Q4 2019 Earnings Call
During the presentation, all participants will be other listen only mode.
Afterwards, you will be invited to participate in a question answer session.
I would now like to turn the conference over to Michael Sullivan Corporate Vice President. Please go ahead Sir.
Good afternoon, and thank you for joining Applieds fourth quarter fiscal 2019 earnings call, which is being recorded joining me are Gary Dickerson or president and CEO and Dan during 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 Form 10-Q , an 8-K filings with the FCC. Today's call also includes non-GAAP financial measures reconciliations to GAAP measures are found in today's earnings press release and in a reconciliation slides, which are available on the IR page of our web site at applied materials Dot com and now I'd like to turn the call over to get.
Three dickerson.
Thanks, Mike I'm pleased to report our results for the quarter, where at the top end of guidance driven by a healthy uptick in demand for semiconductor equipment combined with strong execution across the company.
This rounds out a solid year or performance in a challenging environment as we navigate a down cycles and both memoranda slide.
These results would not be possible without the hard work and dedication of applied materials employees around the world I would like to thank them for the passion. They bring to work every day and congratulate them on their accomplishments this year.
As this is our year end call all began with a brief recap of the past 12 months before providing our perspective on the current market environment.
Well, then talk about the broader context for the industry, including the major growth drivers and inflections that will shape our markets over the next several years.
I'll conclude by summarizing the key elements of our strategy and outlining the investments, we're making to put applied in the best position for the tremendous opportunities ahead.
Flights fiscal 2019, well shaped by the first significant pull back and customer investments. Since 2013. However, this provides a good illustration of how the semiconductor industry is evolving.
As I have highlighted before the market for semi equipment and services is now significantly larger and less volatile than it wasn't the past.
The second calendar quarter of 2019 proved to be the low point of this spending cycle. The downturn lasted four quarters in our quarterly revenue at the trough was approximately 20% lower than at the peak.
In contrast during the industry cycles that took place between 2000, and 2013 or average peak to trough revenue drop was more than twice that magnitude.
This cycle was different in large part due to the growth and diversification of demand drivers spanning consumer and enterprise end markets. It's also important to note that the fundamental dynamics of the memory market or healthier through this cycle. The memory makers are highly focused making disciplined investments.
And capacity and continuing to drive their technology Roadmaps forward.
As well as a more robust core market applied as a more resilient company, that's balanced across different areas of the market and can perform well in a variety of conditions. Thanks to the breadth of our portfolio our semi equipment business is outperforming both the wafer fab equipment market.
And our direct appears this year.
Fiscal 2019 was also a record year for applied Global services. In fact, we're growing our services revenue significantly faster than the underlying equipment businesses.
Over the past 12 months, we've grown our installed base of semi and display equipment by about 2000 systems to almost 43000.
We have also increased the number of installed base tools covered by long term service agreement, which generate subscription style revenues by around 30% since 2017.
Overall, 45% of our F. why 19 revenues came from sources other than new 300 millimeter equipment sales. This is up from 41% just two years ago.
In terms of our near term outlook, while I don't want to speculate about the exact to shape or timing of the market recovery I can characterize what we currently see with three observations first strong investment by foundry logic customers, driven by demand and key geographies and accelerate.
One of the five GE roadmap and commitment to advance the leading edge second early signs of recovery and NAND investments and third positive progression of the ongoing inventory correction in DRAM.
Because of the strength seen in recent months, we're revising our estimates for 2019 wafer fab equipment upwards. We now believe 2019 spending levels could be similar to 2017.
Based on the visibility we have today, we're optimistic about 2020 with an expectation of sustained strength in foundry logic, and a step up and memory investments during the year with NAND recovering ahead of DRAM.
And display as anticipated F. Why 19 revenues were down a third relative to F. Why 18.
At this point, we expect F. Why 20 revenues to be at similar levels as we bounce along the bottom of this market cycle.
And this environment, our display business remains profitable even as we funded R&D for next generation products.
We still believe the display market provides good long term growth opportunities for applied as the industry becomes increasingly technology intensive.
We remain focused on working closely with customers to drive their technology Roadmaps forward and ensuring we have the right portfolio of products in place to outperform the market when investment levels pick up.
Looking beyond the cycle at the broader context for the electronics industry. It's important to recognize that we are in a period of transition as a major new growth drivers emerge in the form of Aiotv big data and artificial intelligence.
Over the next decade, we expect hundreds of billions of edge devices to be deployed and explosion of data generation and new approaches to computing to sustainably process and create value from all the data that's available.
In big data have the potential to transform every area of the economy and our lives. These inflections will also have a profound impact on the semiconductor industry.
As we move from the age of General purpose computing to domain specific approach as new system architectures and new types of semiconductor devices are needed in the data center and at the edge.
