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 first quarter of Fiscal 2020 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-K 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 that earnings for our first fiscal quarter exceeded the top end of our guidance, reflecting outstanding execution across the company in a market environment that is strengthening. Based on our calendar year revenues, we believe we outperformed both the market and our direct peers in 2019. We entered 2020 with momentum, and the signals we see give us increased confidence that the years ahead will be very good for the industry and especially for applied materials. In today's call, I'll give you my perspective on how our markets are evolving and provide our near-term outlook. Then, I'll highlight the key components of our strategy to address the changing needs of our customers and drive sustainable, profitable growth for applied materials. Before I get started, I'll take a minute to address the implications of the coronavirus outbreak. To direct a comprehensive response across all the regions where we operate, we quickly activated our business continuity teams. Our top priority is the health and safety of our employees and their families. We're also doing everything we can to provide our customers the support they need to minimize disruption to their business. In addition, the Applied Materials Foundation is sending medical equipment into Wuhan and we've created a humanitarian response fund for our employees in China and the communities where they live and work. In terms of the business, our current assessment is that the overall impact for fiscal 2020 will be minimal. However, with travel and logistics restrictions, we do expect changes in the timing of revenues during the year. We are actively managing the situation in collaboration with our customers and suppliers. While we're making the necessary adjustments to our near-term plans, we are not taking our eye off the powerful trends that are driving the semiconductor industry forward and creating a structurally larger and less volatile market. At the low point of this recent down cycle in customer spending, which occurred in the second calendar quarter of 2019, the combined quarterly revenues of the top five semi-equipment companies were only 17% lower than at the cycle's peak. In contrast, during the industry cycles that took place between 2000 and 2013, peak to trough revenues for the same five companies combined dropped, on average, 44%. Another important metric we look at is equipment intensity or annual equipment spending as a percentage of annual semiconductor industry revenues. Between 1990 and 2014, this equipment intensity metric fluctuated between 17 and 6%. However, when we look at the most recent five-year period, equipment intensity has been in a tight band of 10.5 to 12%, with a mean of 11.5%. We believe this is a good estimate going forward. and reflects the ever more complex technology challenges we're addressing and the increasing value we're delivering to the ecosystem. In addition to the higher growth and lower cyclicality we see in the market as a whole, Applied is demonstrating even lower volatility than our peers. The reasons for this include the breadth of our product portfolio and the balance we have across different device segments. Dan will provide more color on this topic in his section. Moving to our near-term outlook, we see robust Foundry Logic investment continuing. There is a strong commitment on the part of these customers to advance the leading edge as they get ready for demand related to the rollout of 5G. At the same time, we're also seeing healthy spending for specialty nodes to support growing demand from the IoT, communications, automotive, power, and image sensor markets. Progression in the memory market is consistent with the view we've shared over the past several quarters. NAND appears to be in the early stages of recovery, with prices rising and inventory levels down to four to five weeks. That's compared to eight to ten weeks this time last year. We also see a good setup for DRAM to recover. Encouraging signs include supplier and end market inventories that are starting to get back to normal levels, and prices that appear to have bottoms. These leading indicators bode well for a pickup and investment by memory customers later in the year. Overall, we like the way the market is shaping up for 2020 and beyond. We believe that our semiconductor business can deliver strong double digit growth this year and feel very good about our longer term opportunities. In display, there are no major changes to the outlook we provided last quarter. We expect FY20 revenues to be similar to FY19 as the industry navigates the bottom of this spending cycle. We still believe that display is an attractive adjacent market for applied that provides good long-term growth opportunities. The business remains solidly profitable even as we make the necessary investments to ensure that we have the right portfolio of products ready for when the market picks up. Stepping back and looking at this year in its broader context, it's important to note that the overall electronics industry is in a period of expansion and diversification. Major new growth drivers, including IoT, big data, and artificial intelligence, are layering on top of traditional demand for smartphones and PCs. As I look ahead, I strongly believe that the future will not be like the past. The emerging workloads that will shape the next era of computing require domain-specific approaches, new system architectures, and new types of semiconductor devices. I believe that we need a new playbook for semiconductor design and manufacturing to deliver the power, performance, and area cost improvements that will unlock the potential of AI and big data. At Applied, we've aligned our strategy and investments around this new playbook so that we can enable new system architectures, new devices and 3D structures, the introduction of novel new materials, new advances in 2D geometric shrinks, and new ways to connect chips together through advanced packaging. Applied has a unique portfolio of materials engineering capabilities and products to enable the new playbook. Getting these new technologies to market faster has never been more valuable And this is a major emphasis across the company. For example, we're using advanced metrology, sensors, data science, and simulation to improve learning rates, speed up the transfer of new technologies from applied labs to customers' factories, and reduce the time it takes to optimize device performance, yield, output, and cost. In addition, we have more engagements with a broader ecosystem than ever before focused on accelerating innovation all the way from materials to systems. Our strategy is yielding results for our customers and applied. Calendar 2019 was a new record for our Foundry logic revenues and the current leading edge node transition further grows our opportunity. For an equivalent number of wafer starts, our available market increases by more than 10%. We're also generating record revenue from specialty markets where customers build their technology upon trailing geometries. For these customers, the innovation roadmap is driven by materials innovation rather than geometric scaling. Strength and leading edge, combined with healthy investments and specialty nodes, means that several of our leadership businesses, including metal deposition and epi, are delivering record revenue. At the same time, we continue building momentum in areas of the market where we still have plenty of room to grow. In the quarter, we secured major application wins for critical edge steps at both Foundry Logic and Memory customers. Our process diagnostics and control business delivered record quarterly revenue, driven by strong adoption of our new optical wafer inspection system and continued strength in our leading eBeam products. We're also making great progress in packaging. As the industry introduces increasingly sophisticated packaging approaches, Our strategy has been to focus on addressing the most critical process steps. As a result, we've been steadily gaining market share. Our packaging business delivered record revenues in 2019, while winning well over 50% of our available market. Another important growth factor for the company is our service business. Equipment maintenance is an attractive recurring revenue stream for Applied, and in calendar 2019, we added more than 2,000 systems to our installed base. As I've talked about before, we are finding new ways to deliver value through data-enabled services that accelerate customers' fab ramps and optimize their device performance, yield, output, and cost in high-volume manufacturing. As we do this, we're increasing the number of installed base systems covered by long-term maintenance agreements. In the past 12 months alone, we have grown the number of systems covered by these agreements by nearly 15%. Before I hand the call over to Dan, I will quickly summarize. While we're adapting our near-term plans in response to the coronavirus outbreak, our outlook for 2020 remains very positive. We believe we can drive strong double-digit growth in our semiconductor business this year and significantly outperform the markets. We also like the setup for 2021 and beyond. Our markets are better than ever with powerful new growth drivers still only in their early innings. Applied opportunities have also never been better. We are uniquely positioned to enable the new playbook for semiconductor design and manufacturing while helping our customers accelerate innovation from materials to systems. And now I'll turn the call over to Dan. Thanks, Gary.