Q1 2020 Earnings Call
Welcome to the applied materials earnings conference call. During the presentation, all participants will be in listen only mode. Afterwards, you will be invited to participate in a question and answer session.
I'd now like to turn the conference over to Michael Sullivan Corporate Vice President. Please go ahead Sir.
Good afternoon. Thank you for joining applied first quarter fiscal 2020 earnings call, which is being recorded joining me are Gary Dickerson or president and CEO and didn't earn 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 risk.
Send uncertainties is contained in the flights most recent form 10-K, 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 Gary Dickerson.
Thanks, Mike.
I'm pleased to report that earnings for our first fiscal quarter exceeded the top end up our guidance.
Reflecting outstanding execution across the company in a market environment that is strengthening.
Based on our calendar year revenues, we believe we outperformed both the markets and our direct peers in 2019.
We are 2020 with momentum.
The signals, we see give us increased confidence that the years ahead, we'll be very good for the industry unexpectedly for applied materials in today's call I'll give you my perspective on how our markets are evolving and provide our near term outlook.
Then I'll highlight the key components of our strategy to address the changing needs of our customers and drive sustainable profitable growth for applied materials before I get started I'll take a minute to address the implications of the Corona virus outbreak.
The director comprehensive response across all the regions, where we operate we quickly activated our business continuity team.
Our top priority is the health and safety of our employees and their families.
We're also doing everything we can to provide our customers the support they need to minimize disruption to their business and.
In addition, the applied materials Foundation is sending medical equipment into will Han and we've created humanitarian response fun for employees in China, and the communities, where they live and work.
In terms of the business. Our current assessment is that the overall impact for fiscal 2020, well be minimal.
However, with travel in logistics restrictions, we do expect changes in the timing of revenues during the year.
We are actively managing the situation in collaboration with our customers and suppliers.
Well, we're making the necessary adjustments to our near term plans.
We're not taking a write off the powerful trends that are driving the semiconductor industry forward and creating a structurally larger and less volatile markets.
That's a low point of this recent down cycle in customer spending which occurred in the second calendar quarter of 2019, the combined the quarterly revenues of the top five semi equipment companies, we're only 17% lower than at the cycles P.
In contrast during the industry cycles that took place between 2000 in 2013 peak to trough revenues for the same five companies combined drop on average 44%.
Another important metric, we look at its equipment intensity or annual equipment spending as a percentage of annual semiconductor industry revenues.
Between 1990 in 2014, this equipment intensity metric fluctuated between 17 and 6%.
However, when we look at the most recent five year period.
Equipment intensity has been in a tight band of 10.5% to 12%.
The mean of 11.5%.
We believe this is a good estimate going forward and reflects the ever more complex technology challenges were addressing and the increasing value were delivering to the ecosystem.
In addition to the higher growth and lower cyclicality, we see in the market as a whole applied is demonstrating even lower volatility than our peers.
The reasons for this include the breadth of our product portfolio and the balance we have across different device segment.
Dan will provide more color on this topic in his section.
Moving to our near term out, but we see robust foundry logic investment continuing.
There's a strong commitment on the part of these customers to advance the leading edge as they get ready for demand related to the rollout of Fiveg.
At the same time, we're also seeing healthy spending for specialty notes to support growing demand from the Aiotv communications automotive power and image sensor market.
Progression in the memory market is consistent with a view we've shared over the past several quarters NAND appears to be in the early stages of recovery with prices rising and inventory levels down to four to five weeks, that's compared to eight to 10 weeks. This time last year.
We also see a good set up for DRAM to recover encouraging signs include supplier and end market inventories that are starting to get back to normal levels and prices that appear to have bottomed.
These leading indicators bode well for a pickup in investment by memory customers later in the year.
Overall, we like the way the market is shaping up for 2020 and beyond.
We believe that our semiconductor business can deliver strong double digit growth this year and feel very good about our longer term opportunities.
And display there are no major changes to the outlook. We provided last quarter, we expect F. Why 20 revenues to be similar to ask why 19 as the industry navigate the bottom of this spending cycle.
We still believe that displays and attractive adjacent market for applied that provides good long term growth opportunities.
The business remains solidly profitable, even as we make the necessary investments to ensure that we have the right portfolio of products ready for when the market picks up.
Stepping back and looking at this year and its broader context, it's important to note that the overall electronics industry isn't a period of expansion and diversification.
Major new growth drivers, including Aiotv big data in artificial intelligence or layering on top of traditional demand for smartphones and Pcs.
Looking ahead I strongly believe that's the future will not be like the path.
The emerging workloads that will shape. The next era of computing required domain specific approaches new system architectures, and new types of semiconductor devices.
I believe that we need a new playbook for semiconductor design and manufacturing to deliver the power performance and area cost improvements that will unlock the potential of AI and big data.
At applied we've aligned our strategy and investments around this new playbook. So that we can enable new system architectures, new devices in threed structures. The introduction of novel, New materials, new advances into the geometric shrinks and new ways to connect chips together through advanced packaging.
Applied has a unique portfolio of materials engineering capabilities and products to enable the new playbook.
Getting these new technologies to market faster has never been more valuable and this is a major emphasis across the company. For example, where are using advanced metrology sensors data science and simulation to improve learning rates speed up the transfer of new technologies from applies labs to customers factories.
And reduce the time it takes to optimize device performance yield output and cost.
