Applied Materials, Inc. (AMAT) Q4 2013 Earnings Report, Transcript and Summary

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 today, November 14, 2013. I would now like to turn the conference over to Michael Sullivan, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Rachel. Today, we will discuss the results for our fourth quarter and fiscal year ending October 27. 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 will also contain forward-looking statements including those that our announced business combination with Tokyo Electron and our current view of Applied markets, operational improvements, products, share positions, profitability, growth targets and Q1 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 it should be interpreted in that light. Information concerning the risk factors is contained in our company’s SEC filings including our most recent Form 10-Q. These are our expectations as of today and we assume no obligation to update the forward looking statements. 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 earnings summary presentation, both of which are available on our IR website at appliedmaterials.com. Now I’d like to turn the call over to Gary Dickerson.

Thanks, Mike and good afternoon. At the end of September, we announced that Applied Materials and Tokyo Electron are combining to create a new global innovator for the semiconductor and display industries. This merger will enable us to accelerate the strategic visions of our two companies and to accelerate our momentum for profitable growth. We will bring together complementary leading technologies and products to create an expanded set of capabilities in precision materials engineering and patterning to solve our customers’ high-value problems better, faster and at lower cost. Since the announcement, we have started integration planning and we are pleased with the constructive engagement. We’ve also been meeting with our customers to discuss the specific ways the merger will create value for them and their responses have been positive and supportive. We expect to file our S4 securities registration statement in January which will provide you with additional information, and we remain confident that we will receive approval for the merger in the mid to second half of 2014. The rest of today's call will focus on Applied Materials’ quarterly and year end results, as well as our outlook. In the fourth quarter, Applied delivered earnings toward the high-end of our range and we entered our new fiscal year with momentum in bookings and new product penetration. I would like to thank all our employees for their contributions over the past year. This is a team with tremendous passion to create value for customers and investors. I would also like to thank Mike Splinter whose leadership, guidance and support enabled a seamless CEO transition. Mike and I will continue to work closely as we plan and implement the integration with Tokyo Electron. 2013 was a transformative year for Applied Materials – a year of building momentum for profitable growth. First,…

Thanks, Gary. In the fourth quarter, our orders grew sequentially and revenue was in line with our expectation. We maintained our spending discipline in the quarter which helped us to achieve EPS in the upper end of the guidance range. We entered fiscal 2014 with momentum, especially on both orders and revenue for SSG. Since this is our Q4 report, I'll make some observations about fiscal 2013. We have been transforming the financial profile of the company by one, aggressively reallocating our spending priorities; two, increasing the funding and velocity of new and disruptive products; and three, strengthening our gross margin performance even as we introduce new products. Beginning with spending, we have reallocated dollars from solar to semi and from overhead to products. For example, we reduced solar spending by about $120 million in 2013, and we shifted that spending plus another $40 million in overhead savings to R&D programs within SSG. For the year, we grew R&D as a percentage of R&D plus SG&A by 6 points from about 54% in 2012, to nearly 60% in 2013. To help fund increase we reduced our overall G&A spending by $130 million or 22% over the same period. These are major changes to our organization. Now let me give you some insight into how we’re deploying these additional dollars to strengthen our technology and product pipeline, especially in disruptive products, which are a key driver of future profitable growth. In 2013, we moved over two-thirds of the incremental R&D investment into disruptive products. These are new products such as selective material removal to give our customers new ways of solving high-value problems. Disruptive products expand our addressable market and give us the chance to change the market share landscape. A good indicator of our progress is evaluation tools shipments, which…

Thanks, Bob. As a reminder, today’s call will be focused on Applied’s business and financials and we do look forward to providing you with more information about the planned combination with Tokyo Electron over time. To help us reach as many of you as we can, please ask just one question and no more than one brief follow-up. Rachel, let’s please begin.

(Operator Instructions) And your first question comes from the line of John Pitzer from Credit Suisse.

