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 third 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 GAAP 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 some calendar announcements. On the 8th of September at 9 a.m. Pacific time, we plan to host the third event in our master class series, this time focusing on the ICAPS markets and also on heterogeneous design and advanced packaging. Then, on the 18th of October, also at 9 a.m. Pacific time, we plan to hold our fourth master class. We'll focus on process control and process optimization, including AIX platform technologies like eBeam and AI. We hope you'll join us. And now I'd like to turn the call over to Gary Dickerson.

Thank you, Mike. In our third quarter of 2021, Applied Materials again delivered record performance, capitalizing on strong, broad-based demand for our semiconductor products and services while navigating a challenging supply environment. Over the past 18 months, the pandemic has accelerated the digital transformation of the economy, and adoption of advanced technology, creating a permanent structural shift for the industry. At the same time, COVID-19 has disrupted global supply chains and logistics. A transitory challenge will continue navigating over the coming quarters. Across the company, I want to thank our teams for doing an incredible job to successfully overcome these near-term disruptions, provide outstanding support to customers, and keep our R&D roadmap on track. In today's call, I'll focus on three main topics. First, I'll provide our perspective on the market, starting with our near-term outlook and then recapping our longer-term thesis. Second, I'll summarize the three pillars of Applied's growth strategy. And third, I'll explain how Applied is outperforming our markets today and is well-positioned to play an even bigger, broader, and more valuable role in the future. I'll begin with our near-term outlook. Overall, there's no significant changes to our view of the market. Demand is strong and sustainable, with customers making strategic investments to address long-term secular trends. In 2021, Foundry Logic is the fastest-growing wafer fab equipment market, and we believe it will represent more than 55% of total customer investment for the year. This spending is split relatively evenly between leading-edge and the three most advanced nodes in Foundry and Logic, and technologies for IoT, communications, automotive, power electronics, and sensor applications, or what we call ICAPs. We expect DRAM spending to be the second fastest growing WFE market this year, and we see a positive setup for sustained investment in capacity and new technology. Supply-side inventories remain below normal levels, and long-term demand drivers are strong, fueled by memory-intensive AI computing. On an absolute basis, we expect NAND investments to be similar to DRAM for the year. We believe NAND inventories are at normal levels both on the supply side and demand side. Looking further ahead, I strongly believe there has never been a more exciting time for semiconductor companies. We are only at the beginning of decade-long trends that will underpin secular industry growth. As I've said before, digital transformation is built on silicon and broadens the drivers for semiconductor innovation. Demand for semiconductors is no longer about one or two killer applications, but rather an expansive structural shift in the economy towards digitization and automation. Smart and connected devices at the edge not only consume more silicon, they are driving exponential growth in machine-generated data. To make sense and create value from the vast volumes of data available, new AI computing approaches are needed, fueling further demand for current and next-generation semiconductors. While global consumption of silicon is accelerating, adoption rates of new technology vary considerably by region. As we showed in our investor meeting, we estimate that by 2025, China will have only reached the same levels of silicon spend per capita the U.S. saw in 2015, and India trails China by another 8 to 10 years. Since the impact of digital transformation is so wide-reaching, national governments are increasingly recognizing the strategic importance of semiconductors. As government incentives become available in the U.S., Asia, and Europe, they can provide multiyear support as the industry moves from lean and just-in-time supply chains to more resilient, flexible, and secure approaches, including regionally distributed capacity. However, putting the right manufacturing infrastructure in place is only one piece of the puzzle. Investment in innovation infrastructure to lead in the development and commercialization of next-generation technologies is even more critical to winning the future. Early access to superior semiconductor technologies or what I refer to as winning the PPAC-T race, will determine the countries and companies that thrive and those that won't. At Applied, we have a strong point of view that the industry's future will not be like the past, and we've aligned our strategy and investments accordingly. Our strategy has three pillars. First and foremost, We are focused on being the PPAC-T enablement company to provide the foundation for customers' power, performance, area, cost, and time-to-market roadmaps. We have the broadest and most enabling portfolio of process technologies that we can co-optimize and combine in unique and highly enabling ways. Second, we're shifting more of our business to subscriptions, as we believe this model provides significant benefits to customers and for us. We have already converted a meaningful portion of our installed-based business to recurring revenues, and we are starting