In addition, we have more engagement with a broader ecosystem than ever before focused on accelerating innovation all the way from materials to system.
Our strategy is yielding results for our customers and applied calendar 2019 was a new record for foundry logic revenues and the current leading edge node transition further grows our opportunity.
For an equivalent number of wafer starts are available market increases by more than 10%.
We're also generating record revenue from specialty markets, where customers build their technology upon trailing geometries for these customers. The innovation roadmap is driven by materials innovation, rather than geometric scaling strengthen leading edge combined with healthy investments in specialty nodes.
Means that several of our leadership businesses, including metal deposition and not be are delivering record revenue.
The same time, we continue building momentum in areas of the market, where we still have plenty of room to grow.
In the quarter, we secured major application wins for critical etch stuff at both foundry logic and memory customers.
Our process diagnostics and control business delivered record quarterly revenue driven by strong adoption of our new optical wafer inspection system and continued strength in our leading E beam product.
We're also making great progress in packaging as the industry introduces increasingly sophisticated packaging approaches our strategy has been to focus on addressing the most critical process steps as a result, we've been steadily gaining market share our packaging business delivered record revenues in 2019 well.
Winning well over 50% of our available market.
Another important growth factor for the company is our service business.
Maintenance is an attractive recurring revenue stream for applied and in calendar 2019, we added more than 2000 systems to our installed base.
As I've talked about before we are finding new ways to deliver value through data enabled services that accelerate customers fab ramps and optimize their device performance yield output and cost in high volume manufacturing.
As we do this we're increasing number of installed based systems covered by long term maintenance agreements in the past 12 months alone we have grown the number of systems covered by these agreements by nearly 15%.
Before I hand, the call over to Dan I will quickly summarize well, we're adapting our near term plans in response to the Corona virus outbreak our outlook for 2020 remains very positive.
We believe we can drive strong double digit growth in our semiconductor business this year and significantly outperformed the market.
We also like to set up for 2021 and beyond.
Our markets are better than ever with powerful new growth drivers still only in their early inning.
Applieds opportunities have also never been better we are uniquely positioned to enable the new playbook for semiconductor design and manufacturing, while helping our customers accelerate innovation from materials to system and now I'll turn the call over to Dan.
Thanks, Gary applied materials returned to year over year growth in Q1 with revenue up 11% and non-GAAP EPS up 21% versus the same period last year revenue and gross margin exceeded the midpoint of our guidance and earnings were above the high end of our range our revenue per for.
Since was driven by semiconductor systems, which was up 24% year over year.
We generated nearly a billion dollars in operating cash flow during the quarter and returned close to $400 million to shareholders. Our business outlook calls for continued strength in Q2, and our second half our relative performance was especially strong we outgrew the overall semi equipment market in calendar 2000.
19, and we significantly outperformed our closest peers.
Applied is made strong investments across our portfolio in recent years and today, we are larger and more resilient company that performs well in a variety of market conditions. One of applied unique attributes is our broad portfolio, which is more diversified across end markets and more balanced among.
After device types, including memory.
Leading edge and specialty nodes and logic and packaging.
Our portfolio makes us more stable relative to our past and relative to our peers, the closest of which 450% to 100% more volatile in the recent cycle.
Today, our traditional strength in foundry logic is apparent as we set new quarterly records for overall foundry logic revenue as well as in metal deposition and process control system sales our investments in memory has given us a balance share profile and this will enable us to continued to generate strong.
Turns when spending recovers later this year.
Key pillar of our stability as our aftermarket business, which includes apply global services and our 300 millimeter upgrades and Refurbs.
Our aftermarket revenue as a product of three drivers installed base growth.
The higher service intensity of new nodes and our data enabled service agreements our service agreements provide a higher return on investment for our customers and subscription like recurring revenue for applied in Q1 AG S. generated record revenue of nearly $1 billion, our overall aftermath.
<unk> business also set a new record in Q1 and has grown in every year since 2013.
Against this backdrop, we're pleased to be making further progress towards the acquisition of Coca say electric which has an outstanding equipment business, a very large installed base and a highly talented management team during the quarter, we receive regulatory approvals from Japan and Korea.
And we grew our cash position by over $350 million as we prepare for the transaction.
As a reminder, upon close we plan to prioritize our free cash flow towards repaying. The term loan were using to help finance the transaction, we expect to limit buybacks until we repaid the low.
Next I'll comment on the near term environment and provide our Q2 guidance.
Since the middle of January our business continuity team has been working around the clock assessing the needs and capabilities of our employees customers and suppliers.
Impressed by the decisive action and compassion being demonstrated by our people across the globe.
Our Q2 guidance ranges are wider than usual and our revenue forecast reflects all of the risk factors, we can see today.
In Q2, we expect our overall revenue to be $4.34 billion, plus or minus 200 million, which would be up by about 23% year over year.
We expect non-GAAP earnings to be one dollar and four cents per share plus or minus six cents. The mid point would be up nearly 50% year over year.
Within the outlook, we expect semiconductor systems revenue to be around $3.5 billion up by around 40% year over year.
Our services revenue should be about $955 million and display revenue should be around $310 million.
We expect non-GAAP gross margin of around 45.4%, which would be up nearly two points year over year and non-GAAP opex should be around $820 million. Finally, I will give you some additional color on how our risk adjusted Q2 guidance compares to the strong underlying demand for products.
