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 fourth quarter of fiscal 2021 earnings calls. Joining me are Gary Dickerson, our President and CEO, and Bob Halliday, 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. And now I'd like to turn the call over to Gary Dickerson.

Thank you, Mike. I'd like to start by thanking our employees for delivering the best year in Applied Materials history while navigating a dynamic and challenging environment. Demand for semiconductors and wafer fab equipment remains very strong, and in fiscal 2021, we generated $23 billion of revenue, which represents 34% annual growth. In fiscal Q4, we hit the midpoint of our earnings guidance despite larger than expected supply chain constraints. These constraints worsened in the last few weeks of the quarter as we experienced delayed shipments from several suppliers. Without these supply shortages, we estimate that our Q4 revenues would have been at least $300 million higher. We expect supply chain headwinds to persist into fiscal 2022 and mitigating them remains our top priority. For this reason, I'll begin today's call by providing some additional details about the industry's supply dynamics, both near term and longer term. Next, I'll describe the demand outlook, which is very strong and broad-based. I'll then talk about the progress we're making against our growth strategy and how Applied Materials is positioned to outperform the market over the coming years. I'm also happy to welcome Bob back to the CFO seat while we conduct the search for our next CFO. Later in the call, Bob will share his perspective on the state of the business and provide color on our financial performance. So let me start with the supply side of the equation. Applied has made and continues to make strategic investments in our own global manufacturing infrastructure, so factory capacity is not a limiting factor for us. Like many in the industry, the primary challenge we face today is availability of certain silicon components. For Applied, our issues are relatively narrow, and we are proactively collaborating with our suppliers and directly with the chip companies to find solutions and work around bottlenecks. I deeply appreciate their partnership and teamwork as we navigate these unprecedented circumstances together. Looking further ahead, I believe we will see permanent changes in the way supply chains are designed and operated. In the semiconductor industry and beyond, there's a shift from just-in-time to a just-in-case approach, which will require higher levels of inventory, more built-in redundancy, and more burst capacity. Because the economic value of capturing upside opportunities far outweighs pure efficiency savings, we're also seeing changes in supply agreements across the ecosystem as companies place a premium on having preferential access to capacity. In addition, our customers are providing us with longer-term visibility, and we are collaborating more closely than ever when it comes to capacity planning. On top of that, the strategic importance of semiconductors is now recognized at a national level. Over the next few years, as incentive programs become available in the US, Europe, and Asia, We expect to see a trend towards regionalized supply chains that are more resilient but also increase capital intensity. Now I'll characterize the demand environment, which is extremely healthy. The pandemic has accelerated the digital transformation of the economy, fueling semiconductor consumption and driving the need for next-generation silicon technologies. As a result, we see wafer fab equipment spending for calendar 2021 up around 40% year-on-year. In other words, in the mid $80 billion range and constrained by supply, not demand. There is still a long way to go before supply and demand is balanced, especially as demand drivers continue to grow. We therefore expect wafer fab equipment spending to be up again in 2022. While we're currently focused on resolving near-term challenges, it's important to recognize we're only at the beginning of major technology and market inflections that will play out over the next decade. As everything gets smarter from our phones to our cars to our homes, we see a combination of unit growth and increasing silicon content per unit. For example, if you look at this year's high-end smartphones, by dollar value, the application processor semiconductor content is up about 20% compared to last year's models. and RF content increased at twice that rate. And in data center applications, the average DRAM and NAND content per server is also growing at a 20% compound annual growth rate. As more and more smart devices are connected at the edge, they are driving exponential growth in machine-generated data that must be stored, moved, and processed. Then, to create value from these vast volumes of data, new AI computing approaches are being developed, fueling further demand for current and next-generation semiconductors. When I talk with customers, their message is clear and consistent. They are investing strategically to be in the best position to capture value as these long-term secular trends accelerate. In our core market, Foundry Logic is about 60% of wafer fab equipment spending in 2021, and we expect it to remain at this level or higher over the next several years. Within Foundry Logic, the spending mix is relatively balanced between the most advanced nodes, where we see a fierce battle for leadership playing out, and ICAPs. ICAPS nodes serve the fast-growing IoT, communications, automotive, power, electronics, and sensor markets. In memory, supply and demand fundamentals remain healthy, and we expect investments to be up next year, although not as much as FoundryLogic. Finally, capital intensity is also providing an important tailwind. With the deceleration of traditional Moore's Law scaling and the transition to the new PPAC-T playbook, complexity is increasing. Simply put, more innovation is needed to get from one node to the next, and this higher complexity translates to higher capital intensity. Against this backdrop, I'll now describe applied performance