Bob, last week [ph] where you guys talked about a specific increase in eval tools over two quarter period of I believe 20%. This quarter you are just talking about a significant increase sequentially in the January quarter. I am kind of curious relative to that initial target, are you getting close to that 20% increase over two quarters? Or is there something about the tail proposed merger which is slowing the rate of eval for you guys in the field?

Actually I think the eval number is going to be bigger than 20% -- it’s bigger than that number, but we just didn’t put a number in here today.

As my follow up real quick, Bob, appreciate kind of the quarterly progression of gross margins for the fiscal year. I am curious, is that all being driven by mix as you gain market share in new segments at perhaps lower gross margin, or do you think as you go throughout the year even with those share gains you should be able to bring margins up in some of the new markets you are penetrating.

Yeah. I intentionally, John, I intentionally gave everybody some guidance by quarter because there are so many moving pieces here that want to try and help. Last quarter, if you remember I voice some conservatism about the Q1 gross margins. I looked ahead at quarter and in fact if you look at what we are saying today is probably a little bit more optimistic than the street interpreted last quarter. In fact, even I thought we saw a little bit better. So, a lot of mix things going on here. So if you look Q1, probably a little bit better than people thought last quarter and even I thought down little bit from this third -- up a little bit actually from this quarter, but not quite as conservative as I thought last quarter. As you look to Q2, I project the mix to be a little bit negative. I project, as we go through the year, Q3 and Q4, the product and customer mix should be more positive and I project some of the material costs and absorption to be more positive later in the year. Additionally, the question you ask about new product penetrations, we are pretty optimistic that the new product penetration including the disruptive ones in the evals and the customer engagement, those are not big levers in terms of the gross margins this year. I think we are more enthusiastic both some of the leading indicators of share gains.

Thanks, guys.

Your next question comes from the line of Jagadish Iyer from Piper Jaffray.

Yeah. Thanks for taking my question. Bob, two questions. First, your silicon revenues essentially were flat year-over-year, if I take your guidance of what you have given for the calendar -- I mean for the January quarter. So, if WFE is going to be up somewhere in the vicinity of 10% to 20% for next year, can we expect some significant outperformance given the share gains that you've been talking about for next year?

Yeah, Jagdish, we think -- overall, environment next year, wafer fab equipment is pretty good. We also think we’ll do well next year. We don’t project that far advance at this point, but we are getting some good penetrations. We think we gained share in some significant markets in 2013. And we see momentum continue into 2014. But we have a projected four year ‘14 share in revenue. But we think we have a pretty good momentum.

Okay. And just a question for Gary -- Gary, you had made in prepared remarks about penetration in etch, particularly with regard to NAND customers I guess 3D NAND. So, I just wanted to get a sense from you, how much -- what kind of magnitude are we thinking about and how much is the proliferation going to be for other 3D NAND customers. Thank you.

We definitely are making progress in etch this year. We really have strengthened the team, focused the strategy in the areas where we have good opportunities. And we anticipate that we will gain somewhere around five points of share overall in etch. In 2013, really focused in conductor etch and that is in, certainly planar and 3D NAND where we are making a lot of progress and also in foundry. Thos are the key areas. In addition, we have some strong technology around inflections for our customers and we are getting good pull in those areas also.

And your next question comes from the line of Vishal Shah from Deutsche Bank.

Hi. Thanks for taking my question. I wanted to just follow-up on your comment from orders. You said DRAM orders were down sequentially in the fourth quarter. Can you talk about what’s going on there? It sounds like the supply constraints should continue next year and you are pretty positive about DRAMs trending into 2014? How should we think about the order pattern in DRAM, as well as some of the other NAND and logic customers into 2014? Thank you.

