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 2023 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 filing 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. On July 11th, Applied plans to host a Semicon West technology breakfast from 7.30 to 9 a.m. Pacific time. We plan to announce a major new platform and lead a heterogeneous integration panel featuring executives from AMD, Intel, and Qualcomm, along with Bessie and the EV Group. You can register by visiting the events page of our IR website. There won't be a webcast, so we hope you'll join us in San Francisco. And with that introduction, I'd like to turn the call over to Gary Dickerson.

Thank you, Mike. Applied Materials delivered strong results in our second fiscal quarter, with revenues in the high end of our guidance range. Across the business, our teams are executing well, successfully managing a dynamic near-term environment, making progress with our longer-term strategic initiatives, and introducing enabling new products and solutions for our customers. Despite macro headwinds, our outlook remains favorable, and we expect to outperform our markets in 2023 thanks to our balanced market exposure, our strong position at key technology inflections, which is driving demand for our differentiated products, especially in metal deposition, CVD, etch, implant, thermal processing, and e-beam. In our growing service business, which is increasingly subscription-based. In my prepared remarks today, I'll cover our perspective on the market, both the near-term dynamics and our longer-term secular growth thesis, how Applied is positioned to outgrow the industry this year and over the longer term, and finally, the investments we are making to create more value for our customers and productively scale the company. In 2023, challenging and evolving macro conditions are impacting the semiconductor industry both negatively and positively. Demand that is directly driven by consumer electronics is clearly weak, while demand driven by inflections in technology and strategic regional supply chain investments remains robust. This contrast can be seen in our customers' investment levels. Weakness in PCs and smartphones is a key factor for memory customers who have significantly reduced their investments in 2023. Measured as a percentage of total wafer fab equipment, memory spending is tracking at its lowest level in more than a decade. In Leading Edge Foundry Logic, we also have seen customers trimming their spending plans for the year. We see these changes as timing adjustments as these companies remain fully committed to their long-term roadmaps to win the race for technology leadership in this market. Push-outs and leading-edge investments are being offset by increased strength from customers who serve the IoT, communications, automotive, power, and sensors markets. Over the past quarter, we revised our 2023 ICAPS forecast upwards with demand being driven by two interconnected factors. First, ICAPS customers are delivering critically enabling technology for large global inflections that will play out over the next decade. These include clean energy, electric vehicles, and industrial automation. These inflections are driving significant innovation. At Applied, we have released more than 20 major new ICAPS products since we formed our ICAPS group four years ago. Second, there is a clear trend towards regionalization of supply chains as countries seek to build resilient local capacity to support industry verticals that are central to their economies. We currently see around $400 billion of government incentives being deployed globally over the next five years, a significant portion of which will be directed towards ICAPS markets. While China currently leads in ICAPS spending, we see other countries increasing their investments at a higher rate. In fact, the fastest growing regions for our ICAPS business in 2023 are the U.S., Europe, and Japan. Looking beyond 2023, our long-term growth thesis for the industry remains unchanged. Semiconductors are the foundation of the digital economy, which is driving demand and puts the industry on a path to become a trillion-dollar market by the end of the decade. At the same time, chip technology complexity is increasing significantly as traditional 2D scaling slows, and the industry transitions to a new PPAC-T playbook to drive improved performance, power, area cost, and time to market. Increasing complexity means that wafer fab equipment can grow at a higher rate than semiconductor revenues. And then, within equipment spending, major technology inflections are increasingly enabled by materials engineering, expanding the available market for applied materials. I'll highlight a few examples of how major materials engineering inflections contribute to our growth. First, gate all-around transistors are a great example of a new 3D device structure that is enabled by materials engineering in areas where Applied has leadership products, including epi and selective removal. In addition, we've developed differentiated conductor edge solutions specifically for gate all-around applications. We expect shipments of our gate all around products to begin ramping in 2024 as leading customers move into high volume production. For applied, this inflection creates an incremental opportunity of around $1 billion for every 100,000 wafer starts of capacity. And we expect to gain five points of transistor market share in the overall transition from FinFET to gate all around. Second, in wiring, we're seeing significant innovation in new materials. Adoption of new low-resistance metals for contact and interconnect enabled us to grow our PVD revenues at three times the rate of wafer fab equipment in 2022. High-speed data connectivity remains a key focus for all our customers, fueling further growth at future nodes. Applied technology is providing our customers with new tools to drive their scaling roadmap. Recently, we launched Sculpta, a breakthrough pattern shaping technology, which provides a simpler, faster, and more cost-effective alternative to EUV double patterning. It decreases customers' capital cost by about $250 million for each layer of adoption per 100,000 wafer starts. We are already shipping repeat systems and expect this business to grow to multiple hundreds of millions of dollars of annual revenue in the next several years. The final example is advanced packaging. While we are still in the early phases of industry adoption, this inflection is already a great growth area for us. Our packaging revenue has doubled in the past three years to over a billion dollars. We have strong leadership positions in key enabling technologies, including through silicon via, micro-bumping, and hybrid bonding. We believe we can double revenues again in the next few years with further adoption of 3D multi-die packaging. The increasingly complex solutions our customers are deploying to move from one technology node to the next are also a key growth driver for our service business. Customers are seeing value in our solutions to support their R&D, rapidly transfer and ramp new technologies, and drive device performance, yield, output, and cost in high-volume manufacturing. Our service business is on track to grow in 2023, even with lower utilization rates in certain nodes and after absorbing the impact of U.S. export control rules. More than 60% of our service revenue is generated from subscriptions in the form of long-term agreements. These agreements are growing at a faster rate than the installed base and have a high renewal rate of more than 90%. Given our confidence in the trajectory of the industry and applied materials, We are taking actions and making associated investments to support our growth, accelerate our customers' roadmaps, and drive productivity and efficiency as the industry scales. On May 22nd, we will formally announce a major strategic investment in a new high-velocity innovation platform focused on next-generation equipment and process technologies. As innovation in the industry is increasingly driven by new materials, structures, and devices, our goal is to change the way we collaborate with customers, universities, suppliers, and other partners to bring new manufacturing technologies to market faster and optimize the overall economic returns. We'll look forward to sharing more details next week. Before I hand over to Bryce, let me quickly summarize. While 2023 is a challenging year for the economy in areas of the semiconductor market, Applied's business performance remains resilient thanks to our broad exposure to secular trends, strong product positions at key technology inflections, and our growing service business. Our longer-term outlook is very positive as semiconductors become a larger and more strategically important market globally. and industry trends create outsized opportunities for applied. To position ourselves for the opportunities ahead, we are making strategic investments in R&D and infrastructure while driving improvements in productivity and speed across the organization. Now, Bryce, it's over to you. Thank you, Gary.