Major factor in the adoption rate of AI will be how quickly we can realize improvements and the power performance area and cost or P. pack of the foundational semiconductor technologies.
However, at a time when P. pack improvements are on the critical path Classic Moore's law scaling is slowing to drive the P. pack road map in the future a new playbook for semiconductor design and manufacturing is needed. This playbook has five main elements new architectures nude and.
Hi, says and Threed structures, new materials, new ways to shrink feature geometries, and new ways to connect chips together.
Then to accelerate implementation of this new playbook I strongly believe the ecosystem needs to work together differently by breaking down traditional industries silos.
At applied we've aligned our strategy and investment around this vision of the future.
While we are carefully managing all non R&D spending were investing more than ever and new capabilities and products to accelerate the new playbook.
We recently announced the official opening of our medical Center in New York. This state of the art facility enables us to work with customers and partners and new ways accelerating the transfer of novel technologies from lab to fab.
I'm equally excited about how our future product pipeline is shaping up.
In addition to our traditional unit process equipment, which spans deposition removal modification and analysis of materials, we're developing entirely new categories of products that we call integrated materials solutions.
The applications for these I M. S products include co optimization of deposition removal and analysis, all the way to creating shaping modifying and analyzing new structures and devices.
Well share more details as we bring new products to market and 2020 and 2021 for the time being let me highlight a few examples of how we are defending our leadership positions, winning new applications and expanding are available market in the near term.
In DRAM customers are introducing advanced transistors, and interconnects to improve performance and low power. These technologies were applied has long held leadership were originally developed for logic applications and are now migrating to memory.
Growing demand for specialty nodes that serve the Aiotv communications automotive power in image sensor markets is also driving robust investments and capacity a new technology peapack improvements are equally important for these applications and we're finding new ways to migrate our leading edge.
Technologies into these specialty markets.
Vance patterning is a critical enabler for shrinking feature geometries, which translates to a large growing opportunity and foundry logic and DRAM. The patterning roadmap is increasingly enabled by new materials as well as co optimization of materials deposition and removal.
As a result, we're expanding our positions in memory and winning new applications at foundry logic customers.
And in markets, where we have plenty of room to grow. We're also building momentum and optical wafer inspection, we're winning new positions at foundry logic customers and an edge. We have recently won multiple critical applications in NAND as well as in foundry logic, where we delivered record etch reps.
News for the year.
Before I hand, the call over to D. and let me quickly summarize first we're seeing a strong finish to 2019 driven by a healthy uptick in foundry logic spending, although it's still too early to call the shape and timing of the recovery in memory. We're encouraged by the signs we're seeing.
Second we have a strong positive point of view about the opportunities the AI big data era, well create for the industry and applied wallwork tightly controlling non R&D related spending we are investing more than ever and new products and capabilities that put us in winning positions for the future.
Third the technical collaboration between applied and our customers has never been stronger and we're working with a broader set of customers and partners to accelerate the time to market for new game changing technologies.
Now I'll turn the call over to Dan.
Thanks, Gary applied delivered another solid quarter in Q4 with revenue margins and earnings in the upper end of our guidance range I like the way we ended our fiscal year and I, particularly like the way we're set up for the year ahead on today's call I'll summarize our fiscal 2019 give you my senses.
The business entering fiscal 2020.
And share our outlook for Q1.
In 2019, our end markets were softer across semi display and the transactional portion of our services business.
Despite that we delivered revenue of $14.6 billion and our quarterly revenue and earnings were stable.
Which demonstrates the resilience of our broad portfolio, even in a memory correction here.
In fact, we earn significantly more in every quarter in fiscal 2019 than we did in all of fiscal 2013, which is the most recent year that included a significant equipment correction.
I also like our relative performance in calendar 2019, we expect to significantly outperform our core market and our most direct peers.
Specifically, while equipment market will be down by mid teen percentage.
We expect semi equipment plus AG has to be down in the mid single digits year over year.
Looking ahead to 2020 and beyond we have high confidence in the future growth of our markets and the unique opportunities applied has to enable our customers roadmaps as a result, we invested a record amount in R&D this year, while reducing our spending in SG anyway, we delivered over three.
The dollars and non-GAAP earnings per share and generated nearly $3.25 billion of cash from operations. Our capital. We turn strategy is to fully fund our profitable growth opportunities maintain a strong balance sheet and deliver attractive cash returns to our shareholders through dividends and dividend growth along with opportunistic.
Share buyback.
In 2019, we returned nearly $3.2 billion to shareholders equivalent to 113% of free cash flow. We returned nearly 800 million in dividends raised the dividend by 5% and took advantage of market volatility to repurchase 60 million shares of our stock.
At an average price of $39.86 as a reminder, we're working to complete the acquisition of Coca site electric upon close we plan to direct most of our free cash flow towards repaying. The term loan were using to help fund the transaction.
Now I'll share my thoughts on the business environment.