In services absent the near term risks, our revenue guidance would've been about $300 million higher at the midpoint or up about 30% year over year and AG ESS revenue would have exceeded $1 billion well the situation remains fluid. We believe we can address the vast majority of our unmet Q2.
Demand in Q3, and Q4 and deliver strong growth for the year.
In summary, we are seeing very strong demand for our products solutions and services, we have a broad diverse and balanced portfolio that is delivering strong relative performance and stability in a variety of market conditions as Gary outlined the semiconductor industry is enjoying a new wave of growth.
And the equipment industry is growing along with our customers.
For applied part, we're investing in new products and solutions that will accelerate the new playbook and position applied materials to deliver superior performance stable growth and shareholder returns now Mike let's begin the acuity.
Thanks, Dan now I know there are a lot of people on the call today to help us reach as many of these who can please ask just one question and not more than one brief follow up operator, let's please begin.
As a reminder to ask a question you only need to press star one on your telephone to withdraw your question press the pound key please standby well, we compile the culinary roster.
And our first question comes from Atlanta, CJ Muse from Evercore. Your line is now open.
Yeah, Good afternoon, and Paul you see most of the bank.
Your first question can you speak to lease margin leverage you.
Forward, particularly around accelerating service business combined with a on the tool side, you know where you are mix wise from leadership.
Gross.
And some of the new products. The later in a bigger your thoughts around that.
Thanks, CJ as we look at gross margins I think it's important to look at the evolution of the business over time, we're different business today.
We're driving a significant amount of growth or in a foundry logic, but we're also more diversified business than we've been in the past. If you were to go back a handful of years you would've seen us a spike highly in the foundry business from a share perspective, and the other three device types were mid teens and today.
They were very balanced portfolio and I think that served us really well in 2019, both from a revenue volatility standpoint significantly less than appears in the industry, but also from a gross margin standpoint, the company's performed pretty well a in the most recent downturn as we.
Go forward a foundry logic is going to continue to be a strong market for the industry. The trend line on foundry logic is up into the right every quarter won't be a record, but we will see an upward trending a market less volatility and higher highs and higher loan.
It's embedded within that strength in foundry logic is growth in specialty nodes and technologies as edge devices. Proliferate. This is a great business for a strong driver of cash flow strong driver of operating margins, you're also seeing us a in the broad set of markets drive.
Businesses like etch over time, we are making significant share gains into the NAND market into followed by DRAM and foundry logic in the company's performing really really well rolling that market share and we're going to continue to do that going forward and say you see.
An evolution and profile change of the business you also see our services business going structurally larger it's a great source of stable revenues cash flows and operating margin for the business and so we're a broader bigger more resilient business and it's going to change the profile of the business overall.
Time as you look at a gross margin for the rest of this year or semi systems business on a half over half progression looks fairly linear.
And then you see a growing services business into the back half of the year and a growing display business into the back half of the year and all three of those business look to look position to grow well into 2021, and so we're guiding Q2, we expect to be around those levels for the rest of.
2020 against this mix profile as we see into the back half of the year or we ever satisfied with gross margins as they exist today no are we looking to continually optimize the performance of this company and drive as much in value for our shareholders, absolutely and we're going to continue to drive a as hard as per.
Possible at delivering that value, but I think that gives you a good sense of where gross margin is going to go for the rest of this year and some of the drivers of our business that deliver that result.
That's very helpful. I guess as a quick follow up can you speak to I guess, the improved visibility that you have to memory and in <unk> kind of one of the guideposts that gives you the confidence on on the second half handoff from foundry over to memory to sustain the growth through the year and into next year. Thank you.
Yeah. Thanks, CJ I think the the best way to describe the profile and shape of the business in 2020, we're going to continue to see strength in foundry logic throughout the year and we're seeing early signs of memory recovery today I think all.
Ultimately what happens in 2020 is really going to depend on the magnitude of the every member of the memory recovery later in the year.
We posted a really strong fiscal Q1, our guide into fiscal Q2, we see is very strong and we see that strength continuing into the back part of the year again, we're going to be relatively balanced half over half in our systems business.
And the ultimate shape of that systems business.
And strengthen the back part of the calendar year is gonna be a function of what would be saying for a couple of quarters now which is it's going to depend on the magnitude of the memory recovery. A later in the year, but right now we feel really good given what we see fairly balanced half over half from a semi systems standpoint, and I think theres an opera.
Immunity to do better in our fiscal Q4, and our fiscal Q1 as the memory a recovery begins to accelerate.
Yeah C.J. a this is Gary I'll add a little bit more color certainly what we see for the year is a foundry logic NAND DRAM pretty balanced a in relative to the memory recovery and timing, we talked about the supply and demand the inventory levels on the prepared remarks, and then obviously, we also have a them.
Then signals coming from our customers. So that's really what is driving our our comments relative to the way the years going to shape out and also the balance in all of those different segments.
Thanks Vijay.
Thank you. Our next question comes from the line of a T. Smith from Citi. Your line is now open.
Hi, Thanks for taking my questions and good job on results and guidance I've a question on the display.
Business, a flattish outlook not super exciting disappear Getty that this makes you look at some of the disruptive charters in the R&D pipeline negative aberration or the inkjet tools differently. If you can share the long term view on display market.
So display we still see as a very attractive adjacent market for the company.
If you look at the growth that we've seen over the last few years, it's up significantly I think we're around <unk> billion dollars a that business was up over 2 billion down a little bit this year, but still a very very attractive market and certainly our near term guidance is impacted also because of the corona virus summer.