The overall orders, which were up and where we said DRAM was down. We said the others were up and I think we alluded to the fact we feel pretty strongly about orders into the near term, particularly in foundry and places like that. I know a lot of people have commented in the public domain that this information at a very large foundry, we did remarkably well in the last few months. We don't dispute that notion that’s out there in the public domain. Some of that we think falls into our Q1, so we see fair amount of momentum for ourselves, particularly at leading-edge customers. We do think DRAM, which we mentioned on the phone, not too much momentum right now in the marketplace. So we feel good about foundry, particularly for Applied. We feel NAND looks pretty good, particularly for Applied. In DRAM, we are little more conservative frankly.

Just a follow-up on the solar segment. You saw some improvement in orders, but the segment is still losing money, you said you're going to try to reduce spending there in 2014. Are you seeing any change at all in terms of fundamentals in orders from your customers? Do you have any plans to invest in that business so you're still looking to find ways to optimize that business?

Yes, in solar as we mentioned, we've reduced the operating expenses in the last year by about $120 million. Certainly our goal is to -- while we're in this period of time where the demand is soft, continue to reduce the earnings drag and we see additional opportunities to do that. There is some incremental improvement, we see a couple of opportunities that could get us much closer to breakeven in the EES businesses in 2014. But really we think 2014 is going to remain relatively soft in EES overall, and we continue to look for ways to cut cost. As I talked about in the last earnings call, we set a hurdle relative to the operating profit and ROI in each one of the businesses, and we continually evaluate all of the different businesses against that criteria and make decisions that are appropriate based on that information.

Your next question comes from the line of Terence Whalen from Citi. Terence Whalen – Citigroup: Actually a couple of regional questions. If I look at your order pattern by region, we saw a pretty meaningful decline in Japanese orders in the fiscal fourth quarter. I was wondering given that there has been some DRAM fire in Japan, I was wondering, do you expect future orders to come in future quarters because of that disruption in the DRAM? Thanks.

Well, DRAM what we believe is that we'll be somewhat higher. There's some strength in mobile DRAM and as you said, there's some capacity that was taken offline that will provide some incremental lift in the DRAM business. We really don't expect to see that to be a significant change in 2014. We see stronger incremental business in NAND flash, both in planar and the first factory ramping 3D NAND, so that we think will be stronger. And we see incremental CapEx in foundry. Also, DRAM, we think will be up slightly in 2014, but not a significant amount. Terence Whalen – Citigroup: Terrific. Kind of switching gears to Taiwan, obviously you're now in sort of middle phases of a pretty large order ramp in Taiwan. In terms of your experience last year thinking about the seasonality of orders, are you confident that after the fiscal first and second quarters there are enough positive offsets in foundry and logic to compensate for the sort of more pronounced seasonality that we are again seeing this year from Taiwan?

Yes. I think that – again if we look at the market overall in 2014, as I mentioned we think NAND will be up both in planar and 3D NAND. Foundry -- the ramp in 20-nanometer we think will be pretty significant in 2014 and there is a big focus for all of the foundries to move to FinFET technology as quickly as possible. So we see incremental spending there from the foundries in Taiwan and elsewhere on that technology transition in FinFET. So overall, we think the foundry spending will also be up in 2014. And then relative to your question on the seasonality, certainly we have seen that pattern over the last couple of years, relative first half, second half. We really are not making any forecast right now relative to first half and second half of 2014.

Your next question is from Timothy Arcuri from Cowen and Company.

Bob, numbers don't always relate perfectly with the MOP’s filings that are filed by one of your big customers in the foundry space. But they announced that there was $900 million worth of orders that got filed during your quarter for you and yet you're reporting Taiwan orders of something like 720? Is that just an order timing issues, so we should expect a very strong Taiwan order number for SSG also in January? Thanks.

Yeah. I pulled out the historical data, Tim, on that, because I saw that obviously. And what you see is it always -- it doesn’t always tie tightly in the individual quarters, but the partner is usually petty consistent overtime and we remain optimistic about our opportunity there in the next quarter. So I think there is some linkage.

Okay. And then just, Bob, you said last quarter you talked about the eval tools and SSG. It seems like they are constraining revenue guidance a bit? So can you give some sense in terms of what the absolute dollar magnitude is that that issue is constraining SSG revenue guidance time?

