Q3 2020 Applied Materials Inc Earnings Call

August 13, 2020

[music].

So in the presentation, all participant lines will be in listen only mode.

Afterwards, you will be invited to participate and the question and answer session.

I would now like to turn the comparable with it Michael Sullivan Vice President. Please go ahead Sir.

Good afternoon, and thank you for joining applies third quarter fiscal 2020 earnings call. Joining me today, our Gary Dickerson, our 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 concern.

The risks and uncertainties is contained in applies most recent form 10-Q, an 8-K filings with the SEC. Today's call also includes non-GAAP financial measures reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings presentation materials, which are all available on the IR page of our web site at applied materials Dot com and now I'd like to turn the.

All over to Gary Dickerson. Thanks, Mike This time last quarter I started the call by outlining the stuff we were taking inside applied materials to navigate the cobot 19 pandemic our actions have been guided by two key principles first maintaining the trust of our employees customers suppliers and partners.

First and second focusing on strategic initiatives that will allow us to emerge stronger over the longer term.

Today I'm pleased to report that both our manufacturing operations and R&D labs are running smoothly at pre cobot levels of productivity.

I'd like to acknowledge the exceptional contributions resilience and creativity of our employees and suppliers. We have rapidly adapted to new ways of working to deliver this quarter's outstanding results.

A few weeks ago at Semicon West I outlined Applieds vision for the next decade, I talked about the critical role semiconductors will play in shaping a better future for everyone. The advances in technology needed to unlock the potential of artificial intelligence and how materials engineering will enable.

The industry's new Peapack, T. playbook to advance power performance area cost and time to market.

I also announced Applieds, new 10 year goals and roadmap for environmental sustainability, which is part of our commitment to grow our business responsibly and make possible a better future having covered our long term perspective in detail at that event today I'm going to focus my comments.

On current market dynamics and provide additional insights into our product portfolio and business momentum.

Starting with the market environment, we remain mindful of global economic concerns and that consumer spending as a potential headwind for many sectors, including the electronics industry.

With that said demand for semiconductors has strengthened over recent months.

The world adapt to the challenges created by the pandemic several major technology inflections are being accelerated.

Work from home home schooling and online retail are driving investments in cloud data centers and communications infrastructure. Many organizations are building stronger business continuity plans and increasing the use of automation and I O T technologies.

And because AI has the potential to transform entire industries. It's adoption remains nondiscretionary for many companies.

In wafer fab equipment, we expect overall foundry logic spending to grow this year, even with soft demand in specialty nodes that serve automotive and industrial markets.

At the leading edge, we see a strong commitment from customers to build out their fabs and aggressively drive their R&D roadmap.

This gives us confidence these levels of spending are sustainable in 2021 and beyond.

As I've described before with the slowing of traditional to the Moore's law scaling there will be a transition from general purpose computing to customized solutions tailored for specific applications or workloads.

Recent announcements by leading systems companies illustrate this inflection very well custom designed silicon and diversification of architectures play to the strength of the foundries and underpin their ongoing investments.

And memory, we see investments for the year growing slightly faster than in foundry logic as customers push forward with their technology Roadmaps. We also see the growth rate and DRAM being very similar to NAND.

Against this backdrop of a strengthening demand our semiconductor systems revenues are up 18% on a trailing 12 month basis and at the midpoint of our fourth quarter guidance will be up 25% for our fiscal year.

Next I'll explain what's driving our outperformance today and how by focusing on our customers highest value problems, we are positioned to grow faster than our markets over the next several years.

The process complexity required to produce leading edge transistors, and Interconnects continues to grow and new innovations in materials and structures are fundamental to driving higher performance and lower power consumption.

This plays directly to the strength of Applieds traditional leadership areas, namely, creating and modifying materials and structures. For example, our deposition businesses CVD PVD and happy generated more than $5.2 billion of revenue and calendar.

For 2019, and according to be less size data gained eight points of market share.

And our growth businesses that focus on shaping and analyzing materials and structures, we have strong momentum where the fastest growing company in etch, even though we don't currently serve the die electric market segment.

At the midpoint of our guidance our edge revenues will be up nearly 30%. This fiscal year. Since we introduced our centsthree system. In 2015, we have shipped more than 5000 chambers and we recently introduced Symthree why which is the most advanced etch system we've ever built this this.

And provides extremely high material selectivity as well as precise depth and profile control needed to form the densely packed high aspect ratio structures and next generation Threed NAND DRAM and logic devices.

We're also the fastest growing company in the metrology and inspection market.

The midpoint of our guidance revenue for our process diagnostics and control business will be up more than 40% in fiscal 2020.

We're winning share in optical wafer inspection any beam with new products that are in the early stages of adoption and have significant traction with leading customers.

Applied has by far the broadest product portfolio in the industry spanning materials creation modification shaping analysis and packaging.

This allows us to see inflections early and develop more complete solutions for customers from co optimizing deposition and removal processes all the way to our integrated material solutions that combine multiple process and metrology technologies within a single system to address our.

Customers most complex challenges.

In addition, our business is very well balanced across device segments and foundry, where we are traditionally very strong we're seeing our available market grow node over node and we're positioned to outperform the market as these new technologies ramp in high volume manufacturing and.

DRAM our share is even higher than in foundry logic over the past five years, we've gained 25 points of DRAM patterning share and still have significant potential to grow.

We've recently won multiple process tool of record positions for future node transitions, including multi patterning hard mask and hard mask open applications.

In addition, the industrys upcoming transition to high speed DDR five is enabled by advanced logic like features including high K metal gate. This grows the available market in areas, where applied has clear technology leadership.

Another area, where we're delivering more value to customers and have strong growth momentum is our aftermarket businesses. If we look at applied global services, plus 300 millimeter upgrades revenues are up 21% compared to the same period in 2019 within AG us.

60% of our service and spare parts business comes from predictable recurring revenue streams in the form of long term service agreements. This year the renewal rate for these long term agreements is in excess of 90%, which is clear validation of the value customers see in our advanced so.

Service products.

In display our revenue outlook for fiscal 2020 is unchanged at $1.6 billion and we expect 2021 to be similar.

However, we're seeing some encouraging signs in the high end of the market specifically robust demand for 8-K screens and the adoption of OLED Tvs, we remain optimistic about the long term opportunities for applied in the display market as we focused on addressing future technology inflections and expand.

Landing our available market finally, I'll highlight how we're working differently inside the company as well as with our customers and suppliers.

Cobot 19 restrictions has stimulated many changes and the way companies in the industry or operating.

For example, since March we've provided thousands of digital support sessions using a are in video held more than 900 training sessions with field support engineers, using VR and live distance learning and fully restored R&D lab productivity, while bringing only a fraction.

Our engineering staff on site.

I strongly believe that innovate anywhere provide substantial long term benefits by eliminating waste saving time and money and reducing the industry's carbon footprint.

Over the past several years apply doesn't making significant investments in state of the our digital infrastructure sensors, the metrology data science machine learning and simulation.

The combination of these technologies enables us to accelerate product development cycles speed up transfer of new technologies from lab to fab and optimize cost output and yield for our customers in high volume production.

Before I hand, the call over to Dan I will quickly summarize.

First thanks to the extraordinary hard work of our employees and suppliers. We are operating the company at pre cobot levels of productivity, while maintaining stringent protocols to keep our workplaces safe and healthy second while we're mindful of potential macroeconomic headwinds semiconductor.

Our equipment demand is strengthening and the longer term industry growth drivers remain firmly in place based on what we hear from our customers. We believe current spending levels will be sustained or even higher in 2021 third our strategy to accelerate the peapack key playbook.

Is yielding results for our customers and applied today, we're outperforming the market overall, and especially in key growth areas, including etch and inspection.

Looking ahead I am very excited about the innovative new products and integrated solutions, we will bring to market. This year and beyond now I will turn the call over to Dan.

Thanks, Gary.

Today I'll summarize our Q3 results give you more insights into the performance trend, Gary outlined and share business outlook for Q4.

Pleased that despite challenges related to covert 19, our teams delivered double digit year over year revenue growth across semiconductor systems HGS and display.

Our installed base business, which includes HGS plus 300 millimeter upgrades grew by 11% sequentially and 21% year over year and now represents about a third of our company's total revenue.

For the company as a whole we grew revenue by 23% year over year and generated non-GAAP earnings of one dollar in six cents up 43% year on year.

We anticipate continued momentum in our fiscal Q4 and Q1.

During the third quarter, we shipped a significant proportion of the backlog that we couldn't satisfying Q2 due to coded related supply chain disruptions are demand has remained strong and our Q3 ending backlog was nearly unchanged from the prior quarter.

The industry supply chain performance continues to improve and despite ongoing logistical challenges in Q3, we increased our non-GAAP gross margin by 40 basis points sequentially and 100 basis points year on year.

We also delivered sequential operating margin gains in both semiconductor systems and Dgs non-GAAP Opex was in line with our targets and we allocated 69% to research and development.

We increased non-GAAP operating profit to $1.16 billion up 41% year over year in May we successfully issued $1.5 billion of senior notes at historically low rates and later redeemed $1.35 billion of maturities that were due in October 2020 in June two.