Of our customers are in areas that are already impacted and so that reduced our guidance in terms of Q2, but as Dan said, we see the second half of the year.
Being very positive and we also if you think about visual experiences in the way they differentiate a different mobile devices or Oh, all of the trillion connected devices that will will be happening well be growing over over the next several years. The we see that that market is going to continue to grow.
So 2021, we certainly see the business being up a fair amount over what we see in a 2020 the capital intensity is rising as new technologies are adopted so we see a a good opportunity in our core business and certainly just like we do in semi we're very focused.
On enabling customer roadmaps, and enabling new structures new materials.
For our customers. So we have those investments that we're also making in terms of display we're making good progress on those on the pipeline of those new opportunities.
Not going to announce anything here on the call today, but we're still very optimistic overall about the business and also those a those new opportunities.
Great and they pick one put Dan Dan on Opex I know you don't like to peg opex to ratio and how should we think about the spending for the rest of the year.
Yeah, I think in the current environment 820 million a quarter feels like about the right level, a you'll obviously see us continue to drive discipline into our spend I think you've seen that over time over the last handful of years operating leverage has delivered some pretty significant reductions of opex.
As a percent of sales and right now R&D as a percent of Opex is at an all time high for the company. So I think the company is being very disciplined from a discretionary spend spend standpoint, and investing in the right amount of money to capture the significant opportunities we see in front of us.
But we will continue to monitor those opportunities and guide one quarter at a time, but this level feels about right.
Thanks, a lot of yeah, I guess I would add one thing to that I think you know we're not emotional over the investments were making we we make investments where we think we can have a drive shareholder value. So you know that's that's basically the way we look at this we have we do have a point of view I think as a leader you need to have a point of view encourage in terms of how you drive.
Our business, we believe that this business is going to be fundamentally bigger based on a <unk> a big data I O T layering on top of mobile social media and Pcs. So if we see that that business is going to be larger in the new playbook that I talked about in the prepared remarks for a <unk> big data.
Is absolutely essential as Moore's law classic Moore's law slowing so we see tremendous opportunities a applied isn't the best position. If you look at the five aspects of that new playbook, and we're going to make those investments and.
As I said earlier 2021 shapes up really well for us on many different aspects come together and we definitely are definitely see great growth opportunities going forward, but we also are not emotional about how we make those investments. So we're not married to anything.
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your line is now fan.
Good afternoon, guys. Congratulations on the solid results, Gary you've given us a lot of sort of qualitative guidance on semi cap equipment spending for this year I'm wondering if you can give us a sense of what you think you overall WFP market grows in calendar year 20, but perhaps more importantly, how important is China in your mind to that growth in can you help kind of profile the Chinese.
Then between sort of memory foundry logic I've got to imagine a lot of the trailing edge logic stuff you were talking about in your prepared comments is situated in China, but how do we think about that.
Yeah. Thanks, Jon This is Dan I'll jump in Ah take that so let's break it up into pieces, let's first talk about WFP in 2020 in the growth rate over 19, and then I'll come back and talk a little bit about China, and what we see in that market embedded in that overall growth rate.
So we think 2020 is going to be a really strong year for the industry. We feel good about that the ultimate question around growth rate is a function of what you use as a starting reference point for 2019, so I'm going to break this up piece by piece hopefully a I can.
Shed some light and be helpful to clear up I think some of the confusion that exist in the market. So whats important is as we establish a reference point for 2019, and then we talk about growth off of that so we know the number for 2019 WFP, it's not mid Fortys.
I think one advantage. We have is we've got a very broad portfolio and we've got insight and into all the different device types and that gives us some unique insights in terms of market sizing. So let me share with you what we're seeing and hopefully we can help out.
2018 was 56 billion.
That's according to Gartner, it's a good number it's validated by a third party. So 2018 was 56 billion off of that number we see 2019 as it down 10% to 12%.
And that's the baseline we're using for 2020 growth.
We see 2020 as a market up 10% to 15% based on everything we see and likely at the high end of that range given the conversations we're having with customers.
So while it's too early to know 2020 with precision.
2019 is very clear as a baseline so hopefully now the baseline for 20, Nineteens clear off of that baseline will likely up 15%, we expect to significantly outgrow the market with our semi systems business.
And it's not one device type.
Coming to China embedded in that outlook as we think about 2019 and where that ended we see that market.
As about six and a half billion dollars and we see growth off of that market of about $2 billion to $3 billion.
Embedded within that.
If you take a look at that $2 billion to $3 billion I would say a third of it is 200 millimeter trailing nodes foundry logic.
Two thirds of it is 300 millimeter business.
The two thirds of its 300 millimeter business, it's roughly evenly split between trailing node foundry logic.
And a memory.
And there's balance within the memory profile.
And so I think that gives you a sense of what we're thinking for the China market and if I were to take.
Take a step back and the still down what we're seeing.
We see a consistent steady ACO system building investments in technology, Roadmaps with modest capacity additions and even if we look at the two to 3 billion of incremental spend that we're seeing in China and domestic China and we take a look at what it costs to build.
New memory factory, seven to 8 billion or a new foundry logic factory of 15 to 18 billion, even embedded within that two to 3 billion of growth. It's modest capacity additions and part of that spend is 200 millimeter part of it is 300 millimeter.
With diversification across device types.
