we're in a really great position to enable these new technologies. And as customers are moving forward with new display technology, it increases our total available market and puts us in a good position to continue to grow that business. If you look at display overall, you really have 2 big drivers. One is the strong organic LED for mobile opportunity and that is a broadening out to a large number of customers and also, the increased adoption of larger TV screens. So both of those are driving our business. As I said earlier, we have very strong and deep relationships with leading customers and we're focused on the biggest technology challenges. If you look at all of those customers that want to get into the growing mobile OLED market, we're focused on the major technology challenges that enable those customers to build those kinds of devices. We're not ready to announce any specific opportunities at this point in time but we will later this year.

Our next question comes from Krish Sankar of Bank of America Merrill Lynch.

The question I had was WFE running at 40 billion, 40 plus billion this year and next year, where do you think 3D NAND WFE is within that? And if the prices for NAND roll over, the reality of economics kick in and 3D NAND makers scale back the CapEx. Or do you think demand is strong enough to continue investing in capacity for the next 2 to 4 years?

Sure. So the question was, is 3D NAND going to keep expanding? Is that -- yes. So let me take a shot at that. So 3D NAND spending is up this year. It was up again last year. If you look at it, there's about 1.6 million wafer starts in the world of 3D NAND -- NAND in total. By the end of this year, they will convert at 750,000 wafer starts per month. So there's still a fair amount that's going to convert. I think that the vast majority that's going to convert over time because 3D performs better than 2D. I think what also helps memory in general, particularly NAND, is that more and more customers' customers are starting swap out 3D NAND over time for hard disk drives. So overall, demand for memory is going up. The share of NAND, far versus how this drive will trend up and 3D will be the NAND of choice versus 2D. So they're early in the build-out, 750,000. They got to get to 1.6 million. And we think that the installed capacity is going to go up over time because of this demand. Then if you look at greenfield versus refresh, we're kind of agnostic, frankly. So if you look at the cost of doing a greenfield 3D NAND factory, we do well. In fact, we're gaining share at virtually every product, I believe. If you look at transition of one 3D to a higher level of 3D, the revenue opportunity for us is about the same.

Our next question comes from Stephen Chin of UBS.

Just a follow-up question on the higher outlook for wafer fab equipment spending. What customer type is driving that big increase in your WFE? And do you think this $40 billion number is the new normalized level for WFE and not a peak?

Yes, it was seen across the board. We're seeing it at NAND, DRAM and foundry. Logic's kind of flattish. We're seeing it at almost every customer, I think, too. So it's very broad. And when you get that broad, it's not, hey, they're timing DRAM, they're putting more DRAM in a PC. The root cause is broader than that because it's across a wide range of device types of customers. So then you say, what is the application for driving? We do think it's more and more about more applications for your PC and your data center and stuff like that. So it does start to see these AI stuff, deep learning. Can I point exactly how much does AI I know? But it's across the board we're seeing this, right? So then in terms of the number, those are, I called earlier, I think this year begins with a 4. But I'm not saying it's 40, frankly. It's a good number and I think next year's a good number. So I actually think the new normal is 40 plus. I think what I worry about internally at the company, that we don't plan more for the upside than downside. I think there's more opportunity on the upside than the downside.

One thing I'd add to that is that I think everybody is seeing a large increase in the amount of data and also the value of the data. If you look at deep learning, the amount of data that you process is going to go up. Right now, a lot of data's thrown away. So you've got an increase in the amount of data and then the amount of data that's processed is also going to increase. So both of those factors make me personally pretty bullish about the memory business long term. And certainly, that's also what we're hearing from our customers.

Our next question comes from Romit Shah of Nomura.

I did notice that display revenues were a little light in the quarter and that margins were down about 5 points. Can you talk about that, Bob? Is that just short term noise? And last quarter, you gave a target for display. I think it was up -- for 2017, up 50%. Do you still feel good about that?

Yes, we do. It's just timing and it's just logistical. Display's going to have a really good year. The underlying market dynamics are very strong for both TVs and mobile. And our position's really good. So I think display is strongly a lot of opportunity. And then we have a product cycle we've discussed coming on board later in the year. So I'm bullish on display and I think I wouldn't read too much in these quarterly numbers. In terms of the numbers we set last quarter, yes, we'll hit those. Yes.

Our next question comes from Toshiya Hari of Goldman Sachs.

Bob, I had a question on gross margins. You guys showed nice upside in the quarter. And just wondering what the drivers were here. In the past, I think you pointed to outsized growth and things like etch and display that were headwinds to the business. The recent improvement, is that a function of that headwind abating? Or is that a combination of mix shift and also fundamental and sustainable improvement across the board?