to monetize new products and services using subscription approaches. And third, we continue to optimize our portfolio of businesses that serve adjacent markets, including display, to drive profitable growth and higher free cash flows. This strategy is yielding results, and 2021 is shaping up to be a strong year of outperformance for Applied. Starting with our unit process tools, we are seeing very strong demand for our leadership products. For example... Taking the midpoint of our fourth quarter guidance, both our epi and thermal businesses are on track to grow more than 70% this fiscal year, while CMP will grow more than 60% and implant more than 50%. We're also seeing outperformance in our growth areas, especially process diagnostics and control, where we expect to grow more than 60% in calendar 2021. On top of this, we have strong momentum with our co-optimized and integrated solutions. By revenue, about 70% of the semiconductor products we sell today have already been co-optimized at some level. Co-optimization allows us to see and solve higher-value problems for customers, speed up technology transition to high-volume manufacturing, and make our solutions stickier. Beyond co-optimization, our integrated material solutions, called IMS, combine multiple processes with customized metrology and sensors in a single system, typically under vacuum. Our latest IMS product that lowers interconnect resistance by 50% in advanced foundry logic directly addresses a multi-billion dollar opportunity over the next five years. With IMS, we can target the most complex and valuable challenges in the new PPAC-T playbook, and we have an exciting pipeline of new solutions for both Foundry logic and memory. Another area where we're seeing strong and sustainable growth is our ICAPS business that serves a broad spectrum of customers and applications in IoT, communications, automotive, power, and sensors. Within ICAPS, demand for 28 nanometer and larger nodes is especially robust. Revenue from products serving these applications is expected to double this year. By acting early and forming a dedicated ICAPS team in 2019, we've been able to increase our focus on these customers and accelerate our share of this market. We're developing new products specifically designed for ICAPS markets, including integrated and co-optimized solutions. As a result, we're deepening our partnership and collaborations with these customers. For example, we recently signed a five-year contract with a leading ICAPS customer designed to provide more assured supply for them and more predictable revenues for applied customers. Today, we are demonstrating strong momentum in our leadership and growth businesses, IMS, and ICAPS. And as I look ahead, I'm confident our opportunities are even better. It's clear that advances in materials engineering are foundational to the industry's PPAC-T roadmap. The PPAC-T playbook has five key elements. New architectures, including workload-specific ASICs and new memories. 3D structures, including gate all-around transistors, varied power rail, and 3D DRAM, new materials for gate, contact, and interconnects, new geometric shrink, and advanced packaging. We believe that the relative contribution of these five elements to PPAC-T at future nodes is evolving in ways that create opportunities for Applied to play an even larger and more valuable role. Let's take advanced packaging as an example. We identified this inflection early and began investing in differentiated technology years ago. Today, we enjoy a clear leadership position in the advanced packaging equipment with more than 60% share of our served market. We will generate more than $800 million of revenue from our equipment business this year. And through a combination of organic R&D and strategic partnerships, we're also developing highly enabling future technologies. We are very excited about our opportunities and pipeline, and we'll share more details with you at our upcoming packaging master class. Finally, when we talk to customers about PPAC-T, they consistently highlight the importance of T, time to market. Time-to-market acceleration is a critical component of our PPAC-T enablement strategy. 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. Our Actionable Insight Accelerator, or AIX platform, that we officially launched in May, brings together process tools, sensors, metrology, data analytics, and machine learning. We have strong momentum and are adding new installations at multiple leading customers. For example, Applied Pro is our process recipe optimizer within AIX, and used to accelerate R&D qualification of individual chambers and tools, as well as enable larger process windows and higher chip yields. Over the next 12 months, we expect to double the number of Applied Pro customer engagements from around 25 this year to more than 50. Before I hand the call over to Dan, I'll quickly summarize. We see strong and sustainable demand for our semiconductor business underpinned by a wide range of positive macro and technology drivers. While COVID-related supply chain disruptions persist, our teams are doing a great job working through these challenges. We believe applied materials will outperform our markets again this year thanks to our strong portfolio of differentiated unit process tools for both leading-edge and ICAPS markets, combined with accelerating adoption of our IMS and advanced packaging products. As we look ahead, we're confident that the strength of longer-term secular trends will drive semiconductor and wafer fab equipment markets structurally higher, and we believe Applied is in the best position to accelerate our customers' PPAC-T roadmaps and grow significantly faster than our markets. Dan, over to you.