Applied Materials, Inc.

Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participant lines 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 third quarter of Fiscal 2020 Earnings Call. Joining me today 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 quarterly earnings presentation materials, which are all 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. This time last quarter, I started the call by outlining the steps we were taking inside Applied Materials to navigate the COVID-19 pandemic. Our actions have been guided by two key principles. First, maintaining the trust of our employees, customers, suppliers, and partners is And second, focusing on strategic initiatives that will allow us to emerge stronger over the longer term. Today, I'm pleased to report that both our manufacturing operations and R&D labs are running smoothly at pre-COVID levels of productivity. I'd like to acknowledge the exceptional contributions, resilience, and creativity of our employees and suppliers today. who have rapidly adapted to new ways of working to deliver this quarter's outstanding results. A few weeks ago at Semicon West, I outlined Applied's vision for the next decade. I talked about the critical role semiconductors will play in shaping a better future for everyone, the advances in technology needed to unlock the potential of artificial intelligence, and how materials engineering will enable the industry's new PPAC-T playbook, to advance power, performance, area, cost, and time to market. I also announced Applied's new 10-year goals and roadmap for environmental sustainability, which is part of our commitment to grow our business responsibly and make possible a better future. Having covered our long-term perspective in detail at that event, today I'm going to focus my comments on current market dynamics and provide additional insights into our product portfolio and business momentum. Starting with the market environment, we remain mindful of global economic concerns and that consumer spending is a potential headwind for many sectors, including the electronics industry. With that said, demand for semiconductors has strengthened over recent months. As the world adapts to the challenges created by the pandemic, several major technology inflections are being accelerated. Work from home, homeschooling, and online retail are driving investments in cloud data centers and communications infrastructure. Many organizations are building stronger business continuity plans and increasing the use of automation and IoT technologies. And because AI has the potential to transform entire industries, its adoption remains non-discretionary for many companies. In WAFER FAB equipment, we expect overall FoundryLogic spending to grow this year, even with soft demand and specialty nodes that serve automotive and industrial markets. At the leading edge, we see a strong commitment from customers to build out their FABs and aggressively drive their R&D roadmaps. This gives us confidence these levels of spending are sustainable in 2021 and beyond. As I've described before, with the slowing of traditional 2D Moore's Law scaling, there will be a transition from general-purpose computing to customized solutions tailored for specific applications or workloads. Recent announcements by leading systems companies illustrate this inflection very well. Custom-designed silicon and diversification of architectures play to the strengths of the foundries and underpin their ongoing investments. In memory, we see investments for the year growing slightly faster than in Foundry logic as customers push forward with their technology roadmaps. We also see the growth rate in DRAM being very similar to NAND. Against this backdrop of a strengthening demand, our semiconductor systems revenues are up 18% on a trailing 12-month basis, and at the midpoint of our fourth quarter guidance, we'll be up 25% for our fiscal year. Next, I'll explain what's driving our outperformance today and how, by focusing on our customers' highest value problems, we are positioned to grow faster than our markets over the next several years. The process complexity required to produce leading-edge transistors and interconnects continues to grow, and new innovations in materials and structures are fundamental to driving higher performance and lower power consumption. This plays directly to the strengths of Applied's traditional leadership areas, namely, creating and modifying materials and structures. For example, our deposition businesses, CVD, PVD, and EPI, generated more than $5.2 billion of revenue in calendar 2019 and, according to VLSI's data, gained eight points of market share. In our growth businesses that focus on shaping and analyzing materials and structures, we have strong momentum. We are the fastest growing company in ECHE, even though we don't currently serve the dielectric market segment. At the midpoint of our guidance, our ECHE revenues will be up nearly 30% this fiscal year. Since we introduced our SIM 3 system in 2015, we have shipped more than 5,000 chambers, and we recently introduced SIM 3Y, which is the most advanced etched system we've ever built. This system provides extremely high material selectivity as well as precise depth and profile control needed to form the densely packed high aspect ratio structures and next-generation 3D NAND, DRAM, and logic devices. We're also the fastest-growing company in the metrology and inspection market. At the midpoint of our guidance, revenue for our process diagnostics and control business will be up more than 40% in fiscal 2020. We're winning share in optical wafer inspection and e-beam with new products that are in the early stages of adoption and have significant traction with leading customers. Applied has by far the broadest product portfolio in the industry, spanning materials creation, modification, shaping, analysis, and packaging. This allows us to see inflections early and develop more complete solutions for customers, from co-optimizing deposition and removal processes to all the way to our integrated material solutions that combine multiple process and metrology technologies within a single system to address our customers most complex challenges. In addition, our business is very well balanced across device segments. In Foundry, where we are traditionally very strong, we are seeing our available market grow node over node, and we're positioned to outperform the market as these new technologies ramp in high-volume manufacturing. In DRAM, our share is even higher than in FoundryLogic. Over the past five years, we've gained 25 points of DRAM patterning share and still have significant potential to grow. We've recently won multiple process tool of record positions for future node transitions, including multi-patterning, hardmask, and hardmask open applications. In addition, the industry's upcoming transition to high-speed DDR5 is enabled by advanced logic-like features, including HiK MetalGate. This grows the available market in areas where applied has clear technology leadership. Another area where we're delivering more value to customers and have strong growth momentum is our aftermarket businesses. If we look at applied global services plus 300 millimeter upgrades, revenues are up 21% compared to the same period in 2019. Within AGS, 60% of our service and spare parts business comes from predictable recurring revenue streams in the form of long-term service agreements. This year, the renewal rate for these long-term agreements is in excess of 90%, which is clear validation of the value customers see in our advanced service products. In display, our revenue outlook for fiscal 2020 is unchanged at $1.6 billion, and we expect 2021 to be similar. However, we're seeing some encouraging signs in the high end of the market. specifically robust demand for 8K screens and the adoption of OLED in TVs. We remain optimistic about the long-term opportunities for Applied in the display market as we focus on addressing future technology inflections and expanding our available market. Finally, I'll highlight how we're working differently inside the company as well as with our customers and suppliers. COVID-19 restrictions have stimulated many changes in the way companies in the industry are operating. For example, since March, we've provided thousands of digital support sessions using AR and video, held more than 900 training sessions with field support engineers using VR and live distance learning, and fully restored R&D lab productivity while bringing only a fraction of our engineering staff on site. I strongly believe that Innovate Anywhere provides substantial long-term benefits by eliminating waste, saving time and money, and reducing the industry's carbon footprint. Over the past several years, Applied has been making significant investments in state-of-the-art digital infrastructure, sensors and metrology, data science, machine learning, and simulation. The combination of these technologies enables us to accelerate product development cycles speed up transfer of new technologies from lab to fab, and optimize cost, output, and yield for our customers in high volume production. Before I hand the call over to Dan, I will quickly summarize. First, thanks to the extraordinary hard work of our employees and suppliers, we are operating the company at pre-COVID levels of productivity while maintaining stringent protocols to keep our workplaces safe and healthy. Second, While we're mindful of potential macroeconomic headwinds, semiconductor equipment demand is strengthening, and the longer-term industry growth drivers remain firmly in place. Based on what we hear from our customers, we believe current spending levels will be sustained or even higher in 2021. Third, our strategy to accelerate the PPAC-T playbook is yielding results for our customers and applied. Today, we're outperforming the market overall and especially in key growth areas, including etch and inspection. Looking ahead, I am very excited about the innovative new products and integrated solutions we will bring to market this year and beyond. Now, I will turn the call over to Dan.