On our previous earnings call I talked about positive leading indicators of future growth. These included inventory reductions across memory demand elasticity in NAND and strong foundry logic demand, both and leading edge and specialty nodes today I feel more positive in semi we have strong pool for our leadership.
Products, including record demand for epitaxy, a metal deposition. We're also winning many new applications for our high growth semi products and die electric deposition etch and inspection, we are significantly outgrowing our markets in foundry logic with growing strength at the leading edge nodes and key wins.
And automotive and advanced packaging.
Well, it's always hard to call the timing and magnitude of a recovery in memory. We think it's a matter of when not F and we expect NAND to lead the way in AG Es revenue was stronger than we expected in Q4, and we still expect better than seasonal revenue in Q1.
The subscription like portion of EG Aes has momentum and will benefit from the thousands of new systems, we added to our installed base in 2019.
Transactional portion of the business should strengthen as memory utilization recovers in 2020.
Rolling It all up we're entering the new fiscal year with the backlog of $6.5 billion, which is our highest yearend backlog ever.
Next I will provide our Q1 guidance, we expect company revenue of $4.10 billion, plus or minus 150 million, which would be up by about 9% year over year, we expect non-GAAP earnings to be in the range of 87 cents to 95 cents per share.
Within this outlook, we expect semiconductor systems revenue to be approximately $2.775 billion.
Services revenue should be about $975 million.
And display revenue should be around $330 million, we expect non-GAAP gross margin to be about 44.6% and non-GAAP opex should be around $800 million in summary, I like the set up for applied as we enter fiscal 2020.
Our thesis surrounding Aiotv big data and AI is being validated through out the eco system and our business outlook is transitioning from positive leading indicators to growing demand.
The investments, we're making in the new playbook are strengthening our product portfolio and driving new design wins that will serve us exceptionally well as the new nodes ramp across foundry logic NAND and DRAM.
Our opportunities in the specialty nodes are also expanding our services business delivered a record year in 2019 and is on track for solid year over year growth in 2020.
Finally, we look forward to closing the acquisition of Coca site electric and welcoming its talented team to applied materials now Mike let's begin the acuity.
Thanks, Dan now to help us reach as many of you as we can please ask just one question and not more than one brief follow up operator, let's please begin.
Ladies and gentlemen to ask a question. Please press Star then one on your telephone to withdraw your question press the pound key.
Please standby, we compiled acuity roster.
Our first question comes from C.J. Muse with Evercore. Your line is now open.
Good afternoon, taking the question I know you don't want to be too specific around the timing and magnitude recovery in memory, but was hoping perhaps you could give just a little bit more color.
Around.
Your product positioning for when that does come up as you look at leadership product.
Well as.
Some of the new products that you have in the pipeline that you expect to come to market in 2020.
Okay. Thanks, Thanks Vijay.
So what we're seeing in memory as customers continuing to drive technology Roadmaps. This year, even as they're cutting the capacity additions to help with supply and demand.
We really like to set up for applied when memory spending recovers, which we think is in 2020 led by NAND.
So if we if we look at the different.
Types of devices in DRAM customers are moving to more advanced metal gate transistors, and the periphery and this is going to drive more demand like we saw in 28 nanometer foundry. So that's really positive for us in leadership areas like APY PVD implant thermals also were gaining.
Share in etch.
There were also enabling new DRAM capacitor module capabilities and new patterning technologies that create large new opportunities for applied where we're reducing the number of steps for a multi patterning and also improving pattern placement. So DRAM expansion really with the more logic like types of.
Steps really plays to our leadership.
Positions and so as those those nodes go forward were in good position and DRAM and Threed NAND.
As customers are scaling beyond 96 layers were winning new applications with as much in NAND.
And as you go to more layers, you need new materials, especially high selectivity hard masks were designed in too many of the next nodes as they ramp into high volume manufacturing. We also have momentum with integrated material solutions. One example is and then what we do co optimization of new.
Hard mask films with the same three etch the co optimization increases increases etch selectivity by by about 50% and we're seeing new DAP and that's wins across multiple customers as we enable much better high aspect ratio patterning, so strong pull across all the NAND customers for new materials new products.
Integrated material solutions were seeing both in NAND and DRAM. So we're optimistic we're going to continue to drive strong growth as customers scale to future nodes.
Hi, good speaking to a quick follow up like you said, we could do a quick one second one on the service side you talked about Oh.
The excellent growth in your installed base and we're coming off of fiscal night.
Good.
How are you thinking about the trajectory from here, particularly as utilization rates on the memory front start to move higher.
Yeah. Thanks CG. This is CJ. This is Dan I'll I'll jump in and take that so the services business is a great growth driver for us it's been a steady source of revenue growth cash flow generation.
Say over the last handful of years. This is a business that's growing at a compound rate of about 15% per year.