The 21.

These transactions extended our weighted average maturities by about five years and reduced the average coupon of our notes outstanding.

During the quarter, we returned $402 million to shareholders in dividends and buybacks.

We remain strongly committed to our shareholder distribution program and to closing the Coca say electric transaction.

We're having constructive discussions to close the final regulatory approval, we need we continue to expect the transaction to be immediately accretive to our non-GAAP financial results and we look forward to providing you with a new financial model soon after we close the proposed transaction.

Next I'll expand on the performance trends carry highlighted in his remarks.

We've discussed our conviction in the attractiveness of our markets and the opportunity we have to generate strong returns by consistently investing for growth.

The investments we've made in recent years, resulting in momentum that's already visible today and will accelerate as new nodes ramp over the next several years.

Let's examine how applieds revenue is profiling in the first half of the calendar year, which is our fiscal Q2 plus fiscal Q3.

Compared to the same period last year, our semiconductor systems revenue is up 23%. This compares very favourably with our closest peers and foundry were significantly outperforming in the market, we're winning critical new applications and advanced patterning and we're working closely with customers to develop next generation transistors and.

Interconnects using innovative approaches like our integrated material solutions.

This is strengthening our leadership in foundry logic, and also giving us new application wins in memory, we're outperforming in the market as well.

In fact, we believe will be the number one company in DRAM conductor etch this year, winning greater than 50% of available market.

We look forward to demonstrating more growth as DRAM spending improves and demonstrate supplied unique ability to perform well and a variety of spending environments.

Based on discussions with our customers, we expect momentum to continue throughout the calendar year, specifically, we believe our revenue in both foundry logic and memory will be second half weighted leading to another year of growth and outperformance for applied.

This strength in our systems business is fuel for growth in our installed base business, which is also on track to be up in the second half and into the future as new systems go off warranty we have opportunities to win subscription like long term service agreements, which are a significant growth multiplier for our parts and service revenue.

Now I'll share our fiscal Q4 business outlook.

We expect company revenue to be approximately $4.6 billion, plus or minus $200 million the midpoint of the range would be up by around 23% year over year.

We expect non-GAAP EPS to be about one dollar and 17 cents plus or minus six cents.

Within this outlook, we expect semiconductor systems revenue to be approximately $3.0 billion to $5 billion, which would be up about 31% year over year apply global services revenue should be about $1.07 billion or up about 10% year over year and display revenue should be about.

$475 million.

Non-GAAP gross margin should be about 45.7% or up nearly two points year on year.

Non-GAAP opex should be around $820 million.

In summary apply delivered double digit revenue growth across all of our segments in Q3 with strong operating leverage we're pleased to see how the investments. We've made are translating to growth and relative out performance. Both in foundry logic and also in memory, where we've made significant investments in recent years.

The company is also position to weather cycles better than ever with our installed base now driving a third of our revenue and 60% of our parts and service business coming through subscriptions.

I'm incredibly proud of our teams for driving our innovation, increasing our shipments and customer support all while driving strong shareholder returns in a very challenging environment.

Now, Mike let's begin the DNA.

Thanks, Dan and to help us reach as many of you as we can I'm going to ask you to please ask just one question and not more than one brief follow up operator, let's please begin.

Thank you.

Good question, you will need to press Star then one on your telephone to withdraw your question. Please fast the powerful.

Our press question comes on the line of CJ Muse with Evercore. Your line is now open.

Yes. Good afternoon. Thank you for taking the question I guess first question on the gross margins.

Really great performance year on year, both for the actual in the guide.

And just curious.

Firstly, how should we think about any room for upside just based on lower expenses related to reduce costs associated with cobot logistics et cetera, and then as you think about the portfolio that youve kind of discuss that you see in the next year or two can we get back to got peak, 36.6%.

We saw on 28 team for Silicon.

Yes, Thanks CJ.

You know on gross margin the company's performed really well in the current environment.

You talk about the year over year performance. If you take a look at our guide we're going to be up almost 200 basis points into the fiscal Q4, so the company's performing really well.

I would like to underscore the hard work that our operations and supply chain and logistics team are doing to mitigate the impact to the current pandemic environment. We're in that region done an absolutely superb job and so the company is doing well on that front.

As we take a step back and think about.

The longer term trajectory around gross margins.

Theres clearly a lot of activity going on inside of the company. This is something we spent a lot of time focused on and.

We're hopeful that over time, we've got an opportunity to raise those gross margins even off of these levels as we delivered the new innovation to market that Gary talked about are in his prepared comments.

Ultimately I don't think will ever be satisfied no matter, where the gross margins are but clearly the company is performing well in the current environment that we're in.

And then when we take a step back and look at our semiconductor systems operating margin again, the company is performing well I think what you'll see into the coming quarter. While we don't guide operating margin by segment I think you'll see some strength on that front as well and so I do think that we've got an opportunity over time to get back to.

That prior benchmark for the segment.

So again, a lot of hard work and I think the companies doing well in a difficult environment.

Very helpful and as a quick follow up.

It sounds like within your prepared remarks that.

Your view on memory Capex is actually better than perhaps where we were three months ago and I think.

You know as we listen to micron today and others in the storage arena.

Concern that perhaps things might be getting softer. So can you provide some color on.

How exactly you're seeing memory capex trends into the second half of the year Len through 2021. Thank you.

Yes, sure CJ, let me paint a little bit of a bigger picture for you that puts the memory, what we're seeing in the memory marketing context, and so if we look at WFP. This year in our best Best estimate at this point given everything we see from the market and our customers, we're going to be up about 10% to 15% year over year.

That's off of a 2019 baseline that's about 51.5 billion.

We think it's a good number it's at third party validated number by BLS Psi and so we think were up 10% to 15% and as you take a look at our.

Prepared comments, we think that theres going to be strength in both memory and foundry logic, we think both of those segments for us from a revenue standpoint are both in the second half weighted to out the year.

And we think the proportion of spend within WFP is weighted towards foundry logic more than 55% of the spend is in foundry logic.

We think that strength continues into next year, both the overall market as well as our position against that opportunity, we see strength into 2021.

And we feel like the portion of spend in 2021 is going to be very similar to what we're seeing this year.

So as we look at the back half of calendar 2020.

We're not expecting a spike in memory spending and we're not expecting a precipitous fall. The company is performing well in this environment you see how well we've performed in the first half of the calendar year.

Versus the first half of calendar 19, and we're just going to keep competing delivering innovation for customers and driving our business. So we feel good about how we're doing.

Thanks Vijay.

Thank you. Our next question from the line of John Pitzer.

Credit Sir your line is now open.

Yes. Good afternoon, guys. Thanks for let me ask the question Dan maybe just a follow up on that it sounds like in your answer to see Jays question that foundry actually get stronger half on half in the second half of the year I'm just kind of curious given that the largest foundry guy spend more than half of this capex budget. This year can you help me understand better sort.

The business outside of that large guy and especially coming from China, how much more growth can you see in kind of the.

He did call second or third tier foundries, but let's just use that for for lack of a better term indoor from China as you look into your fiscal fourth quarter guidance.

Yes, Hi, John.

Let me try to help you with what we're seeing in the market. So as we look at our foundry logic business couple of things I would say.

We've been saying for several quarters now that we're going to see strength and foundry logic throughout the year.

Nothing's changed on that front, we see a diversification of us of spend underway in the market, we see multiple customers ramping multiple nodes with a strong pool for the technology and innovation that we're bringing to market we.

See our business significantly outperforming the overall foundry logic market.

And about a quarter ago three months ago about three months ago, We reported our fiscal Q2 revenues.

Which is the equivalent of calendar Q1 in 2020.

And as I look at the profile of foundry logic spend this year and our revenue against that opportunity. It looks like our fiscal Q2 is going to be the low point for calendar 2020 in terms of foundry logic business.

And then as I think about strength into the back half of the calendar year, which is our fiscal Q4 fiscal Q1.

Based on everything we see today things look good. So it's just a fundamental underlying diversification of spend multiple customers multiple nodes and very consistent with what we've been saying now for several quarters.

That's helpful guys and then maybe as my follow up for Gary.

Clearly one of the things that Cove. It has shown a spotlight on is kind of the strategic importance.

Of semiconductor manufacturing capacity, we've got the chip that moving its way through Washington, Prime Minister Ave in Japan has talked about building more fabs in Japan, and I think even though you have set up a commission im just kind of curious from your perspective, how do you see kind of this regionalization of.

Capacity potentially playing out over the next several years and what incremental opportunity that might afford applied materials.

Yeah. Thanks, Thanks, John for the question. So first I'd Echo what Dan said I was on a call with one of our major foundry logic customers two nights ago and not only strength in 2020, but also into 2021 and I think if you. If you take a step back and you look at what's driving this and it gets back to your question also.

Though about the strategic nature of semiconductors, and what we're seeing with cobot 19, as an acceleration of technology transforming every industry certainly my by a 10 year old twins or doing a learning from home you have a remote working from different locations.

E Commerce all of those things that we've been talking about or accelerated and we're all living that right. Now are you also see kind of a from a a multiyear secular trends that transition.

