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 2022 earnings calls. Joining me are Gary Dickerson, our President and CEO, and Bryce Hill, 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. Applied will host its next masterclass one week from today on Thursday, May 26th at 9 o'clock Pacific time. We'll introduce you to new IMS solutions for chip wiring that solve the resistance challenges of EUV scaling. We'll detail how the industry can build backside power distribution networks that increase logic density by up to 30% at the same lithography. We'll introduce you to new developments in hybrid bonding and heterogeneous integration, and we'll translate these inflections to our product roadmaps and growth targets. 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. The global semiconductor industry and applied materials continue to navigate an unprecedented set of challenges. Demand for semiconductors has never been stronger or broader, while the industry's ability to fulfill this growing demand remains constrained by ongoing supply chain issues. I would summarize Applied's second fiscal quarter of 2022 as a two-part story. During February and March, we successfully resolved some key component bottlenecks, only for this progress to be offset in April as COVID-related shutdowns further disrupted already stretched supply. These shutdowns are impacting a small number of our suppliers and ultimately delayed around $150 million of revenue in the quarter. Today, our number one priority is to work quickly and creatively across the supply chain to bring more industry capacity online. I would like to recognize the hard work and commitment of our global team and our suppliers who are doing everything possible to meet our customers' needs. In my prepared remarks, I'll cover three key topics. First, the supply situation and how we see this evolving over the coming months. Second, the near-term demand environment and why we believe this remains strong and sustainable. And third, our long-term view of the markets, the industry's roadmap, and applied materials' unique and differentiated capabilities that together create a rich landscape of opportunities for our company. After that, Bryce will provide more color on our financial performance and share some of his initial impressions. Bryce has been with us for eight weeks and we're delighted to have him on board. He brings deep and broad experience to our leadership team at this critical time for applied in the industry. Let me begin with the supply side of the equation. which is our biggest area of focus in the near term. The supply situation continues to present multiple challenges that we are working hard to address. Our key issues are shortages of silicon components, as well as certain other parts that go into the subsystems of our tools. We are doing whatever it takes to deliver for our customers from sending applied resources to supplier sites, to working with customers in creative ways to accelerate shipments, including merging system modules at their sites. In addition, we're collaborating with customers using our technology-enabled services to fast-track the startup and qualification of equipment once it arrives at their fabs. For reference, if you map out a typical timeline, starting with the shipment of a tool from our factory and ending with the first production wafer out, in the customer's factory, the time to install and qualify tools for high volume production can take months. We are seeing strong customer pull for new ramp acceleration services to cut down that valuable time significantly. A positive consequence of our current challenges is that our supplier engagements are becoming much stronger. Not only are we partnering with our suppliers to overcome near-term constraints, We are also building more robust solutions to support industry growth over the coming years. As we focus on the needs of our customers by addressing part scarcity, expediting deliveries, and adding labor in our factories and the field, we are incurring additional costs that are impacting applied near-term financial performance. As issues are resolved and we implement effective long-term solutions, transitory cost headwinds will abate. We're also taking actions to improve value capture, including price adjustments. Turning to the demand side of the equation, our outlook remains positive. The picture for 2022 is clear. We have the orders booked, a full build plan, and a large and growing backlog. We believe unconstrained demand for wafer fab equipment would be $100 billion or more. The key question is how quickly supply issues can be mitigated and how much the industry will actually be able to ship this year. The primary focus for our customers is now securing supply for 2023. The visibility our customers are providing is both longer term and more detailed than in the past. On this basis, we currently see 2023 remaining strong and being higher than 2022. There are several additional factors that give us confidence in this assessment. End demand for silicon continues to grow, driven by content growth in existing and new applications. Second, fab utilization is very high, even as newly installed capacity comes online. Based on almost 10 years of analytics, this is the highest quarter for industry utilization on record. And third, customers are starting up new capacity faster than ever. Essentially, all tools are being installed by our Applied Materials Service team as soon as they arrive at customer fabs, which we have not seen before. As we think about demand sustainability, we also take into consideration the broad-based composition of wafer fab equipment spending. In 2022, we expect Foundry Logic to