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, and thank you for joining Applied's fourth 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 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. I'm pleased to report our results for the quarter were at the top end of guidance, driven by a healthy uptick in demand for semiconductor equipment, combined with strong execution across the company. This rounds out a solid year of performance in a challenging environment as we navigated down cycles in both memory and display. These results would not be possible without the hard work and dedication of Applied Materials employees around the world. I would like to thank them for the passion they bring to work every day and congratulate them on their accomplishments this year. As this is our year-end call, I'll begin with a brief recap of the past 12 months before providing our perspective on the current market environment. I'll then talk about the broader context for the industry, including the major growth drivers and inflections that will shape our markets over the next several years. I'll conclude by summarizing the key elements of our strategy and outlining the investments we're making to put Applied in the best position for the tremendous opportunities ahead. Applied's fiscal 2019 was shaped by the first significant pullback in customer investments since 2013. However, this provides a good illustration of how the semiconductor industry is evolving. As I have highlighted before, the market for semi equipment and services is now significantly larger and less volatile than it was in the past. If the second calendar quarter of 2019 proves to be the low point of this spending cycle, then the downturn lasted four quarters and our quarterly revenue at the trough was approximately 20% lower than at the peak. In contrast, During the industry cycles that took place between 2000 and 2013, our average peak to trough revenue drop was more than twice that magnitude. This cycle was different in large part due to the growth and diversification of demand drivers spanning consumer and enterprise end markets. It's also important to note that the fundamental dynamics of the memory market are healthier through this cycle. The memory makers are highly focused making disciplined investments in capacity and continuing to drive their technology roadmaps forward. As well as a more robust core market, Applied is a more resilient company that's balanced across different areas of the market and can perform well in a variety of conditions. Thanks to the breadth of our portfolio, our semi-equipment business is outperforming both the wafer fab equipment market and our direct peers this year. Fiscal 2019 was also a record year for applied global services. In fact, we're growing our services revenue significantly faster than underlying equipment businesses. Over the past 12 months, we've grown our installed base of semi and display equipment by about 2,000 systems to almost 43,000. We have also increased the number of installed base tools covered by long-term service agreements. which generates subscription style revenues by around 30% since 2017. Overall, 45% of our FY19 revenues came from sources other than new 300 millimeter equipment sales. This is up from 41% just two years ago. In terms of our near-term outlook, while I don't want to speculate about the exact shape or timing of the market recovery, I can characterize what we currently see with three observations. First, strong investment by Foundry Logic customers driven by demand and key geographies, an acceleration of the 5G roadmap, and commitment to advance the leading edge. Second, early signs of a recovery in NAND investments. And third, positive progression of the ongoing inventory correction in DRAMs. Because of the strength seen in recent months, we're revising our estimates for 2019 wafer fab equipment upwards. We now believe 2019 spending levels could be similar to 2017. Based on the visibility we have today, we're optimistic about 2020 with an expectation of sustained strength in foundry logic and a step up in memory investments during the year with NAND recovering ahead of DRAM. In display, as anticipated, FY19 revenues were down a third relative to FY18. At this point, we expect FY20 revenues to be at similar levels as we bounce along the bottom of this market cycle. In this environment, our display business remains profitable, even as we fund R&D for next-generation products. We still believe the display market provides good long-term growth opportunities for applied as the industry becomes increasingly technology intensive. We remain focused on working closely with customers to drive their technology roadmaps forward and ensuring we have the right portfolio of products in place to outperform the market when investment levels pick up. Looking beyond the cycle at the broader context for the electronics industry, it's important to recognize that we're in a period of transition as major new growth drivers emerge in the form of IoT, big data, and artificial intelligence. Over the next decade, we expect hundreds of billions of edge devices to be deployed, an explosion of data generation, and new approaches to computing to sustainably process and create value from all the data that's available. AI and big data have the potential to transform every area of the economy and our lives. These inflections will also have a profound impact on the semiconductor industry. As we move from the age of general-purpose computing to domain-specific approaches, new system architectures and new types of semiconductor devices are needed in the data center and at the edge. A major factor in the adoption rate of AI will be how quickly we can realize improvements in the power, performance, area, and cost, or PPAC, of the foundational semiconductor technologies. However, at a time when PPAC improvements are on the critical path, classic Moore's Law scaling is slowing. To drive the PPAC roadmap in the future, a new playbook for semiconductor design and manufacturing is needed. This playbook has five main elements. New architectures, new devices and 3D structures, new materials, new ways to shrink feature geometries, and new ways to connect chips together. Then, to accelerate implementation of this new playbook, I strongly believe the ecosystem needs to work together differently by breaking down traditional industry silos. At Applied, we've aligned our strategy and investment around this vision of the future. While we are carefully managing all non-R&D spending, we are investing more than ever in new capabilities and products to accelerate the new playbook. We recently announced the official opening of our Meta Center in New York. This state-of-the-art facility enables us to work with customers and partners in new ways, accelerating the transfer of novel technologies from lab to fab. I'm equally excited about how our future product pipeline is shaping up, In addition to our traditional unit process equipment, which spans deposition, removal, modification, and analysis of materials, we're developing entirely new categories of products that we call integrated materials solutions. The applications for these IMS products include co-optimization of deposition, removal, and analysis, all the way to creating, shaping, modifying, and analyzing new structures and devices. We'll share more details as we bring new products to market in 2020 and 2021. For the time being, let me highlight a few examples of how we are defending our leadership positions, winning new applications, and expanding our available market in the near term. In DRAM, customers are introducing advanced transistors and interconnects to improve performance and low power. These technologies were applied as long-held leadership were originally developed for logic applications and are now migrating to memory. Growing 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. PPAC improvements are equally important for these applications, and we're finding new ways to migrate our leading-edge technologies into these specialty markets. Advanced patterning is a critical enabler for shrinking feature geometries, which translates to a large growing opportunity in Foundry Logic and DRAM. The patterning roadmap is increasingly enabled by new materials, as well as co-optimization of materials deposition and removal. As a result, we are expanding our positions in memory and winning new applications at Foundry Logic customers. And in markets where we have plenty of room to grow, we're also building momentum. In optical wafer inspection, we're winning new positions at FoundryLogic customers. And in etch, we have recently won multiple critical applications in NAND, as well as in FoundryLogic, where we delivered record etch revenues for the year. Before I hand the call over to Dan, let me quickly summarize. First, we're seeing a strong finish to 2019 driven by a healthy uptick in Foundry logic spending. Although it's still too early to call the shape and timing of the recovery in memory, we're encouraged by the signs we're seeing. Second, we have a strong positive point of view about the opportunities the AI big data era will create for the industry and applied. While we're tightly controlling non-R&D related spending, we are investing more than ever in new products and capabilities that put us in winning positions for the future. Third, the technical collaboration between Applied and our customers has never been stronger. And we're working with a broader set of customers and partners to accelerate the time to market for new game changing technologies. Now, I'll turn the call over to Dan. Thanks, Gary.