In the current downturn current year memory, driven down turn utilizations falling the businesses the low single digit grower.
When you include things like Refurbs and upgrades your mid single digit grower. So good performance in a very difficult market thats down about mid teens as we think about the the performance of the business that drives those results. The long term service agreement portion of the business. This year was up mid teens, it's really.
Transactional portion of our services business, that's fallen with industry utilization than it's been a headwind to growth this year.
Thats in the sort of down 10, 11% as we profile into 2020, we really like the set up around our services business going forward.
We think we can continue to execute on the long term service agreements and continue to drive that performance at the levels, we've seen historically and when industry utilization recovers in memory, we would expect our transactional business to transition from a headwind of growth to a growth out or for us in 20 Twond.
Okay. So we really like the set up and the execution of the team in this environment. He thinks it's it sets us up well for 2020.
Thanks CJ.
Our next question comes from.
Tim Malik with Citi. Your line is now open.
Hi, Thanks for taking my questions and good job on the results and guidance. The first to Gary can you talk about the puts and takes between OLED and LCD enjoy kind of flattish display outlook at this point, though we hear Samsung display is resuming construction of if I, even something you've had in China are pushing out and as my follow up.
Dan If you can talk about the opex profile for the remainder of the fiscal 20.
Thanks, Tim I'll actually take both parts of.
Your question so as we go to the display market and we think about how 2019 played out it played out exactly as we expected we sit down about a third year over year, and that's where we ended up.
Where forecast expectations were set probably three six months ago embedded in that was incremental growth off of these levels and what really drove that incremental growth is as we said solid performance of the TV market into next year and the handset market would recover.
Creating incremental growth for the company, we think the handset market is going to play out exactly as expected, we're going to see recovery in the handset market.
What's happened in the interim in the TV side is as we've seen several news headlines from some of our customers about the late investments there is a bit of inventory build on the TV side Third party research firm has come out and confirmed what we've been reading about in the headline center.
Customer conversations are also confirm this dynamic and so as we look forward into 2020, we think theres going to be some incremental softness on the TV side that reflects all of the news that's out in the market to date.
We expect the handset to recover as we originally expected and that gets us a flattish profile similar revenue levels to what we're seeing this year.
Thats the best way I would describe it and then from an Opex perspective.
I think we're going to take this one quarter at a time, we came up to 800, we all know that profiling into Q2, there's the full impact of merit and we don't get the.
Benefit of the shut down over the holiday season, and so you know maybe that goes up incrementally to 820 to reflect that dynamic.
That gives you a sense of where we level out on those.
You know typical seasonal aspects of transitioning from Q1 to Q2, and then we probably hover in that neighborhood for the rest of the year.
Thanks, a lot to.
Our next question comes from Toshiya Hari with Goldman Sachs. Your line is now open.
Hi, guys. Thanks, very much for taking the questions.
Gary you talked a quite a bit about your expectations around new products into next year.
Was hoping you could remind us roughly what percentage of Wi Fi you guys served today.
Out applied and how that would expand with some of these new products going into 2020, and 2021 and kind of related to that obviously.
You seem to be picking up share nicely in 2019.
What are your kind of preliminary expectations into 2020, when you think about your potential outperformance relative to the market that I've a follow up thank you.
Hi, Toshi this is Dan.
On the first one.
No the percentage of the addressable market that we focus on its going to vary from year to year, depending on the spend to mix and profile of our customers, but the way to the best way to think about it is low to mid Sixtys part of Wi Fi or markets that we can address in any given year, that's going to vary in change again from year to year.
Spending depending on that profile, Max and I think some of the new products that we end up bringing to market I think it's going to help drive growth in share and in the current markets that we serve maybe there's some adjacent cheese, we begin to look at maybe it pushes it towards the higher end to the range over time, but it's still going to be in that low to mid Sixtys Zip code.
Depending on any given year and what customers happened to be spending on you know tissue I guess I can also add little bit of color I think relative to the to the different areas, where we compete today.
Definitely we're driving innovations and unit processes around deposition removal modification and analysis, we have momentum with some new products than we have some major new products and the pipeline that we're driving but beyond that as we've talked about before.
You have got AI big data.
A need for a thousand times improvement in performance per watt.
In classic Moore's law to these scaling not being an off really to meet those.
Those needs for performance per watt. So we're not only driving unit process is one thing that we've also been driving or the integrated material solutions or co optimizing steps and even integrating multiple steps in a single system under hi, vacuum and we have really strong pull from customers again, not just for unit price.
Assesses where again I want to emphasize we're driving very hard with some big new products and the pipeline. Some we already see some adoption.
Early momentum, but beyond that it's really how do we enabled not just materials for removal how do we create structures shaped structures modifying analyze structures and I spent a lot of my time with R&D leaders across our customer base tremendously strong pull for.
Improvements in power performance.
