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 third 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. And with that introduction, I'd like to turn the call over to Gary Dickerson.

Gary Dickerson Thank you, Mike. In our third fiscal quarter, Applied Materials delivered results at the high end of our guidance range. Across the business, our teams are executing well. We are making incremental improvements in our operations as we productively scale the company. and we're driving our technology roadmap, introducing enabling new products and solutions for our customers. In my prepared remarks today, I will start with our big picture view of the IoT AI era and how this is driving growth and innovation across the industry. I'll then summarize applied strategy and how this is enabling us to outgrow the industry this year while also positioning us for sustained growth outperformance over the longer term. And finally, I'll cover our near-term performance and outlook, including some recent business highlights. In the summer of 2018, at our AI Design Forum, Applied laid out a thesis explaining how we expected IoT and AI to drive a new wave of semiconductor growth and innovation. Five years later, IoT and AI inflections are having a profound impact across many sectors of the economy, as well as within the semiconductor industry. We view IoT and AI computing as two sides of the same coin. At the edge, consumer devices, vehicles, buildings, factories, and infrastructure are all getting smarter and more capable. Our customers that serve these IoT communications, auto, power, and sensors markets, or ICAPs, are growing and represent the largest portion of wafer fab equipment sales in 2023. Increasingly intelligent edge devices are fueling an explosion of data generation that can then be transmitted and combined to create very large data sets for training AI models. High performance AI computing is primarily enabled by hardware innovations. As a result, AI is becoming the key driver of the leading edge logic and DRAM roadmaps, as well as heterogeneous integration, which creates exciting new innovation opportunities for device designers. In summary, the first part of our thesis is that the combination of IoT and AI drives demand for significantly more chips as well as next generation silicon technologies. The second part of our thesis relates to how those chips and new technology innovations will be supplied. In terms of technology, as the benefits of traditional Moore's Law 2D scaling slow down, the industry is moving to a new playbook to drive improvements in power, performance, area cost, and time to market. The PPAC-T playbook has five elements, new system and device architectures, new 3D structures, new materials, new ways to shrink, and heterogeneous integration. The transition to the new playbook is positive for Applied in two key ways. First, as the roadmap evolves, it is increasingly enabled by advances in materials engineering where Applied has differentiated capabilities. Key examples of this include the move to gate-all-around transistors and backside power distribution in advanced logic. Second, the PPAC-T playbook is inherently more complex, and we can help customers manage this complexity by providing more comprehensive solutions, which include integrated products and advanced services to accelerate R&D, technology transfer, ramp, as well as yield and cost in volume production. In parallel to the new PPAC-T playbook being implemented, we're also seeing regionalization of semiconductor supply chains as countries seek to build resilient local capacity to support industry verticals that are essential to their economies. As a result, hundreds of billions of dollars of government incentives will be deployed globally over the next five years. At Applied, we recognized these trends early and made important changes to our strategy, organization, and investment profile. In the past five years, we created a dedicated organization to focus on the ICAPS market and released more than 20 new products for ICAPS applications. We also formed a team focused on co-optimized and integrated products to accelerate solutions for leading-edge logic and memory. This has resulted in much deeper strategic relationships with our customers, new highly differentiated products, and increasing market share. We developed a very strong portfolio of products to enable multiple generations of DRAM technology that is fueling share gains in this market segment and contributing to our outperformance. we established a clear leadership position in heterogeneous integration and advanced packaging. In fact, we just announced five new heterogeneous integration products at Semicon West in July. This strategy and increased focus on IoT and AI-driven inflections has enabled us to deliver more value to customers and strong performance in 2023, even during a period of very low investment by memory makers. It also positions us for ongoing outperformance in 2024 and beyond. Let me highlight a few key areas. In DRAM, our revenues in the first half of 2023 were higher than our two closest process equipment peers combined. Our strength in DRAM is underpinned by multiple factors. We have gained significant share in DRAM patterning, both for EUV-based and multi-patterning. We have developed unique co-optimized hardmask solutions, which are a key enabler for capacitor scaling. We have successfully ported key technologies developed for logic to DRAM, where they are used in the peripheral circuitry to significantly increase IO speed. And we are the largest supplier of advanced packaging solutions with leadership positions in Microbump and through Silicon VIA, that enable multiple generations of high bandwidth memory. As DRAM investments increase, we feel very positive about our opportunities, especially in high performance DRAM for the data center. High bandwidth memory is less than 5% of DRAM capacity today, but it is expected to grow at a 30% compound annual growth rate over the coming years. If you look at an HBM2 die compared to DDR5, it's about 25% larger because of additional IO routing and the area needed for the TSVs. On top of this, the extra processing steps needed for die stacking further increase our total available market by approximately 5%. Another key growth driver is our ICAPS business. We see ICAPS demand as sustainable as these customers are delivering enabling technology for large global inflections that will play out over the next decade. These include industrial automation, electric vehicles and vehicles with advanced driver assistance systems, solar and wind energy, where each megawatt generated requires $3,000 to $4,000 of power chips, and the smart grid. which could drive $50 billion of annual silicon demand by the end of the decade. ICAP's investments are also expected to be underpinned by government support around the world, and we expect these markets to be a significant beneficiary of regional incentives. The increasing complexity needed to enable the PPAC-T playbook, combined with a broadening of the industry's geographic footprint, are both key growth drivers for our service business. AGS delivered record revenue this quarter and is on track to grow in 2023, even with this year's low fabulization rates and after absorbing the impact of new U.S. trade rules. This year, 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%. With strong customer pull for our services and a robust pipeline of new capabilities, we believe we're on track to achieve low double-digit AGS growth in the coming years. While I'm excited about the opportunities ahead, it's important to recognize that to deliver this future, the industry must also overcome significant challenges relating to complexity, cost, and our combined carbon footprint. At Applied, we believe the way to do this is through closer collaboration and higher velocity innovation and commercialization of next generation technology for energy efficient computing. In the past quarter, we announced two major initiatives, our epic platform in the United States and a collaborative engineering center in India. These investments will support even faster and better relationships with customers universities, suppliers, and government partners to accelerate time to innovation and time to commercialization while increasing our combined R&D productivity. In addition, we're also driving a collaborative approach to reduce carbon emissions as the industry grows. In July, we rolled out our collaborative Net Zero Playbook, and we announced two major new products that help customers with carbon reductions. Our Vistara platform, which lowers platform energy consumption by up to 35% and increases throughput density by as much as 30%. And EcoTwin, that enables customers to monitor, model, and optimize chemical and energy consumption by tool and by recipe. Before I hand over to Bryce, I'll quickly summarize. Advanced chips are at the foundation of major global inflections And as the IoT AI era takes shape, it's driving a new wave of growth and innovation for the semiconductor industry. At Applied, we have focused our strategy and investments to deliver high-value technologies that enable key IoT and AI-driven inflections. We have strong leadership positions in ICAPS, leading-edge Foundry logic, DRAM, and heterogeneous integration using advanced packaging. This strategy is enabling us to consistently deliver strong results in 2023 despite lower overall wafer fab equipment spending and positions us for sustainable outperformance over the coming years. Now, Bryce, it's over to you.