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 first quarter of Fiscal 2022 Earnings Call. 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-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 quarterly earnings materials, which are available on the IR page of our website at AppliedMaterials.com. Before we begin, I have a calendar announcement. Applied will hold its next master class on Thursday, April 21st at 9 o'clock Pacific time. We'll cover patterning technologies for the chipmaking industry, including 2D scaling with EUV lithography, materials-enabled patterning of gate all-around transistors, and 3D patterning control using eBeam technology and AIX. We hope you'll join our technology experts for presentations and Q&A. And now I'd like to turn the call over to Gary Dickerson.

Thank you, Mike. This is an unprecedented period for applied materials in the semiconductor industry. Demand for semiconductors has never been stronger or broader, and the supply chain's ability to fulfill this growing demand is constrained in the near term. While the supply environment remains challenging, we landed our first fiscal quarter of 2022 towards the high end of our guidance range and delivered our highest ever quarterly revenues. These results are a testament to the capabilities and commitment of our global team who are executing well and focused on doing everything possible to deliver for our customers. The industry clearly has a long way to go before supply catches up with demand. Applied orders for the quarter were an all-time high, beating our previous record by a half billion dollars. To ensure our own manufacturing capacity is not a limiting factor, we've made and continue to make strategic investments in our global infrastructure. This includes our state-of-the-art logistics service center in Austin, Texas, that we're bringing online this month. Like many in the industry, the biggest challenge we face today is is the availability of certain silicon components that go into subsystems within our products. We are working closely with our suppliers to find solutions and eliminate bottlenecks. I would like to thank them for their partnership as we collaborate in new ways to overcome near-term headwinds and build a stronger supply chain that better supports the future needs of the industry. In today's call, I'll talk about our demand outlook, which is very strong and strengthening. I'll provide our longer-term perspective on the secular trends reshaping the semiconductor industry, and I'll give you some updates on the progress we're making against our strategic goals and how we're positioned to outperform our markets over the coming years. Later in the call, Bob will share his perspective on the state of the industry and our financial outlook. Let me start with market demand. It's clear that wafer fab equipment spending in 2021 was limited by supply with some unmet demand pushing into 2022. If we look at our semiconductor systems revenues from the second quarter of 2021 to the end of Q1 2022 and compare to the prior 12-month period, they were up 43% year-on-year. We think this is a good approximation for industry growth in calendar 2021, which would put WFE in the mid $80 billion range. Demand is very strong and continues to grow. We believe wafer fab equipment spending could reach $100 billion in 2022. And since we are already close to being sold out for the year, we also have a positive growth outlook for 2023. Within WFE, Foundry Logic spending grew faster than memory in 2021, and we see it growing faster than memory again in 2022. We believe Foundry Logic made up more than 60% of total WFE investments last year and will remain at these levels or increase as a percentage of the mix over the next several years. Innovation at the edge and in the cloud means that Foundry logic demand is broad-based and split relatively evenly between the most advanced nodes and ICAPS customers who serve the IoT, communications, automotive, power electronics, and sensors markets. It's also important to put this near-term demand outlook in the context of the secular trends driving longer-term growth and structural changes in the industry. While digital transformation is already reshaping the global economy today, it will take decades to fully play out around the world, and at the foundation of this multi-trillion dollar inflection is advanced silicon. Today, nine of the top ten most valuable companies in the world either design or build chips. Eight of the nine are now designing their own customized silicon in-house, and the other one manufactures a large percentage of the world's chips by value. I think this is a great example of the fundamental role silicon plays in driving the system-level power, performance, and cost improvements that will unlock silicon the full potential of digital transformation and the metaverse. Back in 2018, we introduced our framework for describing the semiconductor industry's future technology roadmap. We called this the new PPAC-T playbook and said it had five key elements. New chip architectures like workload-specific ASICs, new 3D structures like gate-all-around transistors, backside power distribution, next-generation 3D NAND and 3D DRAM, new materials in gate, contact, and interconnect, new ways to shrink from EUV lithography to advanced patterning, and advanced packaging from 2.5D silicon interposers to 3D chiplets and hybrid bonding. As the major technology inflections that make up the PPAC-T playbook take shape, it's clear this future roadmap is more multifaceted and complex than anything the industry has done before. This increasing complexity has positive implications for applied materials. First, we expect capital intensity to remain at the levels we have seen over recent years, And second, Applied's broad capabilities are more valuable because they allow us to address higher order problems for customers and provide them with more complete solutions. On top of the opportunities