Yeah. I don’t think it’s a big revenue constraint. It’s -- there is mid-level double -- it’s a good number of double-digit tools, right, and the growth is pretty good too. But they are more of leading indicator of share gains than revenue slippage. So I am really happy we are doing them because they are really good indicator of share opportunities, but they are not a big short-term problem for evidence.

Okay. Thanks so much.

You’re welcome.

Your next question is from Jim Covello from Goldman Sachs.

Hey, guys. Thanks so much for taking the question. I appreciate it. Gary, you talked about 4 points share gain in inspection in this year? Could you give us a little more granularity on that? How much that might be, what you would consider leading-edge versus trailing-edge and what pulls are driving that? Thank you very much.

Thanks. Yeah. So, as I talked about before, we see very, very strong -- continue to see very strong pull from customers in the inspection market, lot of momentum, especially in foundry and logic, layer penetration increasing at 20-nanometer and 28-nanometer. And we also see a very strong position as the customers move to FinFET technology. In the leading FinFET companies the layer penetration for us is increasing, so that -- really the strength is in, the foundry and logic business. There are some areas where the technology is superior to the competitors, especially in some of the patenting types of applications. We have imaging capabilities that really leverage our strengths. So that’s one area that is growing for us and I mentioned in the prepared remarks that our UVision brightfield sales were a record in this last year. We also have a strong position in e-beam technology, the e-beam review business is a few hundred million dollars and we are strengthening our position there. And as customers are moving to the 3D NAND, there is more demand for e-beam types of applications and the defect review. We are actually seeing traction both in foundry and logic with some unique e-beam imaging capability and metrology. So we are seeing some more pull there and e-beam inspection especially in 3D NAND is increasing. That’s a small number for us today, but we see that longer term as they -- as an increasing opportunity.

That’s terrific. Thank you. Maybe from my follow-up, on the 3D NAND opportunity, obviously there is one big customer that’s been very aggressive early on there, would you expect to see orders from other 3D NAND customers, significant orders from other 3D NAND customers at some point in calendar year 2014 or would it be beyond that in your estimation?

Yeah. I think we will see certainly technology buys in 2014. The one customer you mentioned is really has been pretty optimistic relative to the performance of the device. And certainly, all of the customers have that transition on their roadmap and so for the other customers 2014 we would see technology buys not so much high volume production.

Your next question is from the line of Mahesh Sanganeria from RBC Capital Markets.

Thank you very much, Bob and Gary. I’m looking at the -- your order buy segment for last five years and it looks like NAND that this quarter was, like I would put, if I go just last five years and I assuming that’s a -- that’s a result of increasing content of definite share in 3D NAND, if you can confirm that? And on foundry, your last -- first half of year your run rate was a $1 billion per quarter and we are still only at $650 million and assuming that since you are commenting that foundry will be stronger next year, I would think that the first half of next year will probably grow year-over-year. Is that a fair assumption?

Okay. I will take the NAND question first. So the opportunity for us as I talked about, there are more – there is more dollars per wafer start for us in the transition from planar to 3D NAND. Dep and etch are areas that are good opportunities for us and other areas that are also increasing. CMP steps are increasing in the transition from planar to 3D NAND. There are also EPI steps in 3D NAND and of course, we have a very strong position there. So that's adding incremental opportunity in the transition from planar to 3D NAND. So those are the areas where we see the largest growth. And then the foundry question, what was the foundry question again?

The foundry question -- you're indicating that the foundry spending is going to increase next year and if I go look at this year's first half, your order run rate was about $1 billion and you're ending at $650 million. And I would assume that the order run rate in the next fiscal year, which is the current quarter should be increasing beyond $1 billion run rate for you to – foundry to grow in 2014?

Yes, I don't know that we're going to give any specific numbers. What Bob had mentioned is correct, relative to incremental strength and foundry orders in Q1 as many people have reported. There was a question on the call today relative to the orders last quarter that were reported in Taiwan and our numbers being below that. As Bob said, that we think will come into alignment and we look incrementally in Q1 for the orders to be very positive.