Yes. If you look at a company like Applied, the gross margin improvement or change is a function primarily of 2 things and one third thing that's a little smaller. One is execution and second is mix and the third which is a little smaller, is absorption with volume, right? So if you look at execution, that's really three things, how you're executing cost reduction; how you're executing on new product development; and how you're executing in terms of field execution. So if you go look at it, this year, we're up a lot. We're up over a couple -- I don't know, several points. And if you look at it, I would say that the improvement -- we have underlying improved execution. So this year, we're up about almost, what, 3 points? So if you look at it this year, execution is trending up and that'll continue on for a while. I think every year, we'll get better. Now we're benefiting from pretty good mix shifts. It's been a good year for our products in the TIG family, PVD, epi, things like that. And so it's helped a little bit. And absorption's helped a little bit this year. It's a pretty big year. It's over 40 and we're gaining share. But I would say that the overall gross margin performance of the company will trend up over time, but this year was helped a little bit by volume and by mix. But I would say I'm still positively upward bound on margins. So if you go -- if we have to redo a model in Analyst Day, I'd probably lean in on a higher WFE and higher margins.

Our next question comes from Joe Moore of Morgan Stanley.

I wanted to follow up on some of the questions on the upward revision in WFE, particularly with regards to memory. We look at sort of memory cash flows and make some assumptions that there's just an algorithmic percentage of that peak cash flow that gets spent which is probably more negative than what you guys are describing that there are sort of people who are looking at the current situation and deciding that they need more supply. I mean, I guess it's more semantics, I guess. But how do you characterize when you see the upward revision that we've seen in just a 6-month window? How much of that is just because prices are better, companies have cash flow and they use it to improve their competitive position versus something that's more sort of structural and dynamic? How do you interpret it as more structural aspect versus just better pricing?

We look at a few things. Yes, we dug into this ourselves, too. We looked at what's driving this data. We looked at some cosmic data. So we looked at the stuff like how much data is captured out there. And we capture -- it was like 8 zettabytes of data was captured in 2016, I think, close to 25 zettabytes of data in 2020 and then it goes to like 45 zettabytes of data. So more and more data has been captured. It's gone up a lot, even in your homes, your cars, your industry, your companies. Then we look at the transmission, processing, source of that data we talked about. So when we start to look at root causes, we've seen a lot of this stuff, right? So then you go look at what's going on more close to planet Earth. And so we looked at this and we said, well, what's going on with NAND and DRAM? We split them up. DRAM's up but it's the still not through the roof. It's pretty good but still kind of restrained because a fair amount of this budget's being spent on NAND. So DRAM price is good. NAND price is good. Supply and demand's okay. So the DRAM, I would say, has probably gotten a little more upside than downside, frankly, in '18 because this year it hasn't been through the roof. It's up from what we thought earlier in the year. And then if you look at NAND, they're selling all the 3D NAND they can build. So it's still pretty good and I do think it goes to these longer term trends they have at NAND. So then if you look at the -- the final thing is just, well, how come you guys are low early…

Our next question comes from Patrick Ho of Stifel.

Gary or Bob, in terms of the display business for you guys, we do see the longer term trends of OLED. Can you give a little bit of qualitative commentary on the LCD side of things, how you're benefiting this year as TV sizes do grow larger? Is this also one of those sustainable trends? Or is this just going to be a 1-year or 1.5-year phenomenon as the industry transitions on that front?

Yes, I'll start and Gary can jump in. Gary's TV aging is a little obsolete at his home base, but I'll start. So if you go look at this year, we're going to be strong in both TVs and mobile. TV's largely LCD. Mobile is -- the spending is largely for OLED, okay? So if you look at the 2 drivers, in OLED, it's conversion of the phones which we've talked about. My estimate is likely early in '18, about 37%, 38% of the phones, there'll be capacity to make them OLED even though the demand is there. We think it will be about 55%, as we said earlier in kind of 2020. I think it is 67%, 2021. So really, OLED phone displays is kind of supply constrained, to be honest with you. So that's very sustainable. I think it will keep going up beyond 67% is my opinion, too, in 2021. I remember everything, we got backlog kind of ships 6 to 9 months later. So you have extra length on the revenue. Then if you go to TVs, what's really driving the TVs is the big TVs. So we said at Analyst Day that through 2020, I think it was, we're tracking 7 Gen 10.5 fabs. We're now up to 9. And so -- and those [indiscernible] is just starting to ship, okay? And those fabs, on average, spend more than a Gen 8.5. I think there's been about $2.2 billion where it's like $1.2 billion, I think, on a Gen 8.5. So this big TV stuff's got legs for a while. And the capital intensity for these bigger fabs is good and our position's real good.

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

You mentioned earlier on the call regarding bit density and 3D NAND from generation to generation being slower than the planar NAND conversion. So just wondering, could you give us an idea on how much more fab capacity might be needed annually to drive, say, 40% bit growth and what the incremental opportunity can be for AMAT?