Hopefully that helps shed some light on both the overall Wi Fi market, John as well, it's what we're seeing in China.
No. That's great color then quickly as my follow up I want to make sure I heard you on the correctly I think you said in the prepared comments.
The full fiscal year 20, you expect flat panel to be roughly flat ish year over year, which would kind of imply a second half run rate of close to $1 billion, if not slightly over I'm just kind of curious why are you confident about that is it mainly because of the 300 million cushion you had been the April guidance for the current affairs.
It's mostly coming out of flat panel or am I thinking about the math right on that.
Yes, So let me start with the math you are thinking about the math correctly, we've had a point of view now for a couple of quarters that.
Revenue in 2020 in the display business is going to be similar to what we saw in 2019 everything we see in the market today increases the confidence we have in terms of that outlook. So no change to the full year guidance as we look at the risk Weve assessed as part of the Corona virus.
We think we're taking a well first of all we think the risk is temporary and we think there's no change to our a full year outlook fiscal year outlook.
As a result of that and so we think we're being prudent in de risking our guide by about 300 million and we see recovery of those revenues in Q3 Q4, as we on par with 300 million across our reporting segments, we talked about services.
Would've been our first billion dollar quarter, but we've de risked that based on the virus in terms of rank order of the 300 million.
First most impacted as our semi systems business.
Followed by our display business, followed by our service business. So if you put the pieces together without being point specific on any one of those I think you get a sense of how much we've de risked star services business.
Display will be incrementally more than that.
And semi systems will be incrementally more than that the some of those three will equal 300 million arse, our thesis around display being or I'm sorry.
Tvs being a recovery mark or going through a digestion period in the market you will see recovery of the handset market that framing of the profile of spend in display still holds we see both markets looking good into 2012.
The one and we think we returned to nice growth profile in the back part of the year and into 2021.
Great color congratulations again guys.
Thank you. Our next question comes from the line of Krish Sankar from Cowen and company. Your line is now fan.
Thanks for taking my question and done again, thanks for the Ted if it called the I'm on the all the industry stuff Stupid question number. One is you know based on your guidance of roughly 3 billion for sami's and around the things, maybe there's something minus 200 million for the rest of.
Fiscal 20.
It looks like when I look at your last cyclical peak in April 2018, you guys talked about 3 billion and then the field trailed off.
I understand the diminish I suppose you know what semi system, there's probably some shift in numbers, but overall it looks like.
You can sustain to $3 billion sales number for the rest of the fiscal year kind of curious from your vantage point, how much of this growth was of the probably.
Peak number was.
Capital intensity going up with says he match specific share gains and then the second quick housekeeping question on your color on China, If I'm remembering right. I think you said 200 millimeter is gonna be at Philadelphia number, which is about $3 billion for China Wi Fi.
So present that hard given the fact that lasted for them, but I, China 200 millimeter was only half a billion why is it jumping up so much this year. Thank you.
Yeah. Thanks crash. So it taking the the second question first we've been talking about specialty nodes, we've been talking about trailing no geometries, we've been talking about billions of edge devices and intelligence on the edge and sense.
Sure technologies that are supporting the build out of the internet of things and we see a trailing no geometries is one place that China can you know in the near term play a strong role in helping to build out there ACO system in.
In a disciplined way and so it fits in with the framing that we've been talking about technology development.
Echo system development and disciplined investments to support that echo system from capacity standpoint, and so it's very consistent from a framing standpoint.
Yeah, I think on a maybe I can add something on this ER on this part of the question.
The if you look at this market I O T communication auto power devices sensors.
It has a very very high growth rate a innovation is driven by materials innovation. So 2018 was the first year machines generated more data than people a in the next five years of forecasts are the machines will generate 10 times more data than people and when you go to see yes, you see everything getting smarter so.
This market is a big market I think you specifically to your question in China. Your numbers are a roughly correct our numbers are little bit different but roughly correct that there's a lot of growth in China.
In these areas and they can build those types of devices and so you know if you look at a trillion connected devices at the edge by 2030, a the explosion of data a and really the Trent transformation of many industries, a healthcare education and you see retail Uh huh.
Transportation all of these areas.
Growing very fast and the companies that are growing quickly from a market cap standpoint or companies that are data centric companies. So again I think that's that's really what we're seeing is this explosion of data a in this market is a very big market applied has very strong position, we've put together a in the last year.
For a team of great leaders across the company for 300 millimeter and smaller wafer sizes I personally I'm meeting many of the Ceos and R&D leaders in this ecosystem and we have really really strong momentum. One example is a one particular large customer where we won two thirds of the available opportune.
Ladies in a market that is very very sticky over a long period of time, So I think you're correct in that.
Maybe it's surprising that the market is growing like that but we think this is really the early innings of these particular markets Aiotv communication auto power and sensors from a growth perspective in its you know applied has a really great position inside that market.
And Chris coming back to the first part of your question or where you talked about growth and how much of it is share gain versus capital intensity.
I think it's important to take a step back and set a context around how the company has evolved over time, we were to go back a handful of years, we were strong in foundry over 20% and around mid teens in all three other device types today were balanced across all of the device types of the company's.
Made steady progress on that front.
Over the last handful of years since Gary's took over the company. Your specific question reference to time period in 2018, we were high teens, a little over 19% from an overall WFP share standpoint, a that year.