Applied as in the best position, both with unit processes and with these integrated processes to enable the future. So so tremendous tremendous pole.
For for both of those different areas.
Thank you and then if I can squeeze one in.
I'll then can you give us an update on the cooks acquisition, where some of the regulatory hurdles that you still need to to overcome and then I guess with the acquisition.
You're obviously getting some exposure to batch processing, but when you when you look across your product and technology portfolio.
At this point do you feel like it's complete or is is for your future M&A still on the table. Thank you.
Yes, thanks to Shia I'll jump in on the first part transitioning Gary on the second part for Coca side Theres No change in the timing of the transaction, we announced a 12 month timeline when we announced the transaction we've received regulatory approval in Ireland in Israel, We had four other geographies, we're continuing to stay close.
As to the regulators in those geographies.
And we like the progress, we're making but no change to the the timeline from from what we announced when we announced the transaction.
She a relative to Coca site, we still see it is a great opportunity to expand our markets with batch technology and services to accelerate innovation for customers. So nothing's changed in all of the feedback we're getting from customers versus what we saw at the beginning relative to the opportunity to create value.
It relative to M&A, our strategy really hasn't changed we continue to focus on three things a great financial return synergy.
To accelerate our customer value and also our growth and market leadership potential and we still believe we have a very good organic growth opportunities. So the bar remains very high.
And we're not need for M&A, but anything that we look out that fits that criteria.
We're we definitely will continue.
To investigate and move forward, if we find something that fits that criteria.
Hey, thanks to Shia pick them up.
Our next question comes from Krish Shankar with Cowen and company. Your line is now open.
So I think putting the question and congrats on the so I have two of them one as either done the Gary.
I think in the past you guys have spoken about did that data analytics talking about two years out there. If you maybe you want to speak about it maybe not it's not I'm just trying to put numbers around it if next year all that being the scene as this year. This non WPS, UPT and plus and what kind of growth expectation should you expect for eight months non business.
Semi business and then as a quick follow up for done I think you mentioned this is John quoted guidance can you give any breakdown between.
On the logic DRAM and NAND. Thank you.
And Chris I Didnt understand the first part of your question you said something about analytics, but then I heard you talk about NAND. So I don't know, we just I know you're in Europe .
I'd be remiss to syllable.
Let me give us make it simple it's it's in 2020, if you everything being equal if not WPS often lucent, we just putting some numbers out the how should we expect im not semiconductor business driven by not to put a formal outperform and also on the John quota.
You can give a big done between Ponzi logic them in that.
Okay. So thanks, Krish from a Wi Fi standpoint.
We don't want to get into guidance around next year, but what I would say is since gary's come into the company, we've become very balanced as a company in terms of our penetration of device types. This is a very balanced company I think we're seeing the benefits of that in this environment as we inflect from one device type to another.
And I think it serves the company well in a time of uncertainty the company's work hard made a lot of investments to create that very balanced portfolio by device type and so without being specific I would just leave you with that contextual thought that we're fairly agnostic to how these device types flash in one quarter at another and I think that give.
As you some parameters on how to think about things.
From a guidance standpoint, we don't guide by device tight, but the thing I would highlight is next quarter will be a record quarter for us in foundry logic based on the guidance that we've given what we typically don't guide by device type.
Hey, Thanks, Chris Thanks again.
Our next question comes from John Pitzer with Credit Suisse. Your line is now open.
Yes, Thanks, Ted Thanks, Walt gave us a first question you won't be good job.
Well to site.
Let me just on channel. So this challenge.
When you look out to 2020 how important.
So China Walter.
Mitch.
Okay.
Thanks for the question our view on China is pretty similar to what we've communicated before domestic the domestic China market is incrementally stronger than our view at the beginning of year.
You know within the range of what we had expected but incrementally stronger.
And we now anticipate domestic China will be up from last year to around $6.5 billion longer term you know I I've been in many meetings and conferences over the last several years and and my message is the same today as it's been over the last several years, we Ics still expect steady growth in China.
So we think next year will be another year.
Of investments, but we don't see hockey sticks again, what we do as we look at leading indicators for all of the different projects either.
Mastic or international and again, our view is again very very similar to what I've talked about in the past.
We think theres going to be steady growth, we're positive about the market. We're positive about our position in the market art, our share continues to be healthy and accretive to our overall global market share. So that's that's kind of an top level view for China and just to add a couple of things to look Gary said John .
As you think about our planning we always have base cases, we always as have upsides.
You know, we'll be ready to respond if theres upside to our base case, but that's not currently baked into our planning assumptions and Gary has it exactly right. We've been talking for several years now about slow steady development of an echo system, they're investing in technology Roadmaps. We saw last year, we see a follow through on it this year.
We'll see a follow through on it again next year and we're not planning for any hockey sticks associated with investments from that geography.