and progress towards our strategic goals. In fiscal 2021, we grew semiconductor equipment revenues almost $5 billion, or 43% year on year, outpacing the market growth rate during that period. However, as I described earlier, we were unable to fully meet demand in our fourth quarter due to component shortages, and we expect to remain supply constrained going into fiscal 2022. As a result, we've grown our backlog at a company level to $11.8 billion, which is up 77% compared to the same period last year. Our near-term results do not fully reflect the underlying strength in our business and or the progress we're making against our long-term strategy. As a reminder, our strategy has three pillars. First, to be the PPAC-T enablement company and provide the foundation for customers' power, performance, area cost, and time-to-market roadmaps. Second, to shift more of our business to subscriptions. And third, to generate incremental free cash flows and profitability from our businesses in adjacent markets. We've aligned our organization and investments around these critical focus areas and are demonstrating strong momentum. Applied's PPAC-T enablement strategy is built upon three differentiated elements. We have the broadest and most enabling portfolio of unit process solutions. We can co-optimize and integrate these technologies in unique and highly enabling ways. And we're focused on time-to-market acceleration with our AIX, or actionable inside accelerator data platform. Starting with our unit process tools, demand in our traditional leadership areas is very strong. Our epi and thermal businesses both grew 70% this fiscal year, and CMP grew more than 60%. In our targeted growth areas, we expect our process diagnostic and control revenues to be up more than 60% in calendar 2021. Packaging is another very exciting area for us. Our equipment revenues are up more than 55% year on year, and we're on track to exceed $800 million for calendar 2021. We're also bringing highly enabling future technologies to market through a combination of organic R&D and strategic partnerships. Moving to our co-optimized and integrated products, the customer pull for these solutions is strong and increasing for future nodes. Co-optimization allows us to see and solve higher value problems for customers, speed up commercialization of new innovations, and capture more of the available opportunity. One example is dielectric materials, where we're driving parallel innovations in materials deposition, modification, and removal. Our CVD group has more than 15 new materials, either in development or recently released. These enable new structures or manufacturing techniques in both foundry logic and memory. The revenue opportunity we've opened up for the co-optimized etch and CMP steps is almost twice as large as the market for the standalone deposition equipment. Another example is advanced patterning, where we're co-optimizing CVD, ALD, and CMP with our CIM3 etch, enabling us to gain more than five points of share in patterning this year. Integrated material solutions, or IMS, go one step beyond co-optimization by combining multiple processes with customized metrology and sensors in a single system, typically under vacuum. With IMS, we can target the most complex and valuable challenges in the new PPAC-T playbook. For example, this year we delivered five new low-R or low-resistance metallization integrated solutions to customers that address next-generation applications in foundry logic, DRAM, and NAND. This included our copper barrier seed IMS that combines seven different process technologies in one system under vacuum, ALD, PVD, CVD, copper reflow, surface treatment, interface engineering, and metrology. This enables a 50% reduction in interconnect resistance at the most advanced foundry logic nodes and creates a multi-billion dollar opportunity for applied materials over the next five years. The final component of our PPAC-T enablement strategy is time-to-market acceleration. New digital tools that accelerate R&D, technology transfer, and high-volume manufacturing are a major focus area for our customers. In the coming years, these technologies will have a huge impact on productivity and innovation to commercialization speed. They will also play a key role in making regional supply chains economically competitive and sustainable. Our AIX platform brings together process tools, sensors, metrology with data analytics and machine learning. We currently have 25 AIX R&D acceleration engagements with leading customers, and we now expect that number to triple over the next 12 months. Another highlight for 2021 is the progress we're making with subscription revenues. In our service business, we've already converted a significant percentage of our spares and service revenue from on-demand to long-term service agreements. We now have nearly 15,000 installed base tools covered by these agreements, up 12% year on year. The tenure of these agreements has grown from 1.9 years at the end of 2020 to 2.3 years today, and our renewal rate is about 90%. Several customers have highlighted how these long-term agreements have allowed them to better manage disruptions in parts supply and technical support during the pandemic. Before I hand the call over to Bob, I will quickly summarize. As the digital transformation of the economy accelerates, demand for semiconductors continues to grow and is significantly outpacing supply. We expect supply shortages of certain silicon components to persist in the near term, meaning that we don't expect to fully meet demand in Q1. Managing these constraints in partnership with our suppliers and chip makers is our top priority. Looking beyond the near-term disruptions, I feel very positive about the future. Longer-term secular trends are driving the semiconductor and wafer fab equipment markets structurally higher. and it applied we're making significant progress towards our strategic plans. We're in the best position to accelerate our customers' PPAC-T roadmaps and grow significantly faster than our markets over the next several years. Now, I'll hand the call over to Bob.