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

Hello, everyone, and good afternoon. Thank you for joining our second 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, I'd like to remind you that today's call contains forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ. Information concerning the risks and uncertainties is contained in Applied's most recent Form 10Q and 8K filings with the SEC. Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures are found in today's earnings press release and in our reconciliation slides, which are available on the IR page of our website at appliedmaterials.com. Before we begin, I have a calendar announcement. On Tuesday, July 9th, Applied will host the Technology Day for the financial analyst community and other industry participants. The events will take place in San Francisco beginning at 8 a.m. Pacific time. Gary Dickerson will be joined by other CEOs and technology leaders from throughout the semiconductor, hardware, software, and data center ecosystem. We hope you'll join us, and we'll be in touch with invitations and more details. And now I'd like to turn the call over to Gary Dickerson.

Thanks, Mike. In our second fiscal quarter, we delivered results toward the top end of our guidance range, reflecting solid execution across the company in a challenging business environment. Overall, our outlook has not changed significantly since our February call. Investment by memory and display customers remains muted for the time being, and we continue to pay attention to the broader macroeconomic risks. Looking further ahead, we maintain a strong, positive view of our markets and as powerful new demand drivers take shape. We're excited about the opportunities these secular trends create for Applied, and while we're carefully managing discretionary spending consistent with current market conditions, fueling our long-term growth remains a top priority. We're focusing on driving R&D to accelerate customers' roadmaps, building new capabilities, and positioning Applied to play a bigger and broader role in the AI big data era. In today's call, I'll begin with our latest perspective on near-term market dynamics. Then I'll talk briefly about the future growth drivers that are reshaping the semiconductor and display industries, as well as the implications for applied. And I'll finish by describing our performance and strategic priorities. Starting with the near-term environment, our view of 2019 is largely the same as it was at the start of the year and shaped by two key factors. First, the semiconductor industry is in a period of diversification. If you look back over the past five years or so, you'll see that smartphones drove the majority of semiconductor capital investments. We believe that is changing. As we transition to the AI big data era, major new drivers are emerging that will fuel industry growth for years to come. Although we're only in the early stages of the build-out, we see the combination of cloud data centers, 5G infrastructure, IoT, and automotive technologies underpinning a much more significant portion of wafer fab equipment spending in 2019. The second major factor impacting this year ahead is the memory cycle that the industry has been navigating for the past several quarters. Recent data shows that NAND pricing is stabilizing and inventory levels are down from their peak, although they still remain above normal levels. DRAM is not as far along in the correction cycle with high inventory levels and prices still falling. As I've said before, I believe this memory cycle is different from those of the past. The fundamental dynamics in the market are healthy, with disciplined investments in capacity. This year, customers are focusing resources on advancing their technology roadmaps, and overall memory spending will be down significantly from 2018. We expect inventory levels to normalize as the year progresses, creating a more favorable environment for capacity investments in 2020. In Foundry logic, we have seen customers' plans firm up over the past few months and now expect spending to be up year on year. In aggregate, our view of overall wafer fab equipment spending in 2019 is unchanged. we still see spending down mid to high teens on a percent basis versus last year. In display, the picture is also consistent with our outlook from last quarter. We're still anticipating that our 2019 display revenues will decline by about a third from 2018's level as customers push out investments. Over the longer term, we maintain our view that display is an attractive market which is becoming more technology intensive and increasingly dependent on materials innovation. The introduction of larger substrates in TV manufacturing, as well as rigid and flexible OLED technologies for mobile applications, creates important growth opportunities for Applied over the next several years. Even as we work through this period of softer demand, I believe it's critically important we do not lose sight of the bigger picture. Major new industry growth drivers are emerging in the form of IoT, next generation communications, big data, and artificial intelligence. These technologies are disruptive and transformative and will touch almost every area of the economy and our lives. From a semiconductor perspective, we believe the AI big data era will be characterized by two major inflections. The first is a computing architecture inflection towards AI workloads as we move beyond general-purpose computing to specialized systems designed for new applications in the cloud and at the edge. The second is overcoming the deceleration of classic Moore's Law scaling to deliver system-level improvements in power, performance, and cost that will unlock the full potential of AI and big data. We see a new industry playbook for semiconductor design and manufacturing emerging, that includes five key components, new architectures, 3D structures and scaling techniques, novel materials, new ways to shrink feature sizes, and advanced packaging, including new ways to connect chips together. We see applied breadth and depth as a key strength as we collaborate broadly to address the technology challenges that will enable this new playbook. Our strategic priorities are to accelerate innovation for our customers while finding new ways to create sustainable value with our technology. I'll highlight four important ways that we're doing this. First, we're building new capabilities. We're creating powerful R&D platforms like the Meta Center in New York and the Advanced Packaging Lab in Singapore to complement our existing Meta and Technology Center in Silicon Valley. In parallel, we're leveraging state-of-the-art sensors and metrology combined with data science, machine learning, and simulation to reduce product development cycles and speed up transfer of new technologies from lab to fab. Second, we're developing entirely new types of products to address the most complex challenges in the chip manufacturing process, from the introduction of novel materials to key integration bottlenecks. Some of our key areas of focus include critical deposition, implant, and etch processes to scale current memory structures, the introduction of novel materials combined with sub-Angstrom-level control of those materials that are needed to enable new memories, including MRAM, re-RAM, and PC RAM, new materials and interface engineering to enable significant improvements in power efficiency and performance at leading-edge foundry logic nodes and next-generation advanced packaging for heterogeneous integration. Our product pipeline spans from new unit process tools all the way to integrated material solutions, or IMS, where we can combine multiple processes together with customized metrology within a single system. Third, we're expanding our engagements across the AI ecosystem to accelerate innovation from materials to systems. In July, we will be hosting another AI Design Forum, bringing together leading companies in the field to support deeper collaboration between system architects, chip designers, and the manufacturing community. I hope that many of you will be able to join us for this event. And fourth, we're building a more resilient company that performs well and can continue to fuel innovation in a variety of market conditions. For example, increasing our focus on our service business has been a great way to deliver additional value to customers while providing a revenue stream that is relatively decoupled from industry cycles. We expect Applied Global Services to deliver high single-digit growth this year even in an environment where semiconductor and display customers are trimming their capital spending. Before I turn the call over to Dan, I'll quickly summarize. Despite soft near-term demand, the company is delivering solid performance. We're prudently managing discretionary spending and relentlessly focusing on our R&D pipeline. We expect 2020 to be a more positive setup both in terms of industry spending and how much of that spending Applied can address. And we remain highly optimistic about the longer term. As powerful new drivers for semiconductors and displays emerge, we see tremendous opportunities for Applied materials. Now Dan will provide his perspective on our performance and outlook. Thanks, Gary.