Today, you know were Oh, I'm, sorry, 2019, we were a little over probably a little over 20% in 2019. So we feel really good about the progress we've made and significantly outperforming the peers and the market in in 2019, So you death.
Suddenly see some share accretion playing out in the current environment. The second thing I would say our thesis around increasing capital intensity you see it in foundry logic, you see it in and you see it in DRAM that thesis of increasing capital intensity overtime is firmly.
The intact, we know our customers are investing a lot of money in Wi Fi and so their profitability WFP as a percent of their profitability.
Has come down since 2012, WFP as a percent of EBITDA in memory and foundry logic is down 25% over the last half a dozen years and so they're spending a lot, but they're making a lot of money and so the health of our customers is.
Good as it's ever been and then from a capital intensity standpoint, what we see is WFP as a percent of overall semiconductor industry revenue.
Bottomed around 2013 at 9%.
First we're taking the one data point around the Alito nine downturn of 6% off the table 2013, it was about 9% and Gary referenced in his prepared comments, we've been a tight band centered around 11.5% for the last five years, so to clear indication.
This industry is experiencing increased capital intensity, the macro demand drivers driving the overall semiconductor industry are firmly intact semiconductors, you're gonna go structurally larger as the data economy kicks in and by implication our industry and applied materials are going structurally larger.
So we think the opportunities in front of US has never left this has never look as good as they do today and we're really excited about what we see.
Thanks, good thanks, Dan.
Thank you. Our next question comes from the line of Heartland Stewart from JP Morgan. Your line is now fan.
Good afternoon, good job on the quarterly execution, you know one way to combat the slowing of traditional Moore's law and the manufacturing fund, but still drive Moore's law like performance improvements at the chip level as to the use of these advanced packaging architectures, whether that's chip let strategy multi chip die stacking you guys have a pretty strong position end use market.
Hi, with his segment expected to do this year and roughly how big is your advanced packaging segment relative to the size of your overall semi business.
Yeah. Thanks for the question Harlan so it and you're right. We've talked about this new playbook are.
Going beyond the classic to de shrinking and Moore's law and packaging is one of those five drivers for the new playbook and it really really really is very important you know.
One example is if you take a GPU a in a new package and this is a product that was released over the last couple of years, you'll get 50% lower power in Threeq ex increase in speed three times increase in speed just from the package. So definitely really important as part of the new play.
The book from an applied perspective, we had record revenues and packaging 2019, and we have really strong momentum into 2020, we have the most comprehensive portfolio of solutions.
Support the packaging roadmaps for our customers and as you talked about heterogeneous integration approaches a in 2019, we won over 50% of the applications. We competed for an art. We have this broad portfolio with CVD PVD, CMP plating, and the edge and where we have highly differentiated.
<unk> new products, we have very deep engagements with leading customers and there's a lot of focus on innovating with new packaging architectures applied has very deep engagement with a really across the whole eco system that those engagements are really driven by two things one we have the broadest.
Portfolio of current and new products that haven't been announced yet a that are enabling from a packaging perspective. We also have the most advanced packaging lab, where we can run entire end to end process and co develop new packaging technology.
With leading customers and partners. So again overall very strong momentum with record business and 19 and I think this area. So we haven't quantified it a in terms of a dollar amount, but its sizeable and I would say relative to growth opportunities and as one of the elements of the new.
Playbook, it's under appreciated and the opportunities are bigger than what what people would think relative to our growth potential here.
Thanks for the insights there and you guys have talked about memory spending recovery with NAND, leading the way this year, but would DRAM probably seen those steadily rising, especially in mobile and servers and looking to be sustainable and he will forgot the new gaming console platforms launching in the second half that are driving pretty strong bit demand growth for Grafix DRAM.
Are you guys starting to get some visibility on a return to spending by some of your DRAM customers in the second half of this year.
Yeah. Thanks, Harlan I'll take that I think what we see we talked about the magnitude of the growth we see in WFP year over year into 2020.
Our view on that is it's broad based.
I think that you'll see a good profile from foundry logic I think you see a good profile from memory and I think you will see balance a cross device types within memory. The growth profile into 2020 is gonna be across those those ah different device types.
And yes, so we will start seeing.
DRAM or this year.
Great. Thank you.
Thanks, Harlan operator, we saw the number of people in the queue I'd like to have US. Please move to one question per person. Thank you very much.
Thank you Sir our next question comes from the line up here Ferroglobe from New Street Research. Your line is now fan.
Hi, Thanks, guys looking like Chris Flynn.
On sundry I'm looking for you you have no growth repro across a one point Mount Oh.
I was surprised.
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Hum.
It's from the mode. So we'll look at school.
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Hundreds of ammonia mood.
No.
I haven't heard Oh, that's such a written or when you.
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Hi, pure this is Mike Unfortunately, I couldn't hear your I think you're on maybe on a cell phone. So we can tell you were talking about foundry and the mix of getting to a number like 1.9, but we unfortunately couldn't hear the rest of the details of your question and so we're not sure how to respond could you try one more time please.
Oh, Yes, you have you done now.
That is a little better let's try again.
Okay, sorry, it's all about so I was wondering how it's a rather news.
From lives.
You'd be nodes.
As being added to.
Another 7 million addressing boundaries yet.
Limits on 10 nanometer hi, Jim and how much comes in you you he knows ramping today.
Yes, so ah thanks, Pierre let me take a stab at that and see if Gary wants to add anything so what I would say is we won't we won't share internal forecast of how foundry logic.