Yes, we think our Q1 looks pretty good and we think our share looks pretty good there. I haven't projected beyond the first quarter or so, but the visibility in the near term next quarter still looks pretty good.

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

Just a follow-up question on the, I guess, the lower DRAM orders that you're currently seeing. Do you get the sense that this is due to the higher capital intensity of going sub 20 nanometer or is it from lower yields making the larger die sizes for mobile DRAM and maybe you could talk about where you think the DRAM spend will head as you go into 2014?

The data we have -- first you asked the qualitative question, then the quantitative question. I'll do the quantitative one first. We see it has the potential to be up year-over-year, but not dramatically up. We see the first part of the years Q1 super, we think it gets a little stronger during the year. We think it is driven more by mobile DRAM. In terms of capital intensity daunting them, I think it's more of a capacity – do they need the capacity and if you read stuff that folks like you even write, they're benefitting from a little bit of pricing improvement now and they seem to be showing more discipline around it than they have historically. Operator And your next question comes from the line of Weston Twigg from Pacific.

I was wondering if, maybe you could give us a little bit more color on some of these evaluation tools you're placing and really specifically I'm wondering if some of these are the selective removal products and whether or not you have any new inspection platforms under evaluation?

Well, we definitely have opportunities in selective material removal as we had talked about in the July meeting. That market we believe will grow very significantly over the next few years. We are always introducing new models and new products, including in inspection. We typically won't talk a lot about some of these new tools. What we've been doing is really targeting the high value problems for customers as they're making these technology changes around FinFET, 3D NAND. There are some new areas that we are looking, that we are pursuing that are good opportunities for us long term and not ready to talk about those in detail. It does take time as you know for those new tools to be adopted in the technology roadmap for the customer. So, as Bob said, it’s really a leading indicator of opportunities for us in the future and our $200 million that we are spending in SSG really are focused on these major technology transitions and highest value problems for our customers.

I think most of the places, it speculates that we have and we do have them there, so.

Okay. Good. That’s helpful. And then just as my follow-up, this is related to OpEx. You mentioned that around $10 million -- the OpEx may have been $10 million higher without the shutdown this quarter, does that mean OpEx goes up another $10 million in the following quarter?

Yes, I’ll try to give you color on that. I think this is a little risk it goes up. Here is what’s going on. At the beginning of the calendar year of January 1st, we do our annual raises and reviews for everyone, and then we also accrue the intensive comp a little bit higher rate, so there is a little bit of a step up. I think I referred to that last quarter too on the spending. Now, if you look at structural spending, underpinning that there is a fair amount of continue structural cost savings that were going through. So, I think there is a little opportunity that expenses trend up a little bit in the second quarter, mostly in products again and we are trying to mitigate that. But we continuously tightening our belts but I would say it’s a little bit of upward bound there.

Okay. Thanks.

Rachel, to the next question.

Your next question comes from the line of Edwin Mok from Needham & Company. Edwin Mok - Needham & Company: Hi. Thanks for taking my question. First is just a follow-up question on the eval tool. I was wondering, maybe a different way to ask this. Are those eval tools targeting the 26 nanometer in foundry or some of the 3D NAND opportunity? Are they targeting for longer-term opportunities that you expect to be successful for like, ’15, ’16 or beyond?

I think it’s a combination of opportunities in these major technology transitions at 60 nanometer or the first-generation FinFET. There are some opportunities there for us and then also in 3D NAN. I would say that it’s a mix of products that are going into those near-term technologies and also once that we’re looking out further, as there are even bigger changes with new materials that will be necessary for those devices. Edwin Mok - Needham & Company: I see. Okay. Great. And then, just I guess a question on kind of the R&D spending right, given that you are working towards a merger with Tokyo Electron, are you guys starting to allocate your R&D spending and kind of look at your product portfolio, and how it could match or potentially match with (inaudible) and shift your R&D dollar in areas that you felt you might get some incremental synergy once the deal was done?