Many leading companies developing custom workload specific silicon that's going to the foundries. So again, you see that happening even some recent announcements and I think also when you look out really what is the foundation for a the trillion connected devices in the.

Sure, it's really all of the semiconductor chips and you need to keep driving the pack, we talk about power performance area costs roadmap.

To get to the performance per watt you need to have the right infrastructure for the data economy, So I think that.

Driving power in performance lower power a higher performance at the right cost is just fundamental to competitive competitive does going forward and weigh more important from a from a of.

Perspective, and you absolutely see it like you've talked about a with TSMC coming to United States and I said before that we were certainly encouraging that to happen I think the great thing for the United States you talked about.

Bay in Japan, and also what's going on and other geographic region.

I think that everyone recognizes the strategic importance of these technologies I think it will become even more oh.

Clear to everyone on power performance area cost, what's driving that future technology roadmap and that's again were applied isn't a super good position.

So absolutely I see that that playing out in the way that you've described that it's certainly good for applied as customers move into different geographic regions. What we've seen as really a boost in our service business and certainly strengthened the strategic relationships, we have with a a number of different customers.

Yeah.

Thanks, John.

Thank you Sir our next question comes on the line of test here, Harry with Goldman Sachs. Your line is now open.

Hi, good afternoon, and thank you very much predicting the question.

Gary I was hoping you could provide a little bit of an update on the Coke site acquisition.

You guys talked about a little bit in your prepared remarks, but what are some of the.

Less than the items, if you can remind us on the industrial logic of the deal and help us a little bit look accretion that would be helpful. Thank you.

Yes, hi tissue, let me talk about the deal and then I'll pass back to Gary to talk about the industrial logic that underpins that transaction.

So we've made a lot of good progress on the regulatory front, we've closed closed out five of the six regulatory approvals that that that we need in this transaction as you know so we feel good about that progress, we're having constructive discussions on to close the final regulatory approval that we have in the process we.

At the close soon optimistic about our progress. So we feel good about progress to date and then just as a reminder, we continue to expect transaction is going to be immediately accretive.

Non-GAAP financial results upon close so we feel we're making good progress.

Yes, it does.

We've talked about.

The power performance air at cost roadmap really being fundamental to how all of our customers compete and really people also talk about the limitations with TD scaling Moore's law slowing down classic Moore's law slowing down and I just deeply believe I'm on a calls with a lead.

In customer Ceos, R&D leaders on a regular basis.

And I, just really strongly believe that new architectures, you'll see emerge over the next two or three years are going to be a big driver of the peapack roadmap new structures, new materials, new ways to connect chips together all of those things I'm I'm, just incredibly optimistic that we're going to be able to drive a power.

Performance and cost going forward, but it's not going to be what's been happening in the past. So then if you look at Coca side Caucus I certainly in memory is very strong and when we look at what some of those future structures look like what some of those future architectures or materials look like Coca saw has some unique.

Acknowledges where they can go to much higher temperatures are they can process. Many many wafer simultaneously and it gives you a another technology that we can combine with all of the other technologies that we have to create shape modify analyze and connect structures and devices. So we.

Havent really communicated a lot on the strategic value, we will be doing that as soon as the transaction closes, but they're really some tremendous opportunities and combining these different capabilities together and certainly we've made tremendous progress relative to our memory market share over the last few years.

And Coca side will definitely be additive to that.

And Gary you talked about your level of outperformance relative to the market in fiscal year 20, I think you talked about your touch business at the been part of the guidance growing 30%.

You talked about your process control business being up 40% year as well.

Based on your customer conversations based on some of the Pete you are ones that you are aware of how when you think about 2021, and if you can compare and contrast.

The potential level of outperformance into next year relative to achieve this year that would be super helpful. Thank you.

Yeah Toshiya so.

Again, one of things that's very interesting about the current environment that we're working in a I certainly miss having dinners with R&D leaders and some of our key customers, but I'm actually probably a more frequent connections with as many of those different customers and I'm just really optimistic if you look at what is driving the road.

Now going forward as I talked about power performance area and cost.

We have deep visibility and the reason we have deep visibility into what's happening at a three nanometer and two nanometer is because we're co developing the next generation transistor structure is with customers in the wiring speed is also incredibly important for customers.

And driving the the next nodes from a memory perspective, all of those areas. We have very very very deep engagements and deep insight into what those architectures will look like and Ah, Yes, we've never been in a better position when we look at all of the endpoint.

Plus nodes I would say and certainly in foundry and logic. A word worked we will continue to grow our edge business, where in a great position with the Centsthree why we're delivering higher yield with that technology on the most critical steps for those customers. So were in a great position to continue to outperform their in inspection and.

Measurement, we have two new platforms that we've launched that we're really in the early innings relative to that to that particular adoption and then also we have the synergy with our inspection measurement not only in driving our PTC business, but accelerating our technology inside Applieds lab.

And also with customers with new materials, and new structures, but when you really look at those those next nodes and the materials. The integrated processes that were delivering with customers. We've never been a better position and I'm very very optimistic we have high visibility in terms of what those architecture as well.

Look like and also very high visibility in terms of our position.

Thanks to Shia.

Thank you. Our next question comes on the line of highly entirely J.P. Morgan. Your line is now open.

Good afternoon, great job on the quarterly execution.

As a follow up to the last question you know, it's good to see those strong traction in process control, especially in optical and E beam inspection I think thats about a 1.6 1.8 billion dollar market opportunity and it's actually a pretty sticky part of the market. So what is the.

Differentiators that are enabling the team to win here and then on the metrology side again, another about another billion dollar market opportunity for discrete platforms any plans for the apply team to try to intersect this market opportunity longer term as well.

Yeah. Thanks for the question. So if you look at our PTC business.

This year this fiscal year will be significantly over $1 billion. If you look at our systems and service.

Business and PTC and as I said in the prepared remarks, a greater than 40% growth rate and there really are two things I think that are really important with PTC.

One is the PTC growth and I'll talk about that here in just a minute, but also our ability to accelerate the peapack road map a with within applied on our technologies and also with customers. So if you look at the PTC growth there really two major drivers this year one isn't.

New optical inspection system, and we've already generated several hundred million dollars of revenue with that new opic optical inspection system.

And it's ramping got multiple leading customers, so that and that way and we're certainly still in the very early innings with the with the adoption of that new system and its really targeted towards a line monitoring where you have multiple inspection points in a fab and in some of the leading customers.

Driving the peapack roadmap, we have pretty extensive adoption already have that new optical inspection system and then the other technology that we've introduced this year is a new E beam technology that has the highest resolution elect electron optics.

In the market today, it's about 60% higher resolution from an E beam perspective, and also has very fast imaging. So that particular technology. When you think about driving the peapack roadmap with gate all around or one customer I had dinner with in March was taught.

You know about nano sheets and the ability to have a very very high correlation with this higher resolution imaging capability and developing those future transistor technologies and the same thing is true.

In the memory devices or a new interconnects like selective tungsten all of those areas. Having this unique capability is really important relative to driving the technology roadmap going forward and that particular technology, we have thousands of E beam products and columns.

In the field today.

But that higher resolution and you can I almost think about it you the versus previous other products with a a wavelength riddance reduction it isn't enabling foundation for our E beam leadership for the next decade, so that will proliferate across all of our different platforms. So really those.

The two things that are driving our business. This year, but also the synergy with our process businesses has also never been better inside our labs and also with customers. So those are the two areas, we're driving and I think really in the early innings of continuing to drive value in both of those different.

Areas.

Yeah. Thank you for the insights there and have the 650 million of backlog that the team wasn't able to shifting the first half of this year I think Dan based on your commentary. It looks like you were able to make much of that up in Q3, but how much more do you have to make up in would you try everything up exiting Q4 would there's still decent spillover.

Well into fiscal Q1.

Yes, hi, Harlan so a little color on the 650, we talked about 650 million of unmet demand in our fiscal Q2 that was across all device types spread out between foundry logic NAND DRAM and in the most recent quarter or fiscal Q3.

As you heard in one of the previous answer is our operations team supply chain team logistics team and our supply chain partners have just done an amazing job in a difficult environment, making much better progress than we originally thought three months ago and so we've got a significant chunk of that 650 that was side.

Aside in fiscal Q3, we've got more to go.

Our expectation is all of that will be in the rear view mirror exiting our fiscal Q4, and our fiscal Q1, which is calendar Q4.

It's going to be a first look through of true end market demand across our markets and what has me encouraged is as I look at that true look through an end market demand and seeing the strength. We are across our businesses. I'm. Just gives me confidence that we're continuing to see a strong environment by our customers and.

Strong demand and pull for the innovation, we're bringing to market to enable their technology Roadmaps and I guess the last point I'd make on this is a we make comments on our call three months ago about a strong backlog that we are carrying into Q3, not only did we satisfy a significant chunk of that end market demand in our fiscal Q3.

We're entering our fiscal Q4 with the company's backlog virtually unchanged and so it's a strong endorsement of the strong environment, we continue to find ourselves and.

Hey, Thanks Harlan.

Thank you. My next question comes on the line of fish, Thanks, Hi, with Cowen and company. Your line is now open.

