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, everyone, and thank you for joining Applied's second quarter of Fiscal 2021 Earnings Call. 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 gap measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at AppliedMaterials.com. Before we begin, I have a calendar announcement. We plan to host another master class, this time on logic technology, on the 16th of June at 9 a.m. Pacific time. We hope you'll join us. And now I'd like to turn the call over to Gary Dickerson.

Thank you, Mike. I'm pleased to report another record quarter for Applied Materials. underpinned by strong and broad-based demand across our semiconductor businesses as large secular trends fuel increasing consumption of silicon. I'd like to thank our passionate and hardworking team for delivering these great results. And in particular, I want to acknowledge our operations group and suppliers for successfully overcoming logistics and supply chain challenges in the quarter. At our recent investor meeting, we described our thesis for the industry. laid out our growth strategy and provided our new financial and capital allocation models. Therefore, in today's call, I will focus my comments on three main topics. How we see the current market environment, how Applied is outperforming our markets today, and how we're positioned to grow faster than our markets over the longer term. Later in the call, Dan will talk about our subscription revenues, the strength in our service business, and provide more color on our financial performance and outlook. I'll begin with the industry environment. As the world starts to transition to the post-pandemic economy, demand for semiconductors continues to grow. The pandemic accelerated key technology trends that make semiconductors more pervasive and indispensable in people's lives. Current capacity shortfalls in some areas of the market show the highly efficient, just-in-time supply chains that have served the semiconductor industry well for the past two decades may not be the most effective strategy going forward. There is a clear desire for the chip industry to build more resilient and flexible supply, including more regionally distributed capacity, as the strategic importance of the semiconductor supply chain is increasingly acknowledged at a national level. It's also important to recognize that we're still in the early innings of major secular trends that will play out over the next decade and drive the semiconductor and semiequipment markets structurally higher. At the investor meeting, we described five overlapping inflections. First, at a macro level, digital transformation of the economy is rapidly advancing. For individuals, companies, and nations, embracing digital transformation is non-discretionary because it changes the basis of competition. Those who quickly and effectively embrace these new ways of working will emerge as winners, and those who don't or can't adapt will not keep up. Digital transformation is driving exponential growth in data generation, which leads to the second major inflection, AI computing. New computing approaches are needed to create value from these massive volumes of data. AI computing works best with workload-specific software and hardware built from customized and entirely new types of silicon. Third, the benefits of traditional Moore's Law 2D scaling are slowing down, and the semiconductor industry is transitioning to a new playbook to drive power, performance, area cost, and time to market. As the PPAC-T playbook is adopted, it is driving a step up in investments across the ecosystem. Fourth, there's an increased focus on ensuring that growth is sustainable and responsible as the industry scales and advancing energy efficient computing is critical. And fifth, there's a business model inflection as companies migrate away from products and transactions to outcomes and deeper collaborations focused on speed, and time to market. These five factors add up to strong and strengthening demand for wafer fab equipment and advanced services that we believe is sustainable well beyond 2021. For the first time customers are providing capital spending guidance for multiple years into the future, which is a new leading indicator for demand sustainability. In 2021, We expect Foundry Logic to be the fastest growing wafer fab equipment market with strong investments in both leading edge and specialty devices. DRAM is the next fastest growing market with all major DRAM manufacturers investing in new technology and capacity. Finally, we see NAND growing at a more modest rate this year on the back of about 30% growth in calendar 2020. More importantly, Applied is outperforming the overall market. Recent VLSI market data confirmed that our semi-equipment business grew 23% in 2020 versus market growth of less than 19%. We outperformed even though the device mix would not typically be considered favorable for Applied. There are several reasons why I'm confident 2021 will be another strong year of outperformance. To start with, our leadership areas are in the fastest-growing parts of the market. We expect CMP, epithermal, and implant to all grow more than 50% this year. Next, we're very well positioned to serve the fast-growing specialty markets. We anticipated this market growth several years ago and formed a new