Breaks out across nodes, but I think let me provide some color in context around the 1.9 billion. A I think we would say that we're seeing strong adoption at seven nanometers as they build out the node strong adoption node over node as five now.
Meters gets deployed from a capacity standpoint, and the logic equivalents of that and while we talk about a more balanced market in foundry logic I think what you would see in the near term environment that it's gonna be significantly more weighted in the near term to these leading edge technologies and should we.
We really like the way the business is performing node over node in fact, as we look out into three nanometers, we really like the position and we think we can significantly enhance our relative position node over node. So we really like the way the businesses performing on the leading edge and what you see in the near term environment given the.
Strong ramp around five and seven nanometers is less balance in the market in the near term, but the long term trend of diversification within a foundry logic is still intact.
Yeah up here are the only thing I would add relative to the leading foundry logic.
Is that all of these customers are driving performance power area costs P. pack improvements and that's really all about new materials, new structures to drive power and performance and so for applied as Dan said, you know really all the from a leading perspective a leading.
Node perspective, you know, it's really the our though it is those are you be no like five nanometer where are you see that adoption, but still we're achieving record revenue. We have so many opportunities when we're driving these new structures new materials, New architecture is all of those different areas. So so we.
See record revenue there were also seeing growth not only and transistor and interconnect and patterning a with some of our leading products, but we also have growth in areas, where we have had lower share and actually we have many new critical etch steps that we've won.
New self line multi patterning wins in the you'd be patterning steps, where we really didnt participate in the past. So we look at our etch business in foundry logic, we are extremely optimistic about the growth that we're seeing a new nodes are adopted you know even as he is also being adopted as one of the five.
Drivers of power performance Aireon cost the only thing I talked about is in process control. We have continued strength in E. Beam. We also have strong adoption of new inspection tool and we had record revenues in that market.
This last quarter. So again, it's really about driving that new playbook, along those five vectors power and performance, our leading products were seeing new stops being adopted and in some areas. We have room to grow the the opportunities for us to have never been better and our position has never been better than today.
Thanks, Pierre Thanks.
Huh.
Thank you Sir our next question comes from the line of Joe Moore from Morgan Stanley. Your line is now open.
Great. Thank you I'm wondering if you could if you get addressed to 300 million of kind of deferred.
Revenue that that.
Pushes to next quarter can you talk about why that's happening is that just sort of issues with your customers getting up and running isn't logistics issues getting tools to them or is it supply constraints that you have getting kind of sub assemblies to build tools. Just can you kind of tell us what's what's driving the deferral.
Yeah. Thanks show I think the best way to describe it is the actions China is taking to contain the spread of the virus has led to travel restrictions and logistics of moving things around the country. We see those impacts is being temporary and it re profiles revenue from.
Q2 to the back part of our fiscal year.
And so.
In in the early stages of the China workforce coming back after the lunar new year and after the imposed restrictions by the government. We're seeing some early signs that are encouraging though some return to normalcy, so fluid environment, it's too early to draw conclusions.
From it but we like some of the early indications that we see we're going to continue to monitor the situation closely and update as necessary and again as we breakout that 300, you rank order it semi systems display services, it's about getting our people.
Well into the into the factories and being able to service the equipment.
That certainly put some restrictions on it we know will happen is an important geography in our display business getting our systems.
Into the factories in that region are impacted in the near term and then semi systems. Its more of the same and so we think that given everything we know it's a prudent approach to the environment. We see we're going to continue to monitor it there's an opportunity to do better in Q2, we think.
Customer demand is there and we do think that we recover in Q3 Q4, and our full year fiscal year outlook remains intact.
Thank you.
Thank you. Our next question comes from the line of these that ARIA from Bank of America Securities. Your line is now fan.
Thanks for taking my question and then congratulations on the strong growth and for all the color you gave a lot of questions. What <unk> on the product side I wanted to ask about services. What are you surprised to see the slowdown in services in the last few quarters I'm you know what drove that and then more importantly.
Let's say you're targeting a 15, 20% growth.
Gross.
Your next year.
Well, how much does AG s. need to grow for that or how much can aid you grow in that kind of product growth environment. Thank you.
Yes, thanks for that so as we look at services are we talked about the framework of growth in that business in the prepared comments its size of the installed base its complexity of the leading node technologies and it's the execution against the long term service agreement opportunity we have.
Those underlying growth drivers are absolutely intact. This is a business that's grown strong double digits over the last handful of years Q1 was a record quarter for us and significantly above seasonal Q2 would have been our first billion dollar quarter and so the team is doing a great job executing.
We also know the slowdown in the near term as a function of the memory correction that we're seeing profile throughout 2019 as industry Utilizations come down our transactional component of the business has you know reflected what's happening to industry why utilizations.
But the team is still executing against the long term service agreement opportunity and grew that business nicely in the mid teens in 2019, what we like about the set up through the back half of the year and as we look into 2021 with the services business in particular as the memory recover.
He begins to take hold and as we look at that building momentum throughout 2021 foundry logic demand continues to be strong those are going to provide a nice tailwind for that business to grow into the back half of the year and into 2021, so underlying demand drivers and tax payments.
Executing well and we like the profile going forward.
There are just one more data point I talked about in the prepared remarks, we added 15% increase in the tools under service agreements and those are that subscription type revenue is very sticky and also gives us a higher entitlement per tool. So that's been a big focus it's been a tremendous change in the last.