You spoke about Oh, you know you strengthen beat on conductor etch and overall de them. What do you feel how much of defense is coming from both sides. The de them is more getting logic like in terms of crops as well I'm trying to figure it out as Kansas de them.

Success be translated into NAND, what is not a little different beast.

Yeah. This is Gary so certainly high speed memory is a big focus for a number of different customers. So the like you said on the high K metal gate technologies those are areas, where we have a significant leadership.

And that's helping to drive our DRAM business and also in etch, we've grown our etch business a significant amount in DRAM. If you look at the conductor etch, we gained almost 30 points of conductor etch share in DRAM since 2016 with this entry platform so really good.

Drivers there and as these new high speed memories are adopted and ramp up in the next technology node. It puts us in a really good position to continue to outperform or from a DRAM perspective, and then in NAND, you'll have a different drivers, but it really still is.

About scaling.

The number of layers going vertical and we have a number of very innovative films a different compounds that where that are being adopted in the next generation NAND devices.

So the combination of those very very high stick selectivity films.

With our edge products position us to to perform while also in NAND.

And the other thing out whether they are really.

The other thing I would say and I talked about this a little bit earlier, its coke OSI will be definitely additive to applied overall from a memory perspective, if you think back over the last several years, we've grown our memory business share of total spend for both NAND and DRAM from the mid teens to 20%.

Or more in those different segments. So we think we believe we're very well positioned.

In both NAND and DRAM going forward and certainly Coca site will add to that overall performance.

Yes that makes sense Guy and then a follow up.

Semiconductor business is getting lift cyclical these days, but display is still very deeply cyclical from kind of curious how important is displayed to the long term strategic rationale to compete.

Yes, so as we thanks a lot for the question as we think about the display business crash, we see display as a great opportunity to take a core technology into adjacent markets drive enhanced revenue and cash flow for the company and as we sit here today.

Today, we know we're at a cyclical bottom the market continues to buy a bounce along the bottom.

We do think theres opportunities going forward for this market because structurally larger off the levels that we're at now what we're seeing in the current environment.

As a strengthening post the initial stages of Cove and that gives us some confidence is as we look into.

2021, but and then as we take a look at the technology inflections on the horizon OLED coming to TV foldable flexible displays coming to the handset both of those technology inflections being more top it'll intensive than the current generation of technologies, we think theres some growth.

On the horizon in this in this market. So it's a great way to take core technology and monetize it just and an adjacent market to drive enhanced revenue and cash flow for the company.

Hey, Thanks, Krish and we still have a lot of people in the queue. So operator I'd like to ask that we please do one question at this time and no follow ups. Okay. So please give us our next question.

Our next question comes on the lineup Patrick Ho with Stifel. Your line is now open.

Quarter, Gary maybe as a follow up to some of the technology questions that have been asked already can you give a little bit of color.

How apply can continue to outperform you mentioned process control conductor etch you have new technologies like you mentioned gate all around nano wires and others can you I guess, maybe provide a little more color in terms of some of the opportunities. So maybe a little more on the current.

Etch side, but also in your core deposition businesses as well.

Okay. Thanks, a question Patrick while that's that's a very broad one [laughter], but let me say the you know I I deeply believe Anna and I I Love, a the technology I love interacting with R&D leaders for our customers and I and I would just say.

Okay and you see this dynamic in the marketplace driving power performance area cost faster than others.

Low power higher performance at a better cost is really the key focus for all of our customers and I've talked a lot about what drives the roadmap going forward.

It really is about new architectures, new structures interconnect structures.

Certainly that includes gate all around but there are other technologies working on that are really really really important for customers new interconnect technologies. So that you.

Reduce the resistance in the wiring. That's also a key driver for all of our customers a new ways to connect the chips together from a packaging standpoint, all of the new materials that we're bringing to market. So there are a number of those different areas that are super important relative to driving the peapack roadmap going.

Forward and I would say that one thing that I'm, just so encouraged with.

Our portfolio when you look at creating shaping modifying analyzing connecting devices and structures. There's no one that can do all of those different things and even if you look at Finfet today, I've talked about technology, where we integrate together multiple.

Products or multiple different chambers on a single platform under vacuum to manage interfaces, where we can improve leakage current far beyond what exists today. So you think about improving the leakage current or a 10% improvement and drive current that is incredibly incredibly important.

And that particular technology again, as an integrated material solution.

Works in Finfet, and I think there's a high probability you'll see that coming to market sometime in the next year for for some of our customers you have a that technology can also work and gate all around our national sheets again, there just a number of different areas, where we're driving innovation, we announced recently.

Selective tungsten, which is kind of like atomic layer threed printing to increase the dying diameter of the wire to reduce the resistance that is a really big technology development for our customers driving the peapack roadmap forward.

And the other thing I talked about combining these things together with the highest resolution electron beam imaging capability in the industry and proprietary algorithms, where you can and very high speed imaging. So you can image thousands of points on a wafer look at the key.

Technologies that are being developed look at the spatial distributions and dial in to your process windows for all of those new technologies Lightning fast with a combination of massive unique actionable insight and data analytics and machine learning that we have developed within ups.

Why those are really game changer technologies. So it's really a combination of many of those enabling creating a materials and films shaping modifying we have many unique technologies. The analyzing many unique technologies. The combination of those things together also means that we're strategically.

We connected to customers in a very unique way, we have unique insights into their future technology nodes their future architectures. The critical challenges that customers are facing and the pull Patrick that we have from our customers has never been stronger.

Thanks, Patrick.

Thank you. Our next question comes on the line as Timothy I'm, sorry, what EBIAT Orlando powerful.

Thanks, a lot Gary I guess I had a bigger picture question on the addition, as China market and it seems like more than half of the gross and overall WFP. This year's coming from indigenous China and I guess my question is can.

Can you update us on the $9.5 billion that you were sort of applying last call and really like bigger picture here. It sounds like there really wasn't any impact from the recent military and use stuff and and my question really is can you talk about the discussions you've had with commerce I mean, they extended regulation that it had zero impact so sort of.

You know what are the tone of the discussions tells you that this is it for a while or whether there could be further effort to additionally, I truly restrict access.

Yeah, attempting because I'll start off and then Dan can answer the a this market size question. So relative to the geopolitical question you know I'm not going to speculate on any future actions that can take place, but really what we've seen today is similar to what and consistent with what we've previously.

We discussed a we've assessed the rules and as we had discussed in.

Our last call, we continue to see no meaningful impact on our business and so I'll also let Dan answer the overall market question.

Yes, Thanks, Gary Hi, Tim.

So as we think about the market in China domestic China market, you know off of the baseline of about six and a half billion in 2019, we've been saying for several quarters now that we see two to 3 billion of incremental spend and a couple of quarters ago. I think are last quarter. We said, we're going to be at the high end of that range and so we're at about nine and a half billion.

Dollars of spend it's pretty consistent with how we view that market for several quarters now and as I think about the profile of spend in China. You know, we do see slow steady development of ACO systems investment in technology Roadmaps, you see modest capacity additions behind that you probably see a little more capacity this year, but.

Not a lot more it's it's a little more and we see spend across 200 300 millimeter geometries, you see from a device type standpoint investment in foundry logic DRAM NAND. So it's really a balanced profile of spend in slow steady development, if theyre ACO system, but no real change in the profile as we viewed them.

Market for several several quarters now.

Thanks, Tim.

Thank you. Our next question comes on the line until such healthy with Wells Fargo. Your line is not open.

Yes. Thanks for taking the question I was wondering if you can kind of talk little bit about the demand that you're seeing in memory. How do we think about that being driven for technology transitions versus wafer additions and how do we think about that into 2021, as we kind of see more normalized fad utilization rates this year.

Yes, Hi, Joe So that's the great thing about what we see today is we still see investments in technology transitions of our customers. We still don't see nor do we see in the back half of the year, a big spike from capacity standpoint, and one of the things that way.

We're really encouraged about given the performance of our business relative to the market opportunity.

We're growing stronger than the overall market. It just shows us that we're well positioned from an innovation standpoint to deliver key enabling technologies for our customers in that roadmap. So we really don't see a lot of capacity wafer starts going into the industry. We see continued investment.

From a technology roadmap standpoint.

Thanks, Joe and operator, we have time for two more questions. Please.

Our next question comes on the line of Quinn Bolton with Needham Linco. Your line is now open.

Hi, guys just wanted to follow up on that last question. If I heard your prepared comments I think you said that you didnt see a big shifting the mix between foundry logic and memory as we head into 2021 I. Just one one is from then to I guess I'm surprised by that comment because I think we've all been looking for probably a better capacity addition next.

Sure in memory and if the mix stays the same it feels like maybe we're not going to get it. So I was hoping you could expand on your thoughts on memory it, particularly from a capacity perspective, it was looking into calendar 21.

Yeah, Hi, Quinn.

So what we're seeing in the market is continued investment from a technology road map standpoint, we see strength.

In the market from a proportion of spend this year.

We see.

More of the spend going to foundry logic over 55% of the aggregate spend is going to be foundry logic related.

We see memory growing a little more than foundry logic this year and as we window into 2021 from a proportion of spend feels very similar to what we're seeing this year. Its continued strength on our foundry logic customers, we see it being more than 55% of the spend next year in 2021, and what I would say about the.