Sure. Some of this goes to what I said earlier. So we see and I think we're a little bit on the low side sometimes, that NAND bit growth is going to be probably in the high 30s or something like that. Now last year was much higher. If you look at content in phones, it was up like -- the data we got from an outside service provider was 57%. So there are indications that we're on the low side on some of these things. Plus we're not sure we've captured all the movement to hard disk drives. So I'd say I'm more on the over camp in that number than the under. So then if you go look at it, as I said earlier, the 750,000 wafer starts by the end of this year, we think that they're going to have to continue to spend in dollars WFE content similar to this year for a number of years. Now if they spend on greenfield or they spend on conversions, we're kind of agnostic from a revenue point of view. But we think the total spending is similar to this year for a number of years.

Our next question comes from Craig Ellis of B. Riley.

I wanted to follow up on the comments that you had, Bob, that there were some project-related R&D spending in the outlooks numbers. The question is to what extent is that more of a near term micro opportunity that the company is using versus something that may be more longer term and structural, either because you're viewing the market opportunity differently over the next few years and are chasing some additional existing SAM or as you look at different opportunities, chasing some new SAM that's emerged over the last 3 to 6 months?

Yes. I think increasing the R&D spend was a wise decision, frankly. I think that when we showed you the model -- if you go back to 2013 when I first got here, we showed the first model. Our base case model was kind of a $30 billion base case. And then we did a $33.5 billion. Last year, it was $34.5 billion, I think. If I had to do a base case model for the industry, it's probably -- it's going to be north of that. I don't want to presell Analyst Day in September, but it's obviously north of that. The second thing is our position's a lot stronger. We used to be 18% of WFE and I think last year, we were like 22% or something. We're still going up. Our model is to hit the 25.5%. We're comfortable with that. So if you look at Applied and then display, the magnitude of the change is big or bigger. It was an $8 billion spending environment when we set up and now it's kind of twice that. Our product pipeline is good. So I think the wise decision is to continue to invest in the opportunities. Now customers are coming to us more and more because we've become even more innovative than we were. So if you look at the range of products we're doing, the innovation in terms of the pipeline, really good. So we're getting lots of pull from customers to develop new products. They're taking more and more demo tools from us. We're getting more and more applications. So I think it's money well spent. I think it'll probably trend up. If you look at the model, probably a little bit of risk that the OpEx is higher than the model, but OpEx as a percentage of sales is down 10 points from 2013 by the end of this year. If you look at operating margins, they're up significantly and will probably beat the model. The upside's lower than the downside on the revenue gross margin, operating margins in the model.

In terms of where we're focused, the strategy for us has been inflection-focused innovation. There are really big inflections that are happening at 10- and 7-nanometer. When you're building these AI chips that are as big as the physical limits, there are a lot of technology challenges. We talked about PVD growing this last year to enable the interconnect -- new interconnect technology for lower-power devices. You've got high-performance memory chips also where the PVD is growing for us. And in the -- and the memory area, the ability to scale 3D NAND, is there's big technical challenges there for our customers. And it's really all about etch, deposition. We've got very innovative new materials. The etch area, we've grown our market share significantly over the last few years. Great products, some of the best products I've ever seen in my life. Sym3 is the fastest-growing product in the history of the company. The Selectra product, where we have 1,000 to 1 selectivity. These are enabling customers to build devices that were never possible before and build them in different ways, scale these new technologies, build the logic devices at the physical limits or -- and the same thing is true in display. For organic LED mobile displays, there are technology challenges that are facing customers that want to ramp new factories for those new types of devices. So for me, personally, we've -- I look at Applied Materials, our competencies, technologies, talent is really unbelievable and sets us apart from any other company. And we're really in a sweet spot of all of these major inflections. So we've certainly moved a lot of money within the company over the last few years. The OpEx as a percentage of revenue has been going done. But we're going to invest to enable these inflections and drive sustainable growth for the company. The opportunities for us have never been better.

Our next question comes from Edwin Mok of Needham.

Just want to circle back on China. You guys mentioned expect a pretty significant pickup in spending in China in 2018. Maybe if I -- we focus on the memory side. We've seen like some of these customer announce pretty aggressive road map for the 3D NAND technology. Just wondering, is this bigger spending in '18 predicated on those customer hitting those targets or rolling out those devices and if they have issues going on with the devices that delay the spending that you expect in '18?

We have a range of forecast for China. So as I said earlier, it's one of our strongest regions in both semiconductor and display. We have very, very deep relationships with many of these customers. Right now, what we believe for 2018 is that the business will be up meaningfully from 2017. But frankly, that's also at the most likely and low risk end of the forecast. There's a higher range there that would be going up at a much faster pace. We're looking at early indicators for all of those new projects, but I think right now, we're pretty confident that the increase in China in 2018 will happen. Maybe it's $1 billion, $1.5 billion in terms of total wafer fab equipment. So that we have pretty high confidence in terms of the engagements or the information we're getting from all of those customers. There is upside potential, but that's our current view.

