By David Lammers

Applied Materials executives said they will focus on operational execution, reducing the break-even points for the display and solar divisions, shifting more of the company’s supply chain to Asia, and fully integrating the Varian acquisition. And the executives said Applied’s technical and services focus will be on solving customers’ high-value problems, or HVPs, a phrase that CFO George Davis said has become “a regular part of the company’s internal dialogue.”

At the Applied Materials analyst event, held in New York City Wednesday (March 28), Applied CEO Mike Splinter acknowledged that Applied has faced a “challenging environment in (market) share” as companies spent more on lithography and as DRAM spending – a sector where Applied historically has excelled – sank to record lows. Splinter said Applied lost 3 percentage points of share in semiconductor equipment, while gaining share in the display and solar segments, where demand has been exceptionally weak.

Applied is taking steps to reduce the break-even point in its Environmental and Energy Systems (EES) unit to $400 million. The display operation’s break-even mark will be reduced from $800 million to $500 million by 2013, exiting this year with a $600 million break-even point, while maintaining an ability to quickly ramp capacity as the market springs back later this year.

In semiconductors, Applied does well among the major foundries, accounting for about 20 percent of foundry equipment spending. Foundries will spend about 24 percent of their equipment capex with Applied as they gear up leading-edge capacity to meet demand for smartphone processors and other mobile ICs, the executives said. Foundries will spend more with Applied to build advanced logic transistors, to ready production of 3D NAND in 2013 and 2014, and to enable the 3D TSVs and other forms of advanced packaging required to enable new capabilities in mobile systems.

Finding defects is becoming increasingly important, and several major customers will spend more on Applied’s non-optical inspection tools, said Randhir Thakur, executive vice president of the Silicon Systems Group (SSG).

Joe Flanagan, the senior vice president of operations, said Applied has largely completed its move of equipment production factories to Asia, and now plans to source more parts from lower-cost Asian suppliers. At the end of the 2008 fiscal year, Applied had only 5 percent of its manufacturing in Asia and about 20 percent of its parts procurement. By the end of fiscal 2011 year, following a “significant transfer” of Applied’s manufacturing capacity from Austin to Singapore, Applied had 50 percent of its manufacturing outside of the United States and roughly 40 percent of its supply chain.

“Between now and 2014 we want to see an acceleration of our plan to move more of the supply base into Asia,” Flanagan said, adding that he is comfortable with the balance of the major equipment production facilities between Asia and North America. In response to a challenger’s question about supporting manufacturing and jobs in the United States, Splinter noted that Asian customers account for 80 percent of Applied’s sales in semiconductors, 100 percent in displays, and 90 percent in solar.

Flanagan said lower costs of materials, factory labor, and shipping continue to drive Applied to source more from Asian suppliers. CFO Davis said Applied’s shift to Asia may reduce its tax rate by 4 percent, due to lower taxes in the Asian countries where it does manufacturing: largely Singapore and Taiwan.

Another method of cutting costs is in design cost reduction: for example figuring out how to make a sub-component with less material. As much as a 15 percent savings is possible through more efficient design, Flanagan said.

Mobile Systems Boom

The executives estimated that worldwide shipments of mobile systems – including smartphones, tablets, and notebook computers – will reach a billion units this year for the first time.

“We live in an age of mobility,” Splinter said, in which “people want to do everything from anywhere.” Much of the new spending will be in emerging countries, with 800 million purchasers of new mobile systems in China and India alone. “People there will give much of their salary to have available these new capabilities, which allow them to participate in the world economy,” he said.

Many of the smartphone processors have die sizes which are nearly twice as large as the previous generation, Splinter said, with the prime example being the Apple iPhone 4S processor, which is much larger than the iPhone 4’s applications processor. “These mobile die sizes will continue to increase as long as they fit into the power and cost footprint,” Splinter said.

In addition, many of the mobile systems use touch-enabled displays built with equipment supplied by Applied Materials.

Splinter said the smartphone compound annual growth rate (CAGR) will be more than 30 percent, and even higher for tablets, over the next few years. With ultra-thin notebooks gaining in popularity, notebook shipments could exceed 100 million units. A surge in notebooks may start in the second half, putting stronger underpinnings in the DRAM sector, where investments have shrunk markedly from record levels five years ago.

Semiconductor Inflection Points

Semiconductor technology will see more inflection points in the next few years than in the last 15, Splinter said. Widespread use of high-k/metal gate technology will drive growth in production and inspection equipment, among other factors, Thakur said. And vertical finFET transistors will drive new forms of implant doping, for which the Varian operation is well-prepared.

To regain market share in etch, Thakur said Applied will shift its focus from the historically strong area of conductor etch to more of an emphasis on patterning etch applications.

“The basic engine for growth in SSG is accelerated cycles of learning. Our customers want to go the next node faster, and we are set up now so that we can solve their problems faster,” Thakur said. Between the 65nm and 14nm nodes – four technology generations – the semiconductor industry will increase the number of process steps by 45 percent. That will add to the served available market (SAM) of Applied and provide an opportunity for an estimated 7 percent market share gain in semiconductor equipment, with epitaxial growth, implants, and thermal processing leading the way.

Thakur said Applied is increasing its investments in 450mm production equipment, even though he sees at least three more technology nodes on 300mm tools.

Solving Hard Problems

Charlie Pappis, general manager of Applied Global Services (AGS), said the services operation enjoyed a 29 percent increase in revenues last year, representing $500 million in additional revenues. That came after a 2010 which Davis described as a “tepid” for services, however. About three-fourths of AGS revenues come from supplying parts to the installed base of 32,000 Applied tools, which now includes the 2,500 Varian implanters out in the field.

“Many of our customers run their machines for 20 to 25 years, and there are service opportunities on every machine,” Pappis said. In some cases, Applied is working with its customers to upgrade the capabilities of 200mm “legacy” tools, supporting technology upgrades or throughput improvements. Applied also has a fast-growing business in maintenance contracts, with some contracts configured on driving down unscheduled down times and improving mean time between failures (MTBF).

“The parts business is an ongoing engineering challenge. And we are doing more of that in-country, solving problems for our customers where they are located so we can avoid shipping back and forth to the United States, which is cost prohibitive,” Pappis said.

Applied is beefing up its fab consulting operation, with about 20 veterans of fab management hired into AGS to provide benchmarking of customer fabs against known best practices and suggestions for means of improvement, among other consulting services.

Tags: 3D IC, 3D NAND, 3D stacked die, 450mm wafers, AGS, Applied Global Services, Applied Materials, etch

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