Industry is.

You know if we go back to 2017 2018 technology transition in the industry.

Investment in current investment in planar and Threed technologies, New architectures, let's say there was an inefficient level of spend as it relates to bid addition to the industry I think you're seeing a much more efficient spend profile overtime, we see capital intensity rising.

But you're seeing a much more efficient production out of Capex that that's going into the industry. Yeah thing I'd say is you know we've got a very balanced portfolio from a share standpoint across all device types were very balanced company and were fairly agnostic to where customers want to spend whether its foundry logic.

And he Ram I think we're set up to perform well and all of those environments given our broad portfolio. So we'll watch the market and we'll continue to update.

Every quarter on what we're saying.

Thanks Quinn.

Thank you I last question comes on the line of lives that are now with Bank of America like your line is now open.

Thank you for taking my question.

I know, it's hard to reconcile under the real time basis, but I'm curious how do we reconcile that youre encouraging words on a memory demand with somewhat mixed picture. Then then views from some of your memory customers, who are mentioning some deceleration in datacenter demand or some declines and you know China smartphones as an exam.

So companies either.

Understand and appreciate that.

Youre demand and their demand doesn't have to.

Correlate on a real time basis, but how are you ensuring that Jordan, how many customers are shipping to their and demand.

Yes, again, what we are comments reflect a content continued pursuit of technology Roadmaps, you know and all we're doing is reflecting the strength of our business and we talked about the first half of the calendar year calendar year 2020 over the first half of calendar year 19.

Our DRAM business is up 20% or NAND business is up 14%.

Over the last couple of quarters sequentially, two quarters ago memory was up for US 24%, most recent quarter up almost 17%.

We are seeing sequential performance in both NAND.

And DRAM and so it's more of a comment of what we're seeing and the.

You know demand for our business as our customers roll out their technology, Roadmaps, and an environment, where technology roadmaps to find the cost structure of our customers. It's cost per bit we see continued investment on roadmaps and with with a modest additions from a capacity standpoint to drive that demand growth at the markets.

Requiring.

Great. Thanks for that for your question and Dan any closing thoughts for today.

Yes, sure Mike So what stands out for me, especially in this quarter is how investments in our strategy the trans leading to growth and outperformance in the market I like the balance share. We now have as a company and that's across all device types I like that we're generating a third of our total busy.

Thats from our install base.

And that's going to give us more predictable revenue and cash flow over time, I really want to thank our employees and partners for aggressively ramping up to meet our customers' needs in a really difficult environment and doing it safely. We look forward to seeing many of you at the city conference and a whole bunch of virtual events sprinkled throughout the quarter.

Until then keep safe, Mike with close call.

Okay, great. Thanks, Dan and we'd like to thank everybody for joining us today, a replay of the call is going to be available on our website by five o'clock Pacific time, and we'd like to thank you for your continued interest in applied materials.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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[noise] Oh.

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Welcome to the odd materials earnings conference call.

During the presentation, all participants will be in listen only mode.

Afterwards, you will be a lot of took a dissipate and the question and answer session.

I would now like the part of the capital what Michael Sullivan Vice President. Please go ahead.

Good afternoon, and thank you for joining applies third quarter fiscal 2020 earnings call. Joining me today, our Gary Dickerson, our president and CEO and downturn, our Chief Financial Officer before we begin I'd like to remind you of the 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. That's contained it applies most recent 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 our quarterly earnings presentation materials, which are all available on the IR page of our web site at applied materials Dot com and now I'd like to.

During the call over to Gary Dickerson. Thanks, Mike This time last quarter I started the call by outlining the stops we were taking inside applied materials to navigate the cobot 19 pandemic our actions have been guided by two key principles first maintaining the trust of our employees customers suppliers and.

Partners and socket focusing on strategic initiatives that will allow us to emerge stronger over the longer term.

Today I'm pleased to report that both our manufacturing operations and R&D labs are running smoothly at pre cobot levels of productivity.

Industries, New Pat P. playbook to advance power performance area cost and time to market.

I also announced Applieds, new 10 year goals and roadmap for environmental sustainability, which is part of our commitment to grow our business responsibly and make possible a better future.

Having covered our long term perspective in detail at that event today I'm going to focus my comments on current market dynamics and provide additional insights into our product portfolio and business momentum.

Starting with the market environment, we remain mindful of global economic concerns and that consumer spending as a potential headwind for many sectors, including the electronics industry.

With that said demand for semiconductors has strengthened over recent months.

The world adapt to the challenges created by the pandemic several major technology inflections are being accelerated.

Work from home home schooling and online retail are driving investments and cloud data centers and communications infrastructure.

Many organizations are building stronger business continuity plan and increasing the use of automation and I O T technologies and because the AI has the potential to transform entire industries. It's adoption remains nondiscretionary for many companies.

In wafer fab equipment, we expect overall foundry logic spending to grow this year, even with soft demand in specialty nodes that serve automotive and industrial markets.

At the leading edge, we see a strong commitment from customers to build out their fabs and aggressively drive their R&D roadmap.

This gives us confidence these levels of spending are sustainable and 2021 and beyond.

As I've described before what the slowing of traditional to de Moore's law scaling there will be a transition from general purpose computing to customized solutions tailored for specific applications or workloads.

Recent announcements by leading systems companies illustrate this inflection very well custom design silicon and diversification of architectures play to the strength of the foundries and underpin their ongoing investment.

Next I'll explain what's driving our outperformance today and how by focusing on our customers highest value problems, we are positioned to grow faster than our markets over the next several years.

The process complexity required to produce leading edge transistors, and interconnects continues to grow and new innovations and materials and structures are fundamental to driving higher performance and lower power consumption.

That's plays directly to the strength of Applieds traditional leadership areas, namely, creating and modifying materials and structures.

For example, our deposition businesses CVD PVD and abbey generated more than $5.2 billion of revenue in calendar 2019, and according to be a lot size data gained eight points of market share.

At the midpoint of our guidance our edge revenues will be up nearly 30%. This fiscal year. Since we introduced our sensory system in 2015, we have shipped more than 5000 chambers and we recently introduced Sim three why which is the most advanced etch system, we've ever built this.

Mhm provides extremely high material selectivity as well as precise DAP and profile control needed to form the densely packed high aspect ratio structures and next generation Threed NAND DRAM and logic devices.

We're also the fastest growing company in the metrology and inspection market.

The midpoint of our guidance revenue for our process diagnostics and control business will be up more than 40% in fiscal 2020.

We're winning share in optical wafer inspection any beam with new products that are in the early stages of adoption and have significant traction with leading customers.

Applied has by far the broadest product portfolio in the industry spanning materials creation modification shaping analysis and packaging.

Our customers most complex challenges.

DRAM our share is even higher than in foundry logic over the past five years, we've gained 25 points of DRAM patterning share and still have significant potential to grow.

We've recently won multiple process tool of record possessions for future node transitions, including multi patterning hard mask and hard mask open applications.

Another area, where we're delivering more value to customers and have strong growth momentum is our aftermarket businesses.

If we look at applied global services, plus 300 millimeter upgrades revenues are up 21% compared to the same period in 2019.

Then a G.S., 60% of our service and spare parts business comes from predictable recurring revenue streams in the form of long term service agreements. This year the renewal rate for these long term agreements is in excess of 90%, which is clear validation of the value customers see.

And our advanced service products.

And display our revenue outlook for fiscal 2020 is unchanged at $1.6 billion and we expect 2021 to be similar.

However, we're seeing some encouraging signs in the high end of the market specifically robust demand for 8-K screens and the adoption of OLED Mtvs.

We remain optimistic about the long term opportunities for applied in the display market as we focus on addressing future technology inflections and expanding our available market. Finally, I'll highlight how we're working differently inside the company as well as with our customers and suppliers.

Covered 19 restrictions has stimulated many changes and the way companies in the industry. Our operating for example, since March we've provided thousands of digital support sessions using a are in video held more than 900 training sessions with field support engineers using VR and lie.

Distance learning and fully restored R&D lab productivity, while bringing only a fraction of our engineering staff on site.

I strongly believe that innovate anywhere provide substantial long term benefits by eliminating waste saving time and money and reducing the industry's carbon footprint over the past several years applied isn't making significant investments and state of the our digital infrastructure sensors them.

Metrology data science machine learning and simulation. The combination of these technologies enables us to accelerate product development cycles speed up transfer of new technologies from lab to fab and optimize cost output and yield for our customers in high volume production.

Before I hand, the call over to Dan I will quickly summarize first thanks to the extraordinary hard work of our employees and suppliers. We are operating the company at pre cobot levels of productivity, while maintaining stringent protocols to keep our workplaces safe and healthy second.

While we're mindful of potential macro economic headwinds semiconductor equipment demand is strengthening and the longer term industry growth drivers remain firmly in place based on what we hear from our customers. We believe current spending levels well be sustained or even higher in 2021.

Third our strategy to accelerate the payback T. playbook is yielding results for our customers and applied today, we're outperforming the market overall, and especially in key growth areas, including etch and inspection.

