Applied Materials, Inc.

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. I would now like to turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.

Good afternoon. We appreciate you joining us for our first quarter of Fiscal 2019 Earnings Call, which is being recorded. Joining me are Gary Dickerson, our President and CEO, and Dan Dern, our Chief Financial Officer. Before we begin, let me remind you that today's call contains forward-looking statements, including Applied's current view of its industry's performance, products, share positions, 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. Thank you very much. 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. In our first fiscal quarter of 2019, Applied Materials delivered solid results in a challenging business environment. Over the past two months, we have become increasingly cautious about near-term macroeconomic risks and have seen further pullback in customers' investments. At the same time, we remain highly optimistic about the long term. Powerful new growth drivers for the semiconductor and display industries are emerging, and we see tremendous opportunities for the company ahead. While we're taking appropriate actions to navigate current market dynamics, we are not losing focus on the bigger picture. We're making strategic investments in new technology, products, and capabilities that will position Applied to play a bigger and broader role in the future. In today's call, I'll start by providing more details about our outlook for the year ahead. Then I'll talk about the future growth drivers that are reshaping our industry. And I'll finish by describing Applied's strategy and highlight some recent accomplishments and milestones. Let me begin with the near-term environment and our current perspective on 2019. In the past quarter, there's been more negative than positive news, with the whole industry facing challenges, which include macro conditions and emerging markets that have weakened, smartphone demand falling short of expectations, particularly for high-end models, which have more semiconductor content, and DRAM prices, which have declined as inventory levels build. On the positive side, we've also observed that NAND inventories are coming down from very high levels seen in the fall, although they remain above normal levels. Fundamental dynamics in the memory market are healthy, with very disciplined investment in new capacity and a strong commitment to advance the technology roadmap. And looking more broadly at semiconductor capital investment, it's important to note that we're in a period of market transition and diversification. For the past several years, smartphones drove the majority of wafer fab equipment spending. This year, more than half of customers' investments will be driven by other categories as new growth drivers, including cloud data centers, IoT devices, 5G, and automotive applications gain momentum. When we take all these factors into account, we see the following implications for applied serve markets. Based on recent public comments by our customers, NAND bit demand is expected to grow in the mid-30% range this year and DRAM bit demand in the mid to high teens. As a result, we believe that investment by memory customers will be down substantially in 2019. However, we also expect channel inventory levels to normalize as the year progresses, creating a more favorable setup for 2020. In foundry logic, we see investment being flat to slightly up year on year, but we expect a higher portion of the spending to be directed towards long lead time equipment, specifically EUV lithography. While this represents a market share headwind for applied in both 2018 and 2019, it's also a positive indicator of customers' future investment in leading-edge process tools. Overall, we believe that wafer fab equipment spending in 2019 will be down mid to high teens on a percentage basis versus last year. In display, weakness in emerging markets is also impacting the timing of customers' investment plans. We see some TD factory projects pushing out of the year and into 2020. As a result, we now believe our display equipment revenue in 2019 will decline by about a third from 2018's record levels. We also expect revenue in the second fiscal quarter to be significantly lower than our average run rate for the year. Over the longer term, we believe the display market remains attractive as the industry is going through several large technology transitions. As larger substrates are introduced in PV manufacturing, rigid OLED adoption increases in smartphones and expands to other applications, and initial flexible OLED products get closer to release. These inflections create important growth opportunities for Applied over the next several years. While we're paying close attention to current headwinds and driving efficiencies across the company, we remain focused on our long-term opportunities. I strongly believe that in the future, technology will play a larger part in many areas of our lives. Entire industries will be transformed by artificial intelligence, big data, and Industry 4.0, and at the foundation of those transformations are semiconductors. We are moving beyond a world of general-purpose computing to specialized solutions that address new types of applications and workloads in the cloud and at the edge. And while the need for semiconductor innovation has never been greater, classic Moore's Law scaling is challenged. Simply shrinking transistors no longer delivers simultaneous improvements in the power, performance, and cost of chips. As I've said before, to unlock the full potential of AI and big data, we need a new playbook for semiconductor design and manufacturing, which will include new architectures, new 3D techniques, novel materials, new ways to shrink transistors, and advanced packaging techniques. All five of these areas require major advances in materials engineering and create tremendous opportunities for applied materials. To enable this playbook and accelerate innovation for our customers, we are making investments in new capabilities, creating entirely new types of products, and extending our engagements across the ecosystem. For example, We recently announced that we are expanding our long-standing technology partnership with IBM as a member of their new AI hardware center. We're also making good progress with our new materials engineering technology accelerator, which is on track to open later this year. The Meta Center will support deeper collaborations with system architects, chip designers, and the manufacturing community. In addition to broadening our participation in the AI big data inflection, we are also building a more resilient company with diversified revenue streams. The portion of our revenue generated from sources other than new 300-millimeter semiconductor equipment sales is increasing. Combined, we expect our services, spares, upgrades, consulting, software, and display in flexible technology businesses to represent about 45% of total sales this year. In Applied Global Services, our progress is fueled by our growing install base and new advanced service products that help customers shorten ramp times, improve device performance and yield, and optimize operating costs. We grew AGS revenue more than 20% in fiscal 2018, and we anticipate high single-digit growth this year, even with wafer fab equipment spending expected to be down significantly. One reason for this is that more than half our service and spares business now comes from subscription-type revenues in the form of long-term service agreements. Before I turn the call over to Dan, I'll quickly summarize. Given the elevated macro risks, In a challenging environment in both the memory and display markets, our near-term outlook is one of caution. Despite these headwinds in 2019, we remain highly optimistic about the future. While we're taking steps to ensure our spending is aligned with short-term market conditions, we're focusing our investments on long-term opportunities. We're driving innovative new product development and building new capabilities that position applied to play a bigger and broader role in the industry over the coming years. Now Dan will provide his perspective on our performance and outlook.