Few years, the significant growth and it's really based on the value that we're providing our customers.
Okay. Thank you.
Thanks to Vac, an operator.
Just two more quick questions. Please.
Thank you. Our next question comes from the line of Timothy Arcuri from you V. S. Your line is now fan.
Thanks, a lot I guess I wanted to go through some numbers with you guys. So youre I think you said in 19.2% of WFP last year. So if I assume that the second half is flat versus the first half that would put SSG sort of in the 11 five to like $12 billion range. So I don't think you would argue it either.
Those numbers since that's what you guided so if I use that and then I assume that you don't gain or lose any share. This year that would imply like $61 billion W.. If you number you're sort of saying well, it's probably more like 57.
So if I just average those two and take 59, and if I try to figure out how much revenue is required to support that much Wi Fi and I listen to what Gary said, which I totally agree with about about you know Wi Fi and density that usually picks out at about 12%. So if you take 12% that would imply that you need over 500 billion dollars' worth.
If semiconductor revenue this year, which would be up like 25% year over year. So I definitely get that why mtc as some of the incremental Wi Fi and they don't and they don't have much revenue, but how can you build a path to have enough revenue to support. This I guess I guess, that's the question. It's just hard to see WFP growing off of this it would like us can take a long time.
For revenue to kind of.
Grown did yeah into these WV levels. Thanks.
Yeah. Thanks, Tim I appreciate the question.
So a couple of things or we have insight and what we think our semi systems business can do against the backdrop of the environment, We see and we're very confident in our ability to significantly outgrow the market and then from a modeling standpoint, I'm curious I guess, how I would get at.
Some of the assumptions, we think 2020 is gonna be a really good year, we expect to outperform the market one of the key variables in the model that you're putting together is what you assume for market share and small changes in market share can make big differences in the model. So we see.
Continued strength from foundry and logic and our business throughout the year, we've got signs of them or recovery and as we've been saying for a couple of quarters ultimately it depends on the magnitude in shape as the memory recovery later here and if we see more momentum at them more currently planning for then I do think that you have.
An opportunity to outperform in Q4 and into our fiscal Q1, and so net net we don't see this.
Being you know in isolated pocket of performance were relatively balanced half over half and we feel really good about our positions and how we're performing this year.
Thank you. Our next question comes from the line of Patrick Ho from Stifel. Your line is now fan.
Thank you very much squeezing me, Gary maybe just a follow up on the share position, who apply a bolt in terms of the customer spending mix, which is influential for you as well as some of the competitive and design wins, you've talked about process control being a record revenue year. How do you look at the next couple of years as.
Hi, just new products continued to be introduced and additional competitive wins you believe can drive the company August outperformance.
Yeah. Thanks, Patrick So you know I would say I've never been more optimistic relative to the market.
Again, you have new <unk> demand drivers that are layered on top of mobile social media and PC. So the market is gonna be bigger than than we've seen in the past you can also see indications over the last few years. The market is structurally larger and less volatile Oh, we have very good share spread across all of that.
Different segments of the leading foundry logic, we have momentum as customers are driving improvements in power performance air in cost in the specialty nodes. A we have very very strong positions, whether it's an image sensors or any of the other.
Markets like Aiotv communication auto and power devices. So we have strength there we've grown a significant amount in DRAM and NAND it relative to market share Dan talked about this earlier, we've grown several points over the last few years. So we have.
Very strong balance and what I would say is again the path forward for the industry is really this new playbook around new architectures, new structure is new materials, a new packages also where we had record last year and we have strength and new ways to shrink. So we have the product pipeline and we have some very.
<unk> products in the pipeline or that are targeted a multibillion dollar types of opportunities, but the other thing I would say that's really important is the combinations of these different technologies with integrated material solutions.
Driving significant improvements in and throughput and drive current or power or the things really that are crucial for the edge in the cloud we have unique capabilities to combine these technologies some of them under vacuum so you're not damaging interfaces electrically so that's another area we.
Engagements across every single customer with integrated material solutions, we have very good momentum there. Besides the current products than we have and the products that we have in the pipeline. So again from my perspective, I've never been more optimistic I spend a huge amount of my personal time with a the R&D leaders for the core.
Customers through this entire eco system, a they're struggling to drive the performance power improvements that are needed and Oh, I think applied isn't the best position that we've ever been relative to our ability to drive our opportunities and growth going forward.
Thank you. Thanks, Yeah, Thanks, Matt and thanks for your question, Dan would you like to help us close the call.
Sure Mike first strengthened our sympathies to everybody has been affected by the credit virus situation I want to personally. Thank all of our employees who are helping their families in their communities. While also taking really good care of our customers Applieds outlook for 2020 remains really positive we expect to deliver strong double digit growth in our son.
Any systems business this year significantly outperforming or end markets looking out into the future I really like the set up I really like what I see continued strong pull foundry logic improvement in memory. Both of those elements are going to drive and fuel growth in our services business overtime I like what I see in display increase.
We ended the second half of 2020 and into 2021, and we expect to close the Coca site transaction in the middle of this year. So I really like to set up in 2020, and 2021, Gary and I hope to see many of you tomorrow at Goldman and next week I'll be on the East coast and look forward to seeing many of you as well, let's close call.
Okay, great, Thanks, and we'd like to thank everybody for joining us today, a replay of our call is going to be available on our website by five o'clock 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.
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