Looking ahead I am very excited about the innovative new products and integrated solutions, we will bring to market. This year and beyond now I will turn the call over to Dan.

Thanks, Gary.

Today I'll summarize our Q3 results give you more insights into the performance trend, Gary outlined and share business outlook for Q4.

Im pleased that despite challenges related to covert 19, our teams delivered double digit year over year revenue growth across semiconductor systems AG ass and display.

Our installed base business, which includes AG S., plus 300 millimeter upgrades grew by 11% sequentially and 21% year over year and now represents about a third of our company's total revenue.

For the company as a whole we grew revenue by 23% year over year and generated non-GAAP earnings of one dollar and six cents.

43% year on year.

We anticipate continued momentum in our fiscal Q4 and Q1.

During the third quarter, we shipped a significant proportion of the backlog that we couldn't satisfying Q2 due to co then related supply chain disruptions are demand has remained strong and our Q3 ending backlog was nearly unchanged from the prior quarter.

We also delivered sequential operating margin gains in both semiconductor systems and AG Ass non-GAAP Opex was in line with our targets and we allocated 69% to research and development.

2021.

These transactions extended our weighted average maturities by about five years and reduce the average coupon of our notes outstanding.

During the quarter, we returned $402 million to shareholders in dividends and buybacks.

We remain strongly committed to our shareholder distribution program and to closing the Coca say electric transaction.

We are having constructive discussions to close the final regulatory approval, we need we continue to expect the transaction to be immediately accretive to our non-GAAP financial results and we look forward to providing you with the new financial model soon after we close the proposed transaction.

Next I'll expand on the performance trends carry highlighted in his remarks.

We've discussed our conviction in the attractiveness of our markets and the opportunity we have to generate strong returns by consistently investing for growth.

The investments we've made in recent years have resulting in momentum that's already visible today and will accelerate as new nodes ramp over the next several years.

Let's examine how applieds revenue is profiling in the first half of the calendar year, which is our fiscal Q2 plus fiscal Q3.

Interconnects using innovative approaches like our integrated material solutions.

This is strengthening our leadership in foundry logic, and also giving us new application wins in memory, where we're outperforming in the market as well.

In fact, we believe will be the number one company in DRAM conductor etch this year, winning greater than 50% of available market.

We look forward to demonstrating more growth as DRAM spending improves and demonstrate supplied unique ability to perform well in a variety of spending environments.

Based on discussions with their customers, we expect momentum to continue throughout the calendar year, specifically, we believe our revenue in both foundry logic and memory will be second half weighted leading to another year of growth and outperformance for applied.

Strengthen our systems business is fuel for growth in our installed base business, which is also on track to be up in the second half and into the future as new systems go off warranty we have opportunities to win subscription like long term service agreements, which are a significant growth multiplier for our parts and service revenue.

Now I'll share our fiscal Q4 business outlook.

We expect company revenue to be approximately $4.6 billion, plus or minus $200 million the midpoint of the range would be up by around 23% year over year.

We expect non-GAAP EPS to be about one dollar and 17 cents plus or minus six cents.

$475 million.

Non-GAAP gross margin should be about 45.7% or up nearly two points year on year.

Non-GAAP opex should be around $820 million.

In summary apply delivered double digit revenue growth across all of our segments. In Q3 was strong operating leverage we're pleased to see how the investments. We've made are translating to growth and relative outperformance. Both in foundry logic and also in memory, where we've made significant investments in recent years.

The company is also position to weather cycles better than ever with our install base now driving a third of our revenue and 60% of our parts and service business coming through subscriptions.

I'm incredibly proud of our teams for driving our innovation, increasing our shipments and customer support all while driving strong shareholder returns in a very challenging environment.

Now, Mike let's begin the DNA.

Thanks, Dan and to help us reach as many of you as we can I'm going to ask you to please ask just one question and not more than one brief follow up operator, let's please begin.

Thank you ask a question you need to press Star then one on your telephone.

Draw your question please press the powerful.

Our first question comes from the line of CJ Muse with Evercore. Your line is now open.

Yes. Good afternoon. Thank you for taking the question I guess first question on the gross margins.

A really great performance year on year, both for the actual and the guide.

And just curious.

Firstly, how should we think about any room for upside just based on lower expenses.

Related to reduce costs associated with global logistics et cetera, and then as you think about the portfolio that you kind of discuss that you see in the next year or two can we get back to got peak 36.6 for so we saw in 2018 for silicon.

Yes, Thanks CJ.

You know on gross margin the company's performed really well in the current environment.

Talk about the year over year performance. If you take a look at our guide we're going to be up almost 200 basis points into the fiscal Q4, so the company's performing really well.

I would like to underscore the hard work that our operations and supply chain and logistics team are doing to mitigate the impact to the current pandemic environment. We're in they've just done an absolutely superb job and so the company is doing well on that front as we take a step back and think about.

The longer term trajectory around gross margins.

Theres clearly a lot of activity going on inside of the company. This is something we spent a lot of time focused on and.

You know, we're hopeful that overtime, we've got an opportunity to raise those gross margins even off of these levels as we deliver the new innovation to market that Gary talked about are in his prepared comments ultimately I don't think will ever be satisfied no matter, where the gross margins are but clearly the company is performing well in the current environment that we're in and then when.

We take a step back and look at our semiconductor systems operating margin again, the company is performing well I think what you'll see into the coming quarter. While we don't guide operating margin by segment I think you'll see some strength on that front as well and so I do think that we've got an opportunity over time to get back to that.

Prior benchmark for the segment.

So again, a lot of hard work and I think the companies doing well in a difficult environment.

Very helpful and as a quick follow up.

It sounds like within your prepared remarks.

Your view on memory Capex is actually better than perhaps where we were three months ago and I think.

As we listened to micron today and others in the storage arena.

Concern that perhaps things might be getting softer. So can you provide some color on.

How exactly you're seeing memory capex trends into the second half of the year Len through joint 21. Thank you.

Yeah sure CJ, let me paying a little bit of a bigger picture for you that puts the memory, what we're seeing in the memory marketing context, and so if we look at WFP. This year in our best Best estimate at this point given everything we see.

From the market and our customers, we're going to be up about 10% to 15% year over year. That's off of a 2019 baseline that's about 51.5 billion.

We think it's a good number it's a third party validated number by deal ASI and so we think were up 10% to 15% and as you take a look at our.

Prepared comments, we think that theres going to be strength in both memory and foundry logic, we think both of those segments for us from a revenue standpoint are both finished the second half weighted to out the year.

And we think the proportion of spend within WFP is weighted towards foundry logic more than 55% of the spend is in foundry logic.

We think that strength continues into next year, both the overall market as well as our position against that opportunity, we see strength into 2021.

And we feel like the portion of spend in 2021 is going to be very similar to what we're seeing this year.

So as we look at the back half of calendar 2020, we're not expecting a spike in memory spending and we're not expecting a precipitous fall. The company is performing well in this environment you see how well we've performed in the first half of the calendar year.

Versus the first half of calendar 19, and we're just going to keep competing delivering innovation for customers and driving our business. So we feel good about how we're doing.

Thank you Jay.

Thank you. Our next question comes from the line of John Pitzer with Credit Suisse. Your line is now open.

Yes. Good afternoon, guys. Thanks for let me ask the question Dan maybe just a follow up on that it sounds like in your answer to see Jays question at the boundary actually get stronger half on half in the second half of the year I'm just kind of curious given that the largest foundry guy spend more than half of this capex budget. This year can you help me understand better sort of.

The business outside of that large guy and especially coming from China, how much more growth can you see in kind of the.

He did call second or third tier foundries, but let's just use that for for lack of a better term and or from China. As you look into your fiscal fourth quarter guidance.

Yes, Hi, John.

We try to help you with what we're seeing in the market. So as we look at our foundry logic business couple of things I would say.

We've been saying for several quarters now that we are going to see strength and foundry logic throughout the year.

See our business significantly outperforming the overall foundry logic market.

And about a quarter ago three months ago about three months ago, We reported our fiscal Q2 revenues.

Which is the equivalent of calendar Q1 in 2020.

And then as I think about strength into the back half of the calendar year, which is our fiscal Q4 fiscal Q1.

That's helpful guys and then maybe as my follow up for Gary.

Nearly one of the thing that Cove. It has shown a spotlight on is kind of the strategic importance.

Of semiconductor manufacturing capacity, we've got the chip that moving its way through Washington, Prime Minister Rob in Japan has talked about building more fabs in Japan, and I think even though you have set up a commission im just kind of curious from your perspective, how do you see kind of this regionalization of cups.

Pasadena potentially playing out over the next several years and what incremental opportunity that might afford applied materials.

About the strategic.

Nature of semiconductors, and what we're saying with cobot 19, as an acceleration of technology transforming every industry certainly my by a 10 year old twins or doing a learning from home you have a remote working from different locations ecommerce all of those things that we've been talk.

You know about or accelerated and we're all living that right. Now are you also see kind of a from a a multiyear secular trends that transition.

Many leading companies developing custom workload specific silica and that's going to the foundries. So again, you see that happening even some recent announcement and I think also when you look at really what is the foundation for.