created by the PPAC-T playbook, major supply chain inflections are underway that are also positive for industry economics. This starts with a shift from just-in-time to a just-in-case philosophy. The most visible example of this is the automotive industry, where the major car makers are quantifying the cost of lost business in 2021 and rapidly changing the way they work with suppliers of their most critical components. We're also working differently with our customers. They are providing us with longer-term visibility, and we are collaborating more closely on capacity planning. In addition, the strategic and economic importance of semiconductors is being recognized at a national level. In the coming years, government support and incentives in the U.S., Europe, and Japan will translate into regionalization of supply. As I've highlighted before, these regional supply chains will be more resilient but also less capital efficient, which is an additional tailwind for us. Overall, our outlook for the next decade is very positive. We expect semiconductor and wafer fab equipment to grow significantly faster than the economy with outsized opportunities for applied materials. To be ready for this exciting future, we've aligned our organization and investments around three strategic pillars. First, to be the PPAC-T enablement company that and provide the foundation for customers' roadmaps for power performance, area, cost, and time to market. Second, to shift more of our business to subscriptions. And third, to generate incremental free cash flows and profitability from our businesses and adjacent markets. Earlier, I talked about key technology inflections that make up the PPAC-T playbook. gate all around, backside power distribution, 3D NAND, 3D DRAM, new materials in the gate, contact and interconnect, and advanced packaging. All of these inflections are primarily enabled by materials engineering. applied core strength, and as a result, they grow our total available market. Thanks to our relentless focus on developing differentiated technology to enable these inflections, we are also in a great position to capture more of that growing TAM. For example, in the transition from FinFET to first-generation gate-all-around, our transistor TAM grows by more than a billion dollars per 100,000 wafer starts per month. And based on our tool-of-record positions, we expect to capture the majority of the inflection. We will provide more details about these inflections and how we expect them to play out in our 2022 masterclasses. While our current supply constraints mean that we can't fully realize the strength in our business, we are executing very well against our product roadmap, and there are clear leading indicators of our future growth potential. I'll highlight a few recent examples. In Edge, we've recently won multiple tool of record positions at advanced nodes in Foundry Logic across all three leading Edge customers. This is significant because these wins are in areas we haven't served in the past and demonstrate how our next generation of etched solutions address customers' most challenging applications. In inspection and metrology, where we have fewer supply chain constraints, our trailing 12-month revenues were up 68% year-on-year, and our e-beam revenues nearly doubled in that period. We expect to outperform the market again in 2022 with especially strong growth in optical wafer inspection combined with further extension of our e-beam leadership. Beyond unit process excellence, Applied is able to combine the industry's broadest technology portfolio in unique ways to create co-optimized and fully integrated solutions. For example, co-optimization of hard mask deposition and etch is an enabling solution for high aspect ratio structures. adoption of our co-optimized Draco solution is accelerating and on track to generate an incremental $600 million of revenue this year. And we recently secured our first wins with a new carbon hard mask deposition and etch solution at a leading memory manufacturer. Another key component of our technology portfolio is our digital tools that accelerate R&D, technology transfer and ramp, and optimize productivity and high-volume manufacturing. We're engaged with a broad range of customers. In this quarter, we secured a new strategic penetration for R&D acceleration using our AIX actionable inside accelerator platform at a leading customer. As part of this engagement, we will use our unique sensor technology and proprietary machine learning algorithms for rapid process window tuning and process variability reduction. We're also making progress on our multi-year journey to increase subscription revenues. Within AGS, more than 60% of our parts and service revenue is generated from subscriptions in the form of long-term service agreements. The average tenure of these agreements is now 2.3 years, up from 1.9 years 12 months ago, and the renewal rate is over 90%. In addition, when we look at our combined software business in AGS and SEMI systems, which are also subscription-based, we expect them to generate more than $300 million of revenue this year. Before I hand the call over to Bob, I'll quickly summarize. Applied and our global teams are executing well in a challenging and dynamic environment, and our near-term focus is on doing everything we can to expedite deliveries to our customers. Demand for semiconductors and wafer fab equipment remains strong and continues to grow. There's still a long way to go before supply catches up with demand. Our outlook for 2022 and beyond is very positive as long-term secular trends drive our markets structurally higher. In addition, the major technology inflections that make up the industry's PPAC-T roadmap expand, apply to addressable market opportunities, and our broad and differentiated technology portfolio puts us in a great position to capture a larger portion of our served markets in years to come. With that, Bob, it's over to you. Thanks, Gary.