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'll be invited to participate in a question and answer session. I will 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 2022 Earnings Call. 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 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 plans to host our services masterclass five weeks from today on Thursday, May 26th at 9 o'clock Pacific time. We'll describe the market opportunity for our services business, explain why 87% of AGS revenue is truly recurring, and give you the growth formula for the business through our 2024 financial model horizon and beyond. We hope you'll join key members of our global services team for presentations and Q&A. And now I'd like to turn the call over to Gary Dickerson.

Thank you, Mike. In our third fiscal quarter, Applied Materials delivered results at the high end of our guidance range and record quarterly revenues. The actions we've been taking to mitigate supply chain challenges are beginning to have an impact, and we expect steady, incremental improvements from here. Resolving supply issues has required new levels of collaboration between our global teams, suppliers, and customers. While all of this hard work is yielding results, global supply chains remain stretched. Demand for applied products is still higher than our ability to fulfill it, and our backlog continues to grow. In addition, our relentless focus on meeting customers' needs in this very difficult environment has created margin headwinds that we're working hard to overcome. We're driving actions to reduce costs and improve value capture including price adjustments. In my prepared remarks today, I'll cover three key topics. First, our near-term outlook on supply and demand dynamics. Second, our longer-term view of the markets and the industry's roadmap. And third, applied materials strategy, priorities and progress. After that, Bryce will provide more color on our financial performance and key areas of operational focus. Let me begin with our near-term perspective on the market. Due to large gaps between demand and supply, as well as equipment companies shipping partially finished systems and merging components in the field, overall 2022 wafer fab equipment spending is difficult to quantify with precision. Our best estimate is that it will land somewhere in the mid $90 billion range. For applied, the picture is clearer. If we use the midpoint of our fourth quarter guidance, we expect our wafer fab equipment revenues to be up approximately 15% for our fiscal year. As we look ahead to 2023, there are three major factors shaping our view of the market. First, memory spending is expected to be lower than in 2022 as macro uncertainty and weakness in consumer electronics and PCs causes these customers to defer some capacity additions. Second, leading-edge foundry logic looks strong, with customers battling for leadership and racing to be first to implement major technology inflections. Third, ICAPS customers who serve IoT, communications, auto, power, and sensor markets are reporting areas of strength and weakness. These customers serve broad and diverse applications. They're seeing softness in consumer-centric markets, which are being impacted by macroeconomic factors. Auto and industrial demand continues to be solid because those investments are driven by large inflections, such as electric vehicles and industrial automation. In these areas, chipmakers are securing long-term capacity agreements that underpin their capital spending plans. While it's too early to provide a forecast for 2023, we believe our business will be more resilient than in the past if there is a demand to pull back in certain areas of the market. We expect Applied to remain supply constrained for the next several quarters. We're working through our very substantial backlog of orders which provides a buffer to in-year demand fluctuations. And in addition, customers are providing us with longer-term visibility and commitments in response to their own customers' actions to lock in the strategic capacity they need. Although we're confident in our ability to perform well in a range of market scenarios, we're mindful of the current macroeconomic trends. As a result, We are slowing down hiring while ensuring we fully fund the R&D programs and strategic operational capabilities that support our long-term growth. Regionalization of supply chains is also something new for the industry. We expect this will provide a small positive tailwind for overall wafer fab equipment spending starting in late 2023. Also, because of the time-bound nature of government incentives in the U.S., Europe, and Asia, we see a higher degree of certainty for these investments. Last week, I was in Washington, D.C., for the signing of the CHIPS Act and met with government officials and leaders from across the semiconductor and automotive ecosystems. I'm happy to see the critical role that semiconductors play in the economy being recognized and acted upon. The need to build more resilient and flexible supply chains remains a key theme for these leaders, and the CHIPS Act will enable many companies to accelerate their investments in strategic capacity. I'm also excited about the potential to create a new high velocity innovation platform in the United States to accelerate the development and commercialization of next generation technologies. As I look further to the future, I feel very positive about the direction of the industry and our long-term opportunities that applied. Consensus within the industry is that semiconductor revenues can reach a trillion dollars before the end of the decade. That translates to a high single digit compound annual growth rate from today. In parallel, the technology roadmap is becoming increasingly complex. As a result, we expect equipment intensity the ratio of wafer fab equipment investment to semi-revenues to remain at today's level or increase over this period. Then, the major technology roadmap inflections, including gate all-around transistors, backside power distribution networks, new materials for interconnect and contact, and heterogeneous integration of chips and chiplets, are enabled by materials engineering. where Applied Materials is the leader, and this shifts more dollars to our available market over time. We've invested ahead of these inflections to create a portfolio of differentiated solutions that positions us to outperform as these new technologies transition to volume manufacturing. Applied Materials Strategy is built upon the breadth and strength of our technology and capabilities. This provides us with a unique ability to engineer, co-optimize, and integrate solutions that address our customers' highest value technology challenges. Co-optimized solutions, where we optimize adjacent process steps, and integrated material solutions, or IMS, where we optimize a combination of process steps in a single system under vacuum, are becoming an increasingly important part of our product portfolio. In our recent master class, we talked about a breakthrough IMS approach for tungsten-only contacts that are free of conventional barrier materials. This provides significant improvements in contact resistance and is critically enabling for smaller foundry logic nodes. The number of process steps are growing as these customers migrate to this pure metal technology and these low resistance integrated solutions for contact and wiring represent new multi-billion dollar revenue opportunities. Over the past two quarters, we have secured multiple tool of record positions at all leading customers. Our ability to co-optimize materials engineering solutions with novel inspection and metrology is also driving record performance in our process diagnostics and control business. We expect PDC revenues to be up almost 40% in fiscal 2022 with broad-based customer adoption of our EB metrology and new optical wafer inspection platforms. In the quarter, we also strengthened our ICAPS portfolio with a tuck-in acquisition. PicoSun is a leader in batch ALD technology, and we're delighted to welcome their talented team to the Applied Materials family. Turning to service, AGS delivered record quarterly revenues despite headwinds for our transactional spares and 200-millimeter equipment businesses due to supply chain constraints. The subscription portion of AGS continues to demonstrate strength. Install-based tools under long-term service agreements grew 9% over the past 12 months. Our renewal rate for these agreements continues to be strong and is currently running at 93%. Before I hand the call over to Bryce, I'll quickly summarize. We're beginning to see gradual improvements in our supply chain, which enabled us to deliver record revenue for the quarter. We expect demand to remain higher than supply for the next several quarters, and we're continuing to drive actions to close the gap. The changing macroeconomic environment is causing some customers to adjust the timing of their investments. However, we're confident that our business will be more resilient thanks to strong pull for a uniquely enabling technology, our large backlog, longer-term visibility from our customers, and industry-wide investment in strategic regional capacity. Our long-term view of the market remains unchanged as multiple parallel secular trends drive the semiconductor and wafer fab equipment markets to structurally higher. At the same time, large technology inflections that are enabled by our core capabilities in materials engineering create outsized growth opportunities for applied materials. Now, I'll hand the call over to Bryce.