Yeah. You are right. Now, we are separate companies and we are driving -- really no change in our strategy, no change in our investment profile. We really can’t work on a deeper understanding of products, technologies, roadmap, all of those kinds of things until we are together.

Our next question is from the line of Krish Sankar from Bank of America Merrill Lynch.

Hi. Thank you for taking my question. I have two of them. One, either for Gary or Bob, can you help us quantify how much more capital intensive or expenses 3D NAND relative to planer NAND for let’s say 10,000 or 100,000 wafer procurement.

Well, I’ll tell you, some of the things that are going on there. It’s capital intensity is located in deposition and etch. So, I think our numbers would say like 30% to 50% and increasing capital intensity going from 2D to 3D NAND per deposition and etch. I think our lithography is actually less intensive, because you are going down to 50 nanometer rules, so it’s heavily located in deposition and etch.

Got it. All right. And then a follow up on the…

I think the official number we put out a little while ago was 50% from planar to 3D for etch and CVD.

Okay. All right. And then on the 3D NAND, your etch market share gain, is that -- are you guys so close to it or are you splitting it with the planar NAND income and supply?

Yeah -- no definitely, I mean all of these applications, etch or all of these markets, etch and inspection, many, many, many different segments and so the share for us is increasing in the conductor etch types of applications, but there are maybe four different companies, five different companies that are competing for that business.

And your next question is from the line of Patrick Ho from Stifel Nicolaus.

Bob, maybe first on the global services business, and in the past you talked about some of the opportunities there to improve the margin profile in that business segment. Can you give us what your thoughts are about some of the efforts and measures you're going to take in 2014 to improve that segment?

Sure. So we talked about early on the call that the revenues are down a little bit in Q1, which is seasonality. If you look at the gross margin opportunity in AGS, which is our global services, we're optimistic that we can make improvements next year. Some of the improvements are going to be some higher value services but we also think there is an opportunity for cost reduction on materials which will save us some money. So we think we have an opportunity to improve gross margins across services and products. We talked about for the company an overall increase of over 1% on gross margins. Within AGS we see similar kinds of opportunities.

Maybe just going to the display side for a second. You guys have seen the pickup in orders in 2013 which will lead to the revenues. Maybe again Bob, how do you manage the inventory just given that that's a very lumpy business and what gives you confidence that the investment cycle will continue just given some of the lumpiness of that business overall?

Sure. If you add up our orders numbers we have reported throughout the year you will see now we have a pretty damn big backlog in display and the lead times in those tools tend to be pretty long, months and months in terms of the lead times to buy the parts and assemble the tools. So you have pretty good visibility into the shipment pattern. Now the risk you have on that tends to be a little bit – they slip it out a little bit. But in terms of the visibility into the shipment plan over the next six months, it's pretty good. The inventory charge we noted on this that was related to a specific type of tool, we are still hopeful that we are going to end up in good territory in those tools. But right now we took the position that it was – we are going to take a reserve against them.

Yes. We found display as we talked about earlier, there are a few things driving the business. One is, the increase in TV sizes that's very positive driver for us and really the new technology in display technology and mobile is also positive with LTPS, OLED, flexible displays. This is really a big part of the battleground for the consumers and we see a lot of technology transitionings happening this Christmas season and then really tremendous focus from very big companies around technology that would be positive for us from a total available market standpoint.

Thanks Patrick and Rachel, I think we have time for about two more callers please.

Your next question comes from the line of Mehdi Hosseini from Susquehanna Financial Group.

Gary, I want to go back to your earlier comment. Your largest 3D NAND customer, was saying last week that China fab is actually a 2D and eventually in the second half of next year, they will convert it to 3D NAND. So, I want to get your overview on what gives you the confidence that today's booking on the NAND is actually 3D, when your customers are saying, it’s more of the conversion when the China fab is up and running on the 2D NAND? I have a follow-up for Bob.

