Applied Materials, Inc.

Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we 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, and thank you for joining Applied's third 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, which 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 10-Q and 8-K 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. And now I'd like to turn the call over to Gary Dickerson.

Thanks, Mike. Our results for the third fiscal quarter demonstrate strong execution in an environment that remains challenging for the time being. Overall, our view of 2019 is consistent with what we've previously communicated. Within our served markets, Foundry logic spending is strong, while investments by memory and display customers are significantly lower than last year. We also remain mindful of the broader macroeconomic risks. During this industry down cycle, my primary focus is ensuring the organization is executing on the initiatives that will put applied materials in the best position for the future. I believe the opportunities for applied are compelling as powerful new demand drivers emerge in the form of IoT, big data, and artificial intelligence. So, even though we are prudently managing discretionary spending in the near term, We are fully funding R&D to accelerate customers' roadmaps and building new products and capabilities that will underpin the company's growth in the years ahead. In today's call, I'll begin with a brief update on the near-term market dynamics. I'll then talk about emerging technology trends and applied strategy to address them. Then I'll finish by highlighting some of our recent accomplishments, starting with the current environment. Our views of the semiconductor and display markets are largely unchanged. In memory, spending has softened slightly since our May call. On the supply side, we still see customers making disciplined investments while adjusting factory output to reduce inventory levels. On the demand side, we believe the price elasticity of NAND is starting to take effect in the form of increases in the average bits per box for both smartphones and PCs. Based on our current visibility, we remain optimistic about 2020 with an expectation that NAND investments will recover ahead of DRAM. In Foundry logic, demand has strengthened as the year has progressed as we see customers accelerating the ramps of their leading edge nodes. Demand for specialty nodes that serve the IoT, communications, automotive, power, and image sensor markets is also driving robust investments in capacity and new technology. Taking these factors into account, our view of overall wafer fab equipment spending for 2019 remains the same, down mid to high teens on a percentage basis relative to last year. We see 2020 as a more positive setup for the industry and applied with the start of a recovery and memory investment and sustained strength in foundry logic spending. In display, there are no significant changes to the outlook we provided last quarter, and we still anticipate our 2019 revenue being down by about a third relative to 2018. Just as in semi, we're excited about the inflections taking place in display and the opportunities these create. We're getting ready for the future by ensuring we have the right portfolio of products to help our customers accelerate the introduction of next generation technologies, including rigid and flexible OLED and larger substrates for manufacturing. A few weeks ago, Applied hosted our second AI Design Forum with more than 700 attendees representing leading companies from across the ecosystem. My main takeaway from this conference is strong alignment around four key themes. First, AI and big data are driving new approaches to computing that require new system architectures built from new types of semiconductor devices. Second, at a time when improvements in power, performance, area, and cost are paramount, classic Moore's Law scaling is running out of gas. Third, to address this, new approaches for semiconductor design and manufacturing are needed. In our view, the new industry playbook has five elements. New architectures, new devices and 3D structures, new materials, new ways to shrink feature geometries, and new ways to connect chips together. Fourth, to accelerate implementation of the new playbook, companies need to connect and work together differently by breaking down traditional silos. At Applied, we're aligning our strategy and investments around this vision of the future. For example, new types of memory, including MRAM, PCRAM, and RERAM, are high potential technologies that can enable new architectures and provide significant PPAC benefits at the edge and in the cloud. But these 3D devices are also incredibly challenging to make at high volume and yield. In the case of MRAM, the device is based on a film stack of more than 30 thin layers, some of which are only eight atoms high. Missing atoms or imperfections in materials have a significant impact on the performance and endurance of the device. To help drive adoption of these advanced memories, we recently introduced one of the most sophisticated products we've ever created. combining many of our leadership technologies in one integrated system. This new system has nine different wafer processing locations, and each process chamber can deposit up to five different materials. The entire process flow takes place under ultra high vacuum to keep impurities out, and we use cryogenics and heat to vary process temperatures by hundreds of degrees. All of this is critical to optimize material structures and interfaces. The system also includes unique onboard metrology that allows us to measure key properties of the materials to one hundredth of a nanometer as they are being created and modified. This next generation of equipment that we call integrated material solutions is one of the ways Applied is bringing to bear our broad technologies and capabilities to address our customers' most complex challenges. Another area where Applied has unique technology and breadth is advanced packaging. Applied has the most comprehensive portfolio of solutions to support customers' advanced packaging roadmaps and new heterogeneous integration approaches. In the past quarter, we won important process tool of record positions at leading customers. securing over 80% of the applications we competed for, including CVD, PVD, CMP, and Etch, where we have highly differentiated new products. Our inflection-focused innovation strategy is also yielding results with our unit process tools that enable new 3D structures, introduction of new materials, and new ways to shrink. For example, we've been building on our strength in Conductor Edge for memory by winning new steps in both DRAM and NAND, as well as new positions for critical edge applications in Foundry Logic. We're also finding new ways to deliver more value to customers through our service business. One example of this is using advanced metrology, sensors, data science, and simulation to speed up the transfer of new technologies from applied labs to customers' factories, and then reduce the time it takes to optimize yield, output, and cost. While growth in applied global services is slightly below our prior expectations, we still anticipate our combined spares and service revenues being up this year, even as customers pull back on their capital spending and operating expenses. Before I turn the call over to Dan, I'll quickly summarize. Our view of 2019 is relatively unchanged. Thanks to the hard work of our employees across the company, we are delivering solid performance, even with the current weakness in memory and display demand. During this industry down cycle, we are focused on driving R&D programs and building new capabilities that will move the needle for customers and applied in the AI era. And we remain excited about our long-term opportunities as these powerful secular demand drivers start to take shape. Now, Dan will provide his perspective on our results and outlook.