The trillion connected devices in the future, it's really all of the semiconductor chips and you need to keep driving the pack, we talk about power performance area cost roadmap.

To get to the performance per watt you need to have the right infrastructure for the data economy, So I think that.

Driving power in performance lower power a higher performance at the right cost is just fundamental to competitive competitive does going forward and weigh more important from a from a economic perspective, and you absolutely see it like you've talked about a with TSMC.

Coming to United States, and I said before that we were certainly encouraging a that to happen I think at the great thing for the United States, you talked about a bay and Japan and also what's going on and other geographic region.

I think that everyone recognizes the strategic importance of these technologies I think it will become even more oh.

Clear to everyone on power performance area cost, what's driving that future technology roadmap and that's again were applied isn't a super good position.

So absolutely I see that that playing out in the way that you've described that it's certainly good for applies as customers move into different geographic regions. What we've seen as really a boost in our service business and certainly strengthened the strategic relationships, we have with a a number of different customers.

Yeah.

Hey, Thanks, John.

Thank you Sir our next question comes on the line of Touchy, Harry with Goldman Sachs. Your line is now open.

Hi, good afternoon. Thank you very much predicting the question.

Gary I was hoping you could provide a little bit of an update on the Coke site acquisition.

You guys talked about a little bit in your prepared remarks, but what are some of the oh.

Oh left standing items, if you can remind us on the industrial logic of that deal and help us a little bit look accretion that would be helpful. Thank you.

Yes, Hi, Toshio, let me talk about the deal and then I'll pass back to Gary to talk about the industrial logic that underpins that transaction.

So we've made a lot of good progress on the regulatory front, we closed closed out five of the sex regulatory approvals that that that we need in this transaction as you know so we feel good about that progress, we're having constructive discussions on to close the final regulatory approval that we have in the process we hope.

The close soon I'm optimistic about our progress. So we feel good about progress to date and then just as a reminder, we continue to expect transaction is gonna be immediately accretive.

Non-GAAP financial results upon close so we feel we're making good progress.

Yes. It does she we've talked about.

Power performance, Eric cost roadmap really being fundamental to how all of our customers compete and really people also talk about the limitations with TD scaling Moore's law slowing down classic Moore's law slowing down and I I just deeply believe I'm on a calls with a leader.

In customer Ceos, R&D leaders on a regular basis.

And I, just really strongly believe that new architectures, you'll see emerge over the next two or three years are going to be a big driver of the peapack roadmap new structures, new materials, new ways that cannot chips together all of those things I'm I'm, just incredibly optimistic that we're going to be able to drive a power.

Performance and cost going forward, but it's not going to be what's been happening in the past. So then if you look at Coca side Caucus I certainly in memory is very strong and when we look at what some of those future structure is look like what some of those future architectures or materials look like caucus I have some unit unique.

Acknowledges where they can go to much higher temperatures are they can process. Many many wafer simultaneously and it gives you a another technology that we could combine with all of the other technologies that we have to create shape modify analyze and connect structures and devices. So we have.

Haven't really communicated a lot on the strategic value, we will be doing that as soon as the transaction closes, but they're really some tremendous opportunities in combining these different capabilities together and certainly we've made tremendous progress relative to our memory market share over the last few years.

Coca side will definitely be additive to that.

And Gary you talked about.

Your level of outperformance relative to the market.

Fiscal year 20, I think you talked about your touch business at the been part of the guidance growing 30%.

You talked about your process control business being up 40% year as well.

Based on your customer conversations based on some of the Pete you are ones that you are aware of how when you think about 2021, and if you can compare or contrast.

The potential level well performing symptom next year relative to want to achieve this year that would be super helpful. Thank you.

Yeah Toshiya so.

Again, one of the thanks, that's very interesting about the current environment that we're working in a I certainly miss having dinners with R&D leaders and some of our key customers, but I'm actually probably a more frequent connections with as many of those different customers and I'm just really optimistic if you look at what is driving the road.

Outgoing forward as I talked about power performance area and caused.

We have deep visibility and the reason we have deep visibility into what's happening at a three nanometer and two nanometer is because we're co developing the next generation transistor structure is with customers and the wiring speed is also incredibly important for customers.

And driving the the next nodes from a memory perspective, all of those areas. We have very very very deep engagement and deep insight into what those architectures will look like and.

We've never been in a better position when we look at all of the end plus nodes I would say and certainly in foundry and logic. A word worked we will continue to grow our edge business.

We're in a great position with the Centsthree why we're delivering higher yield with that technology on the most critical steps for those customers. So were in a great position to continue to outperform their in inspection and measurement. We have two new platforms that we've launched that we're really in the early innings relative to that.

To that particular adoption and then also we have the synergy with our inspection measurement not only in driving our PTC business, but accelerating our technology inside Applieds lab, and also with customers with new materials and new structures, but when you really look at those those next nodes and.

The materials the integrated processes that were delivering with customers, we've never been a better position and I'm very very optimistic we have high visibility in terms of what those architecture is where look like and also very high visibility in terms of our position.

Thanks to Shia.

Thank you. Our next question comes from the line of Harlan sur with JP Morgan. Your line is now open.

Good afternoon, great job on the quarterly execution.

As a follow up to the last question you know it's good to see is a strong traction in process control, especially in optical and E beam inspection I think thats about a 1.6 to 1.8 billion dollar market opportunity and it's actually a pretty sticky part of the market. So what are the.

Yeah. Thanks for the question. So if you look at our PTC business. This year. This fiscal year will be significantly over a billion dollars. If you look at our systems and service.

Business in PTC and as I said in the prepared remarks, a greater than 40% growth rate and there really are two things I think that are really important with PTC. One is the PTC growth and I'll talk about that here and just a a minute, but also our ability to accelerate the peapack roadmap.

Yep.

With within applied on our technologies and also with customers. So if you look at the PTC growth there really two major drivers this year at one as a new optical inspection system and we've already generated several hundred million dollars of revenue with that new opic optical inspection system.

And it's ramping got multiple leading customers so that and it when we're certainly still in the very early innings or with the with the adoption of that new system and its really targeted towards a line monitoring where you have multiple inspection points in a fab and some of the leading customer.

There's driving the peapack roadmap, we have pretty extensive adoption already that new optical inspection system and then the other technology that we've introduced this year is a new E beam technology that has the highest resolution elect electron optics are in the market today.

It's about 60% higher resolution.

From an E beam perspective, and also has very fast imaging. So that particular technology. When you think about driving the peapack roadmap with gate all around or one customer I had dinner with in March was talking about nanoss sheets and the ability to have a very very high correlation with.

This higher resolution imaging capability and developing those future transistor technologies and the same thing is true.

The memory devices or a new interconnects like selective tungsten all of those areas. Having this unique capability is really important relative to driving the technology roadmap going forward and that particular technology, we have thousands of E beam products and columns in the.

Field today.

But that higher resolution you can I almost think about it you V versus previous other products with a a wavelengths riddance reduction it isn't enabling foundation for our E beam leadership for the next decade, so that will proliferate across all of our different platforms. So really.

Those are the two things that are driving our business. This year, but also the synergy with our process businesses has also never been better inside our labs and also with customers. So those are the two areas, we're driving and I think really in the early innings of continuing to drive value in both of those different.

Areas.

Yes. Thank you for the insights there and have the 650 million of backlog that the team wasn't able to shipping the first half of this year I think Dan based on your commentary it looks like Youre able to make much of that up in Q3, but how much more do you have to make up then would you try everything up exiting Q4 would there's still decent spillover.

Well into fiscal Q1.

Heard in one of the previous answer is our operations team supply chain team logistics team and our supply chain partners have just done an amazing job in a difficult environment, making much better progress than we originally thought three months ago. So we've got a significant chunk of that 650 that was satisfied.

Side in fiscal Q3, we've got more to go.

Our expectation is all of that will be in the rear view mirror exiting our fiscal Q4, and our fiscal Q1, which is calendar Q4.

Strong demand and pull for the innovation, we're bringing to market to enable their technology Roadmaps I guess the last point I'd make on this is a we make comments on our call three months ago about a strong backlog that we're carrying into Q3, not only did we satisfy a significant chunk of that end market demand in our fiscal Q3.

We're entering our fiscal Q4 with the company's backlog virtually unchanged and so it's a strong endorsement of the strong environment, we continue to find ourselves and.

Hey, Thanks Harlan.

Thank you. Our next question comes on the line of question, Thanks, Hi, with Cowen and company. Your line is now open.

You spoke about Oh, you know your strength and beat on conductor etch and overall de them. What did you go how much of the sentence coming from the five the DRAM is more getting logic like in terms of drops it well I'm trying to figure it out as Kansas deed.

Oh subsys be translated into Matt what is not a little different.

Yeah. This is Gary so certainly high speed memory is a big focus for a number of different customers. So the like you said on the high K metal Gate technology is those are areas, where we have a significant leadership.

And that's helping to drive our DRAM business and also in etch, we've grown our edge business a significant amount a in DRAM. If you look at the conductor etch, we gained almost 30 points of conductor etch share in DRAM since 2016 with this entry platform so really good.