The problem, we'll follow up tier batches.
Good luck.
Sustainable in the mid calendar year 20, I guess, just given the recent action ways from TSMC and sort of the implied one way of tolerable fourth quarter. I guess is a lot of Jami Nelson community that perhaps from Q4 runway levels yes.
Yes.
For me.
Yes.
Thank you.
We can get back capital gets too which is so strong.
You think Walter.
Well.
The swap was your formal about you seem to be will be a full year for her comments well a couple of per one big level. Thank you.
Yes, Thanks, John let me jump in on that and give you my perspective, so what we've seen the foundry logic.
Right now I would consider and characterize as demand led we had a solid Q4 in the foundry logic market.
Implicit in the guide for Q1 is a record foundry logic quarter for this company. We ended the year with backlog at record levels. So the foundry logic view, we see us follow through into next year, and it's not a one quarter phenomenon.
There is strong pull from customers for the tools, it's multiple customers and multiple nodes, which gives us.
A sense of comfort, we take a look at the foundry market and one foundry customer well into the ramp event seven volume production at end seven plus and five in risk production volume production in the first half of 2020 and and six risk production in the first half of 20.
Section in the second half of 2020, you could make other similar comments about leading edge technology nodes ramping at other foundry logic customers exposed to the leading edge. So multiple customers multiple nodes. In addition to seeing strength on the leading edge, we continue to see strength on trailing no geometries and special.
Multi nodes that continues and while we don't have perfect visibility for the full year were very positive on the foundry Mark foundry logic market over the long run we're layering in the next wave of computing the semiconductor industry to complement what is already there in the form of PC demand in mobile compute demand.
We've got new architectures, hitting data centers lots of new tape outs cloud demand is recovering fiveg.
Beginning to kick in we see a proliferation of intelligent edge devices.
And auto is growing and so as we take a step back we see the strength continuing into next year, we're really positive about the long run, but as I provide a little more context on 2020.
The company's performing well, we talked about the backlog entering the year, we talked about strength in foundry logic, we talked about AG is set up and looks good as we profile into next year swing factor next year for US is timing of the memory recovery for us it's a matter of when.
Not enough and so it's really tough to determine the timing and magnitude of that.
And will stay close to the market stay close to our customers in his new information becomes available we'll try to be as open and transparent as we can be to help help the investors.
Thanks, John .
Our next question comes from Harlan sur with Jpmorgan. Your line is now open.
Good afternoon, guys nice job on a quarterly execution on the better performance in age yes in the up to a quarter and a strong I'll look into January I would assume that the long term subscription part of the the model is very predictable. So was the incremental strength the transactional business, maybe starting to come back because some of your customer utilize.
Zeeshan start to rise that they bring back some idle capacity and if it is that is it more foundry logic or memory driven.
Yeah. Thanks Harlan.
You're right. The long term service agreement part of the business is continuing to chug, along we really like the performance and thats against the backdrop of a tough market, we talked about the transactional nature of the business transactional spares last quarter being a bit of a temporary dynamic with a limited number of customers and this is.
It's just getting back to a more normalized environment clearly customers are seeing the strength, we're beginning to flash and foundry logic I think we're seeing some early signs around.
The set up for memory as we go forward led by NAND and DRAM and it's hard to really parse against that contextual backdrop exactly what's in customers mines when they drive transactional part of the business I would just say in general it feels like a good set up with some positive momentum we feel good about that set up as we look into 2000.
20.
No I think the big the big needle mover.
It's really memory memory utilization certainly the agreement.
Agreements as Dan said, we're up to maybe close to 60% of spares and service.
With agreements, where we have higher revenue per tool, but the big.
Incremental driver will be when memory comes back in utilization goes up in those memory factories, and certainly as Dan said earlier, we expect that to happen in first and we as he said earlier. It's a question of if not a win win not at when not if when not if.
So it's definitely going to happen in.
Sometime here and we hope the NAND starts in 2020.
Thanks for the insights there and when we think about cost per bit declines in memory, both DRAM and NAND the rate of those declines is decelerating pretty dramatically. So productivity by your customers is the big focus more batch be systems is a focus and one of the drivers for the crocus acquisition, but what else is the applied team doing to help customers.
Improve productivity.
Yeah. Thanks, Thanks for the question, so I talked earlier about.
Co optimizing hard Matt mask materials with a much to improve at selectivity. That's certainly for the high aspect ratio patterning incredibly important we have other cases, where we're working with customers on patterning, where we're reducing I mentioned that earlier, reducing their rick the cost of multiple patterning and some.
Cases were able to reduce the cost 30%.
And also enable better pattern placements. So you know for for memory.
Especially the NAND those with some of the areas we're driving.
In other areas and the performance with the periphery going to more logic like structures, especially higher speed memory devices. That's an area that plays to our leadership products and and certainly we see tremendous traction from from customers.