Our next question comes from Sidney Ho of Deutsche Bank.

Going back to the question on capital returns, your free cash flow as a percentage of revenue has come up quite a bit over the past 5 years. I think it was averaging like 15% and now it was more like 20%-plus. Your dividend yield has come down quite a bit as well just because your stock has done so well. But with the long term debt you raised recently, I know you explained that earlier in the call, but just curious, are there any changes to your philosophy in capital returns? I guess specifically, why not raise your dividend and maybe spend a little less on buybacks and -- given dividend hasn't gone up for a number of years? Or are you saving some dry powder for future M&A?

I think we'll probably -- I think we'll continue to return -- the total of all cash to investors will be very, very healthy. I think that the mix will probably morph over time through dividends. We haven't made a firm commitment but I think it will happen. I think the 2 things that I'm kind of watching is, one, I think I'd like to see tax policy because dividend's a firm, fixed commitment. As soon as you make it, then you got to hit it every quarter. And you really have to lean into where you're going to end up, what's your end stake, because people look at the yield, not with -- did you raise it $0.02 a quarter. So we have to commit to a dividend increase over time that gets to effective yield. And with the stock going up, that cash commitment has gone up. So I'm willing to do that, but I'd like to see clarity on the tax policy before I make that fixed commitment to an increasing yield.

Thanks, Sydney, for the question. And Latiff, time check. I just want to see if there's anyone in the queue still.

Yes, sir, we do have one more question in queue.

Okay. Thank you. We'll take that question and then we'll bring it back to me. Thanks.

That question comes from Harlan Sur of JPMorgan.

You guys talked a lot about some of the trends driving logic and foundry, AI, deep learning, VR, data center. And it's interesting because these drivers have some of the biggest chip sizes in the industry, right? In videos, the latest deep learning chip has 18 billion transistors on a single piece of silicon. Broadcom's latest data center switching chip has like 7 billion transistors. These are huge chips, right? My point is that each of these units is consuming more silicon but they're also requiring more leading-edge complex manufacturing. So this is great for capital intensity trends. It's great for equipment business. But frankly, it's a nightmare from a yield perspective. So help us understand the trends you're seeing in your metrology and inspection business and how you guys are helping your customers improve yields. You guys gained share in this segment last year. How do you think this segment grows relative to your overall semi systems business this year?

Okay. Thanks for the question, Harlan. Yes. Again, on the large logic chips that you talked about, we actually had the NVIDIA CEO here just a few months ago. And one of the questions was, really, what does all of this mean to us? And he talked about physical, the chip's as big as they can physically build them. And actually, he also said, a million times more memory. So all of those things are obviously positive for Applied Materials. In inspection share, we're -- or inspection business, we're growing significant amount. We had record revenue in '16. We're on track for record revenue in '17. And if you look at our e-beam business which is our largest part of PDC which includes e-beam inspection, e-beam review and CD-SEM, we're going to be up in '17 more than 50% versus '15. We have very, very strong technology position with world-class electron optics and very strong customer pull for e-beam products in logic, foundry and repeat orders for the PROVision in memory with some large customers. So very, very strong position. We have great technology, very strong customer pull and we believe that we're going to continue the growth that we've seen over the last couple of years in our PDC business.

Great. Well, thanks, Harlan, for the question. And Bob, would you like to add anything else before we close the call?

Sure. Thanks, Mike. One of Gary's favorite expressions around here is innovation's about connecting the dots. Let me see if I connect a few dots that I -- we believe and I hope you heard today. One, we believe the wafer fab equipment market is sustainably higher and less volatile. Also, display is higher and for Applied, it's sustainably a better market because there are more technology inflections and because we're growing our served market. Second, Applied's position in the market is sustainably stronger. And we're executing better and better. And third, we're generating more free cash flow and returning the excess to our shareholders. Speaking of free cash flow, one of your own interesting note comparing Applied Materials to some of the top names in the industrial sector. Relative to the average of the companies, Applied has higher revenue and profit growth along with higher ROIC and free cash flow margins. Compared to these companies, I believe we're being discounted for being more cyclical even as we become demonstrably less cyclical. I believe that over time, we'll be viewed and valued in a new way. So thank you for your time today. And we look forward to seeing many of you in person over the next few weeks.

Well, great. Thanks, Bob. And we'd like to thank everybody for joining us this afternoon. A replay of the call is going to be available on the website beginning at 5 p.m. Pacific Time today. And we thank you for your continued interest in Applied Materials.

Ladies and gentlemen, you may disconnect your lines at this time. Have a wonderful day.