make up more than 60% of total WFE investments. This spending will split relatively evenly between the most advanced nodes and ICAPs. production for the IoT, communications, automotive, power electronics, and sensors markets. ICAP's demand has grown significantly over the past several years, and we see sustainable investment by these customers. The edge applications are consuming more and more silicon. One example is automotive, where the global average silicon content is now $600 per unit, almost twice as much as in 2015. and this will continue to grow with the adoption of electric vehicles. Another example is a 5G phone that has 40% more RF content than a 4G handset. The need for extreme power efficiency in battery-powered edge applications is enabled by innovation in materials and structures and is driving an increase in layers and process steps. Over the longer term, advanced packaging and heterogeneous integration also supports sustainable demand for ICAPS nodes, as chip designers can use the optimal node for power performance and cost for each chiplet in a system. ICAPS customers are more focused on innovation than ever, and we are meeting these needs with new application-specific products. One example is an implant, where over the past five years, we've introduced 10 new systems developed for specific ICAPS applications. While navigating near-term challenges remains our top priority today, we are not losing sight of the bigger picture and long-term opportunities. It's now consensus within the industry that there's a clear path to a trillion dollar semiconductor market before the end of the decade. That would represent a high single digit compound annual growth rate from where we are today. In other words, it took the industry more than five decades to reach half a trillion dollars of annual revenues, and we will add another half trillion within the next six to eight years. We feel even better about where applied material sits within the ecosystem. Because technology complexity is increasing, we expect equipment intensity will remain at today's level or increase further over that period. As a result, WFE will grow in-liner faster than the overall semiconductor market. Then, within equipment spending, Major technology inflections are enabled by materials engineering, shifting more dollars to our available market over time. We describe the industry roadmap that will deliver future improvements in performance, power, and cost of semiconductor devices as the PPAC-T playbook. While different companies have their own version of the PPAC-T playbook, the fundamental components of the roadmap are the same. New architectures, new 3D structures, new materials, new ways to shrink, and advanced packaging. Within each of these five pillars, clear technology inflections are emerging that can be quantified in terms of impact, value, and timing. At our recent master class, we described the industry's transition from FinFET to gate all around, which is a new 3D structure. Applied has the broadest portfolio of solutions to enable next-generation transistor technology. With the gate all around inflection, the total available market for our transistor product portfolio grows by more than 15%. Based on our tool of record positions, we expect to increase our share of that available market by more than five points. And in terms of timing, we expect to start ramping shipments next year. In our next master class at the end of the month, we'll talk about wiring and chip integration innovations. Contact and interconnect are both major focus areas for our customers as they develop new materials and new 3D structures including backside power distribution networks. Between the 7 nanometer and 3 nanometer node, contact metallization steps are growing more than 50% and our total available market is expanding almost 80%. For interconnect layers, process steps are being added even faster and we expect our revenue opportunity to approximately triple. We'll also provide an update on our momentum and advanced packaging. At the investor meeting a year ago, we said we expected to double our packaging revenue between 2020 and 2024. Today, we believe we're on track to hit our 2024 packaging revenue goal one year early by winning more than 60% share of our served market. Beyond equipment, we are delivering and capturing more value with advanced services. Facing both supply constraints and record fab utilization, customers are seeing significant benefits from using our proprietary parts management and service agreements. We see this reflected in our results as AGS delivered record revenue in the quarter, up 15% year-on-year. Before I hand the call over to Bryce, I'll quickly summarize. Semiconductors are the building blocks of the modern world, making them more strategically and economically important than ever. Today, the entire industry is working hard to keep up with the world's rapidly growing consumption of silicon. Demand for applied products and services is strong, sustainable, and broad-based. We anticipate our ability to fulfill this demand will remain constrained by ongoing supply chain challenges in the near term, with incremental improvements beginning in our fourth quarter. Our number one priority is to continue working collaboratively with customers and suppliers to bring more industry capacity online. We are making progress in key areas, although it is not yet visible in our results. Longer term, we see incredibly exciting opportunities as secular trends create opportunities for Applied to outgrow the semiconductor market by enabling the PPAC-T roadmap with our differentiated portfolio of materials engineering solutions. Now, I'll hand the call over to Bryce.