Those areas I think longer term, it's about how do you optimize.
New structures, creating shaping modifying analyzing new structures, we have a lot that we're doing today in co optimization of the those capabilities a tremendous amount in the pipeline, what we have very strong customer pull.
Hey, thanks, Thanks for the insights yeah, thanks, and operator and people on the call I think that we're running a little short on time, we knows a lot of people in the queue I'm going ask that we go to one question right now and no follow ups. Please just so that we can hear from where have you. Thank you.
Our next question comes from Pierre Ferragu with New Street Research. Your line is now open.
Hi, guys. Thanks, a lot for.
Taking my question.
Could you give us a of how do we go different trust fees until you would give I don't know I.
I would kick in Oh, Gee, Ken how you see things evolving.
Either way you could give us some sense of Oh.
Two exposure is going to change on two specific node. So the ones I have in mind.
Yes, the nodes wouldn't you can see move some seven nanometer two seven.
So some kind of a critical dimensions, but.
In session.
And.
Between the 10 nanometer node in the seven nanometer nodes thing.
Additional usually goes.
Thank you guys remain very wet exposed to these new.
Nodes, but I imagine that when you move from many people doing.
Two.
The type of business you are good.
Is different so could you describe that for us. Please.
Yeah. Thanks, Thanks, Pierre so.
It's important remember that when.
Customers are scaling the I would say the first thing.
Is that they're driving a five different areas were shrinking as one of those five different areas, we talked about new architectures.
New structures, new materials, new ways to connect chips together and.
The shrink so so again, we have a tremendously unique technologies, enabling that new playbook and I'm with one of the R&D leaders for one of our customers next week.
With another one the following week again constantly we're getting tremendous pole and driving power and performance because it's very very very difficult. So the first thing I would say is that we have unique capabilities in enabling the new playbook. That's what we're investing that's where we have a tremendous engagements with cost.
Emerge. So then if you think about shrinking.
I talked earlier on the call about where we're working with customers on multiple patterning and there are cases, where we're able to reduce the number of steps by 30% and increase pattern placements. So that's another area, we're doing co optimization.
And it's also important remember that as you're scaling and.
And he would be layers come in some other steps also need to shrink and multi patterning is still growing.
So with applied the you be stuffs that are coming in to replace other steps are not our steps.
So applied has opportunities and we are winning when do you use being adopted and some of those replacement steps.
Theres this focus on multi patterning, where we're focused on reducing staffs reducing cost.
I think another PR. Another really good example is in 2019 in foundry logic, we have very strong momentum with our centsthree etch or and this is where you're seeing the highest do you view adoption, we're seeing very high growth in 2019.
With wins across many customers and we definitely see significant growth much faster than the market with our symthree etch business in a leading foundry customers.
And we anticipate based on the wins that we have we're going to continue to grow at five and three.
As these new technologies are being adopted just another data point with Sam three that's the fastest ramping product in the history of applied we just shift our 4000 chamber.
Many of them going into fat foundry and logic. So that's kind of a top level view I would say again the key thing for all of these customers is how do they drive the technology roadmap.
For power in performance.
Tutti scaling is slowing down they need new ways to drive the roadmap and that's really the sweet spot for applied materials.
Thanks Fair Thanks.
Our next question comes from Patrick Ho with Stifel. Your line is now open.
Oh, Thank you very much Gary I think you just provided a little bit of color already to other question I have but with capital intensity trends for foundry and logic continuing to increase as we go from seven to five and eventually three.
Aside from say like the etch since three and products like that where else are you seeing I guess, increasing capital intensity trends on the foundry logic and that helps both your leadership tools, you leadership businesses as well as some of the growth opportunities.
Aside from Mitch you know you've seen it got positioning are you seeing it in the process control area. What other areas are you seeing that growth in capital intensity trends for your products.
Yeah. Thanks for the question Patrick So if we look at 2019.
You know we've talked about a record foundry logic performance.
And we have a very strong incumbent leadership position as you talked about in foundry logic, a much larger business and more diverse business than our process tool peers.
And that's driving our outperformance in 2019, so if we look at.
Foundry logic.
In this calendar year, we'll have the highest foundry logic revenue ever highest FP revenue ever and highest metals revenue ever. So those are areas that are part of our or leadership products.
We're working with customers on new materials like tungsten deposition shaping structures with selector removal, where we're gaining key wins, that's enabling performance gains for our customers and growth for applied.
So those are those are some of the areas, where we're seeing growth out in terms of 2019 were also seeing strong growth. Besides etch and CVD thermal and you talked about inspection, that's an area, where we just introduced a new product.
We're seeing very strong adoption and that will give us momentum to grow quickly in that business in 2000 to Twentys 20, well, that's a little bit of color around some of the areas that we're driving but it really does get back to driving power and performance area and cost for customers.