Drivers there and as these new high speed memories are adopted and ramp up in the next technology node. It puts us in a really good position to continue to outperform or from a DRAM perspective, and that you'll have a different drivers, but it really still is.

About scaling.

The number of layers going vertical and we have a number of very innovative films a different compounds that where that are being adopted in the next generation NAND devices or so the combination of those very very high selectivity films.

With our edge products, a position us to to perform while also in NAND.

And the other thing I'd, rather they are really the.

The only thing I would say and I talked about this a little bit earlier, its coke OSI will be definitely additive to applied overall from a memory perspective, if you think back over the last several years, we've grown our memory business share of total spend for both NAND and DRAM from the mid teens to a 20%.

Or more in those different segments. So we think we believe we're very well positioned a in both NAND and DRAM going forward and certainly Coca site will add to that overall performance.

Yeah that makes sense Guy and then as a follow up you know your semiconductor business was getting lift cyclical. These days, but just slightly it's been very deeply cyclical from kind of curious how important is displayed to the long term strategic rationale to compete.

Yes, so as we thanks a lot for the question as we think about the display business Krish, we see display as a great opportunity to take a core technology into adjacent markets drive enhanced revenue and cash flow for the company and as we sit here today.

We know we're at a cyclical bottom or the market continues to buy a bounce along the bottom we do think theres opportunities going forward for this market because structurally larger off the levels that we're at now what we're seeing in the current environment.

As a strengthening post the initial stages of coal that gives us some confidence is as we look into.

2021, but and then you know as we take a look at the technology inflections on the horizon OLED coming to TV foldable flexible displays coming to the handset both of those technology inflections being more top it'll intensive than the current generation of technologies, we think theres some growth.

On the horizon in this in this market. So it's a great way to take core technology and monetize it just and an adjacent market to drive enhanced revenue and cash flow for the company.

Our next question comes from the lineup Patrick Ho with Stifel. Your line is now open.

Quarter, Gary maybe as a follow up to some of the technology questions that have been asked already can you give a little bit of color.

Etch side, but also in your core deposition businesses as well.

Okay. Thanks, a question Patrick well, that's a that's a very broad one [laughter], but let me say the you know I I deeply believe Anna and I I Love, a the technology I love interacting with R&D leaders for our customers and I and I would just say.

Okay and you see this dynamic in the marketplace driving power performance area cost faster than others.

Low power higher performance at a better cost is really the key focus for all of our customers and I've talked a lot about what drives the roadmap going forward.

It really is about new architectures, new structures interconnect structures.

Certainly that includes gate all around but there are other technologies working on that are really really really important for customers know interconnect technologies. So that you reduce the resistance in the wiring. That's also a key driver for all of our customers a new ways to connect the chips together.

<unk> packaging standpoint, all of the new materials that we're bringing to market. So there are a number of those different areas that are super important relative to driving the peapack roadmap going forward and I would say that one thing that I'm just so encouraged with.

<unk> products are multiple different chambers on a single platform under vacuum to manage interfaces well, we can improve leakage current far beyond what exists today. So you think about improving the leakage current or a 10% improvement and drive current that is incredibly incredibly.

Britain and that particular technology again, as an integrated material solution. It works in Finfet and I think there's a high probability you'll see that coming to market sometime in the next year for for some of our customers you have a that technology can also work and get all around our national sheets.

Again, there just a number of different areas, where we're driving innovation or we announced recently selective tungsten, which is kind of like atomic layer threed printing to increase the die in diameter of the wire to reduce the resistance. Yeah that is a really big technology development for our customers driving the peapack roadmap.

Forward.

And the other thing I talked about combining these things together with the highest resolution electron beam imaging capability in the industry and proprietary algorithms, where you can it and very high speed imaging. So you can image thousands of points on a wafer look at the key.

Technologies that are being developed look at the spatial distributions and dial in your process windows for all of those new technologies lightening fast with a combination of massive unique actionable insight and data analytics and machine learning that we have developed within apply.

Connected to customers in a very unique way, we have unique insights into their future technology nodes their future architectures. The critical challenges that customers are phased thing and the pull Patrick that we have from our customers has never been stronger.

Thanks, Patrick.

Thank you. Our next question comes on the line of Timothy I'm, sorry, with FBR. Your line is powerful.

Thanks, a lot Gary I guess I had a bigger picture question on your decision as China market and it seems like more than half of the gross and overall WFP. This year's coming from indigenous China and I guess my question is can.

You talk about the discussions you've had with commerce I mean, they extended regulation that it had zero impact so sort of you know what are the tone of the discussions tells you that this is it for a while or whether there could be a further after two additionally, I truly restrict access.

Yeah, it's something that question I'll start off and then Dan can answer the the market size question. So relative to the geopolitical question, Yeah, I'm not going to speculate on any future actions that can take place, but really what we've seen today, it's similar to what and consistent with what weve previous.

As we discussed a we've assessed the rules and as we had discussed in our.

Our last call, we continue to see no meaningful impact on our business and so I'll also but then answer the overall market question.

Yeah, Thanks, Gary Hi, Tim So as we think about the market in China domestic China market, you know off of a baseline of about six and a half billion in 2019, we've been saying for several quarters now that we see two to 3 billion of incremental spend and a couple of quarters ago. I think are last quarter. We said, we're going to be at the high end of that range.

And so we're at about 90, and a half billion dollars of spend it's pretty consistent with how we view that market for several quarters now and as I think about the profile of spend in China. You know, we do see slow steady development of ACO systems investment in technology Roadmaps, you see modest capacity additions behind that you probably see a little more.

Capacity this year, but it's not a lot more it's it's a little more and we see spend across 200 300 millimeter geometries, you see from a device type standpoint investment in foundry logic DRAM NAND. So it's really a balanced profile of spend in slow steady development, if theyre ACA system, but no real change.

In the profile as we viewed the market for several several quarters now.

Thanks, Tim.

Thank you. Our next question comes on the line of Joel Quadracci with Wells Fargo. Your line is not open.

Yes. Thanks for taking the question I was wondering if you can kind of talk little bit about demand you're seeing in memory. How do we think about that being driven for technology transitions versus wafer additions and how do we think about that into 2021, as we kind of see more normalized Ah fab utilization rates this year.

Yeah, Hi, Joe So that's the great thing about what we see today is we still see investments in technology transitions of our customers.

We still don't see nor do we see in the back half of the year, a big Spike from capacity standpoint, and one of the things that we're really encouraged about given the performance of our business relative to the market opportunity.

We're growing stronger than the overall market. It just shows us that we're well positioned from an innovation standpoint to deliver key enabling technologies.

For our customers in the roadmap. So we really don't see a lot of capacity wafer starts going into the industry. We see continued investment.

From a technology road map standpoint.

Thanks, Joe and operator, we have time for two more questions. Please.

Our next question comes on the line of Quinn Bolton with Needham Linco. Your line is now open.

Yeah, Hi, Quinn so what we're seeing in the market is continued investment from a technology Roadmaps standpoint, we see strength.

In the market from a proportion of spend this year, we see more of the spend going to foundry logic over 55% of the aggregate spend is going to be foundry logic related.

Industry is.

You know if we go back to 2017 2018 technology transition in the industry a investment in current investment in planar and Threed technologies, New architectures, let's say there was an inefficient level of spend as it relates to bid addition to the industry I think you're seeing a much.

More efficient spend profile overtime, we see capital intensity rising.

But you're seeing a much more efficient production out of Capex that that's going into the industry thing I'd say is you know we've got a very balanced portfolio from a share standpoint across all device types are very balanced company and were fairly agnostic to where customers want to spend whether its foundry logic.

And Ebrahim I think we're set up to perform well and all of those environments given our broad portfolio. So we'll watch the market and we'll continue to update.

Every quarter on what we're saying.

Thanks Quinn.

Thank you I last question comes on the line of Livac IR with Bank of America like your line is now open.

Thank you for taking my question I.

I know, it's hard to reconcile another real time basis, but I'm curious how do we reconcile your encouraging words on a memory demand with somewhat mixed.

And then views from some of your memory customers, who are mentioning some deceleration and datacenter demand or some declines and you know China smartphones as an example, so completely understand and appreciate that.

Your demand and their demand doesn't have to.

Correlate on a real time basis, but how are you ensuring that Jordan, how many customers are shipping to their and demand.

Our DRAM business is up 20% or NAND business is up 14%.

Over the last couple of quarters sequentially, two quarters ago memory was up for US 24%. Most recent order up almost 17%.

We are seeing sequential performance in both NAND.

And DRAM and so it's more of a comment of what we're seeing and the you know demand for our business as our customers roll out their technology, Roadmaps and an environment, where technology roadmaps to find the cost structure of our customers it's cost per bit we see continued investment on Roadmaps Oh with.

With a modest additions from a capacity standpoint to drive that that demand growth at the markets requiring.

Great. Thanks for that for your question and then any closing thoughts for today.

Yes, sure Mike So what stands out for me a especially in this quarter is how investments in our strategy. They are translating to growth and outperformance in the market I like the balance share. We now have as a company and that's across all device types I liked that we're generating a third of our total business.

As from our install base and.

Until then keep safe, Mike with close call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Q3 2020 Applied Materials Inc Earnings Call

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