group inside the company called ICAPS, to focus on IoT, communications, automotive, power, and sensor applications. In addition, we have strong traction with new products, especially in areas where we have space to grow share. In 2020, we gained 240 basis points of market share in Conductor Edge and 220 basis points in CVD, thanks to the momentum we have in patterning applications for DRAM and Foundry Logic. This year, our etch and CVD businesses combined will generate more than $7.5 billion of revenue. In process diagnostics and control, we expect to grow around 50% in 2021 and generate more than $900 million of revenue from our eBeam products. Extending our leadership in eBeam has been a major focus as it is a highly strategic capability that accelerates adoption of our differentiated semi-products and integrated material solutions as well as being a key component of our actionable insight accelerator. Finally, we're seeing increasing adoption of our integrated solutions where we're bringing together unique combinations of technologies and capabilities. In 2021, we expect to generate more than $400 million of revenue from our first integrated material solutions. In addition, revenues from our advanced packaging product portfolio are on track to exceed $800 million, almost doubling since 2019. Looking beyond the strength in our business today, we believe we're in a great position to deliver sustainable outperformance over multiple years. As the industry roadmap transitions from traditional 2D Moore's Law scaling to the new PPAC-T playbook, materials engineering becomes critically enabling. This is because significant PPAC-T innovations in transistor and interconnect structures and materials are taking place, and these innovations are enabled by applied leadership technologies. We'll cover this topic in more detail at our upcoming Logic Masterclass. As we described at our investor meeting, to serve our customers' evolving needs and maximize our growth opportunities, we've built a comprehensive strategy to position Applied as the PPAC-T enablement company, shift more of our business to subscription revenue, and optimize our investments in synergistic adjacent markets to drive profitable growth and higher free cash flows. Our PPAC-T enablement strategy has three differentiated pillars. First, Applied has the broadest and most enabling portfolio of technologies spanning materials creation, modification, removal, and analysis. In our recent memory master class, we talked about how we're taking unique applied technologies that were originally developed for logic, including black diamond locate materials, and Hi-K metal gate transistors into the DRAM market, opening up new billion-dollar opportunities. Second, we can combine our technology portfolio in unique and highly enabling ways that no one else can do. A great example is our Draco hard mask material for capacitor scaling in DRAM. Draco has been co-optimized to work with Applied's Etch system in a process development that we accelerated with our eBeam technology. Today, we offer a spectrum of solutions from co-optimization of processes and tools like Draco all the way to fully integrated material solutions that combine multiple processes and customized metrology and sensors within a single platform. The third pillar is time-to-market acceleration. We've developed a proprietary suite of solutions to accelerate every stage of the product lifecycle, from R&D to technology transfer and high-volume manufacturing. We call this the Actionable Insight Accelerator, or AIX platform, and it brings together process tools, sensors, metrology and analytics, and machine learning capabilities. There is tremendous pull from customers, and we already have AIX engagements with all major memory manufacturers. One example of how we're applying machine learning in real-world applications is Xtract AI that allows us to combine the most powerful attributes of optical and e-beam inspection and provide a solution that's many times faster than traditional approaches. In simple terms, optical inspection is fast and can find critical defects, while eBEAM is slower but has higher resolution to accurately classify those defects. So we use our eBEAM system to train the Xtract AI engine for defect and noise classification. As applied eBEAM technology has best-in-class resolution and imaging, we get the most accurate classification to train our AI models. We then use inferencing to turn an unclassified map of millions of potential defects into an actionable map of thousands of yield impacting defects. Before I hand the call over to Dan, let me quickly summarize. We see strong and sustainable demand in our semiconductor business underpinned by a wide range of macro and technology drivers. We believe that we're in a great position to outperform our markets again this year, thanks to our broad exposure to the major industry inflections, our strong portfolio of differentiated unit process products, and accelerating adoption of our integrated material solutions and advanced packaging products. We feel very positive about the longer-term secular trends that are driving semiconductor and wafer fab equipment structurally higher, and we're confident that we have the right strategy to accelerate PPAC-T and grow significantly faster than our markets. Dan, over to you. Thanks, Gary.