And really more and more not just with unit processes, but also with these integrated solutions as a sweet spot for applied.
And gives us tremendous momentum going forward.
Hey, Thanks, Patrick.
Our next question comes from Timothy Arcuri with DBS. Your line is now open.
Thanks, a lot Dan I guess I've a question on gross margin guidance, there's hardly any incremental drop through year over year, yet you're doing like $350 million more on revenue, but gross margin is the same I guess its little surprising because SSG.
Which is the highest margin segment is up a lot year over year. So our SSG margins lower in January because it seems like the margins out of corporate level should be 150 basis points higher something like that so can you just make sure that thanks.
Sure Tim.
We won't guide gross margins, but let me by segment. So let me share with you a little bit of what we do see in gross margin as you know gross margin any given quarter. So he's going to be a function of a few things revenue level segment mix product mix customer mix factory activity, all are going to vary from quarter to quarter and go.
End of the gross margin, we think our performance compares favorably with our peers over the cycle our peak to trough gross margin over the cycle was down about 210 basis points. Our next closest competitors in the process tool space. One was down 300. Another one was down 310 and as we're her pro.
Filing into the back part of the calendar year on a relative basis, I think that gross margin performance on a quarter over quarter basis also looks pretty good. So we like how we're executing are we ever satisfied with our gross margin to know our women I actually focused on driving improvements in improving the cost structure, absolutely we're going to keep at it we're going to continue to work hard and I thought.
Thank you are seeing the breadth and depth of our portfolio in a broad sense play out in the gross margin resiliency over the course of the cycle.
Hey, Thank you for asking the question Tim.
Our next question comes from the back are you with Bank of America. Your line is now open.
Thank you for taking my question and just thinking conceptually about next year.
If the foundry logic sustains and memory is there any incremental to the model and I think this pay your starting at low levels, but just at a run rate implies that your growth with the here does that say your January quarter is the low point of the it in terms of sales and gross margin.
I'm sorry for that could you. Please repeat it cut out in the sand I just want to make sure I got the full question sorry.
Yeah of course, and so if memory spending is incremental to the modern from head on and you said, a foundry and logic should sustain and even on the display side I think you're starting at a low point in January does it say that Youre January quarter outlook is very low point of the year in terms of fans.
Gross margins that pinks could actually conceptually I get better India as memory. It covers.
So I guess the best way for me to describe it because I think what we're going to do is we're going to guide one quarter at a time and environment is clearly better today than it was a quarter ago or six months ago, and what I would say just at the very highest level companies performing well.
We've got a good backlog entering the year you pointed out strengths in foundry logic services.
Swing factor in the year I said it before it's really the the essence of the issue the swing factor for the year is going to be what happens in the memory market. So we're going to stay close to customers were going to be ready to respond when the NAND market starts to really starts to hit followed by DRAM and we'll take it one quarter at a time. So I don't think we want to start giving a multiple quarters.
Guidance and shaping the full year given some of the uncertainty we see from a timing standpoint on when things like memory are going to start to flash.
Thanks, It back and operator, we'll take one more question. Please.
My last question comes from the line of Quinn Bolton with Needham and company. Your line is now open.
Hey, guys. Thanks for squeezing me and I guess I just wanted to follow up on John in the next questions. There just it seems almost a logical for us to assume that the foundry strength that you're seeing in the January quarter sustained at that quarterly level through each each quarter of physical 20, because that would get the business up probably well into the teens.
20% year on year in strike and I guess.
Not asking you didnt necessarily guide us quarter to quarter, but isn't it logical to assume that you're probably not going to sustain that peak quarterly revenue. It foundry in every quarter of 2020. Thanks.
Yes, No question Quinn and you know my sustainability into next year is really meant to be that it's not going to be a one quarter phenomenon. We've got a nice backlog Q4 was a was really nice quarter for us and foundry logic Q1 will be a record quarter and it I think it would.
The probably not the right place to set expectation to think every quarter is gonna be into a record foundry logic level and so while the activity level can be nice it doesn't always have to be a record.
Got it thank you.
Okay, great well, thank you Quinn and I think we're almost at the end of our our Dan anything you'd like to say in closing.
Sure Mike just a couple of quick thoughts first like I said at the beginning I'm pleased with where we ended the fiscal year and especially like the set up for applied in 2020 give it a record a yearend backlog and the momentum that we see and key parts of the business second.
We look forward to staying close to investors December 3rd Gary and I are going to get the credit Suisse Conference in Scottsdale next week after that I'll be at the U.S. Conference in New York in the meantime, we hope you all have a happy and safe Thanksgiving with your families like what's gotten close call. Okay, great. Thanks, Dan and we'd like to thank everybody for joining us today, a replay of our call is going to be are they.
Hold on our website by five PM Pacific time, and we would like to thank you for your continued interest in applied materials.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.