Yes, just based on the conversations we've had with them around very specific applications.

So are you saying that it is going to be a conversion or do you still think it's going to be a greenfield 3D NAND?

Well, there's some technology that's similar between 2D and 3D, but certainly what we've seen is buying for some applications that are very specific for 3D NAND. So again, what we've heard in talking with the customer is the timeframe in terms of the ramp and that the specific tools that are being purchased for 3D NAND applications are consistent with what we've talked about.

And the timeframe for the ramp, does it start today or does it start sometime next year?

Yes, I don’t think we want to get into specific details of what customers have told us.

And Mehdi, did you have a follow up for Bob. Mehdi, do you want to follow that up, we’ll be happy to.

Yes, question for Bob, I’m looking at your operating margin for the SSG. Right now, a year or two ago similar revenue run rate was generating about 30% of operating margin, with the structural changes in your cost structure. When do you expect those kind of margins materialize, or is this going to be on pause until the merger is completed?

Yes, I think we strive to get higher gross operating margins. Yes, I agree with you. I think right now, we’ve talked a lot about we’ve been reducing costs in overhead areas particularly ones that aren’t in SSG and investing in product development, which is heavily focused in SSG. Those new products have started to come out whether be eval tools or D2R positions as they start to get revenue ramps on those tools. You see our margins dropped too much more effectively. So we see it going up next year with some volume. We see it improving over time as we start to get penetrations and our goal is to be much more similar to what the numbers you’ve referenced. We’ve just done somewhat of an investment mode in R&D in SSG right now and we’re funding that by cutting back all of other places where it’s sold overhead. So I think our overall approach is somewhat balanced right now but in SSG we’re in investment mode right now.

Thanks Mehdi.

And your last question comes from the line of Harlan Sur from J.P Morgan.

Thanks for taking my question. Nice to see the strong foundry order momentum, on the last earnings call you provided a view that by the end of this year that be about 30k foundry wafer starts of capacity at the 20-nanometer node going to over a 100k in 2014. Given your recent discussions with customers in the strong order momentum, have this view changed? J.P Morgan: Thanks for taking my question. Nice to see the strong foundry order momentum, on the last earnings call you provided a view that by the end of this year that be about 30k foundry wafer starts of capacity at the 20-nanometer node going to over a 100k in 2014. Given your recent discussions with customers in the strong order momentum, have this view changed?

No.

Good answer, Gary.

Great. J.P Morgan: Great.

I think that this is the round.

Yes. And then given the increasing complexity of these next-generation manufacturing processes, I think the frustration that we’re hearing from customers, is that their throughput to the fab is now increasing any where from 15% to 30%. And as we know throughput is the key driver of wafer cost. So how is Applied addressing better throughput on the tools and does the upcoming acquisition of TEL enable you to make even further improvements in optimizations on throughput? J.P Morgan: Yes. And then given the increasing complexity of these next-generation manufacturing processes, I think the frustration that we’re hearing from customers, is that their throughput to the fab is now increasing any where from 15% to 30%. And as we know throughput is the key driver of wafer cost. So how is Applied addressing better throughput on the tools and does the upcoming acquisition of TEL enable you to make even further improvements in optimizations on throughput?

Well, the first thing really for the customers is to make the technology work and that’s been a huge focus whether its 20-nanometer ramp to get the yield and device performance targets or FinFET technology or the transition from planar to 3D NAND, what I would say is that those technology transitions are very big transitions, many new materials, very difficult for the customers. And so the first thing really in working with them is to hit the device performance targets and those are the things that we’re working on and then after that really it’s -- it's trying to optimize the overall capability of business terms. And we’re certainly working with customers on that too but the key thing is trying to enable these major changes in device performance and yield as they go through the initial stages of these new device technology transitions.

Great. J.P Morgan: Great.

Great. Thanks, Harlan 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 p.m. Pacific Time today. Thank you for your continued interest in Applied Materials.

And ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.