Q4 2020 Applied Materials Inc Earnings Call
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Welcome.
To the applied materials earnings conference call during the present.
And all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session. I would now like to turn the conference over to Michael Sullivan Corporate Vice President. Please go ahead Sir.
Good afternoon, everyone and thank you for joining Applieds fourth quarter of fiscal 2020 earnings call. Joining me are Gary did.
Person, our president and CEO and Dan Durn, our Chief Financial Officer before we begin I'd like to remind you that today's call contains forward looking statements, which are subject to risks and uncertainties that could cause our actual results to differ information concerning the risks and uncertainties is contained in Applieds. Most recent form 10-Q, and 8-K filings with the SEC todays call also includes.
Includes non-GAAP financial measures reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at applied materials Dot com and now I'd like to turn the call over to Gary Dickerson.
Thanks, Mike I'm very pleased to report that applied materials delivered record revenue.
In our fourth fiscal quarter and earnings hit an annualized run rate of $5 per share for the first time.
For the fiscal year, we grew revenues, 18% and earnings 37%, while making significant strategic investments in new technologies and products to address the.
Industry's highest value problems and position the company for sustained long term success.
These results are all the more impressive considering the unprecedented disruptions we've navigated this year.
I really want to thank all our employees suppliers and partners for their resilience and adaptability.
Our teams have switched to new ways of working delivered on our commitments to customers and investors and kept our technology and product development on track.
While our actions to date are driven by a need to protect the health and safety of our employees, while keeping our company's strong I'm very excited about.
Long term benefits of working in new ways, especially remote support in R&D.
In today's call I'll begin by sharing our current view of the market environment. Then as this is the end of our fiscal year I'll highlight some of our major accomplishments in 2020 before describing the growth driver.
There's an inflections that will shape our markets over the next several years.
Conclude by outlining our strategy and investments that will drive applieds long term profitable growth.
As we adapt to the challenges created by COVID-19 and prepare for the post the pandemic era we.
We are seeing fundamental changes in many areas of our lives and the world is depending on semiconductors more than ever.
Investments in IP and communications infrastructure combined with the accelerated digital transformation of companies and the economy as a whole are driving very robust.
Semiconductor and wafer fab equipment demand.
In foundry logic, we see leading edge customers building out their fabs and aggressively driving advanced R&D. This gives us confidence that current investment levels are sustainable into 2021 and beyond.
In addition, specialty markets underperformed in 2020 due to headwinds in industrial and automotive and therefore represent an upside for 2021 as these sectors rebound in memory spending is growing faster than foundry logic. This year as customers push forward with.
Our technology Roadmaps, we see NAND to outgrowing DRAM and 2020, and then DRAM growing significantly faster than NAND and 2021.
Consistent with perspective, we shared on the August call. Our outlook remains very positive we are outperforming them.
Market and we are demonstrating we can grow independent of the spending mix.
This quarter semiconductor systems revenues were up.
All time.
The midpoint of our guidance will be up another 12% next quarter.
For the fiscal year.
Year semi systems revenue grew 26%.
With broad based strength across products and device types.
Our traditional leadership businesses that provide solutions for creating and modifying materials and structures are benefiting from innovations that enable leading edge transistor.
Yours and Interconnects.
For example, our metals deposition business technology that is critical to interconnect performance grew revenues, 42% in fiscal 2020 to nearly $2.2 billion.
In our businesses that focus on shaping and analyzing material.
Aerials in structures, we have significant opportunities to grow our share and we're demonstrating our strong momentum in fiscal 2020, our etch business generated record revenues growing nearly 30% year on year, we're gaining share in conductor etch as we win new Apple.
Applications in DRAM and foundry logic.
Our inspection business also delivered record performance as systems revenues increased 46% for the year.
We have significant traction with leading edge customers and are winning share in optical wafer inspection and E beam with new products that are still.
In early stages of adoption.
As the benefits of traditional tutti Moore's law scaling slowdown leading companies are describing how the industry is transitioning to a new playbook to drive performance power area cost and time to market of new devices. This peapack, t. playbook and clay.
Moods, new architectures, new structures, new materials, new ways to shrink geometries, and new packaging technology.
Applied is uniquely positioned to accelerate this playbook the breadth of our product portfolio is a key advantage because it allows us to combine technologies and innovative new ways.
For example, in patterning, where we generated nearly $1.1 billion of revenue in fiscal 2020, we have been winning new applications across multiple customers with a new product that delivers a novel heart mask material combined with a co optimized etch solution to open the hard mask.
This is a great example of a new class of highly differentiated products, we call integrated material solutions or I am us we have numerous AI ns engagements with our leading customers and I'm very excited about the IMF products, we'll be bringing to market in the next several years.
Another area, where we are creating value using our broad capabilities is advanced packaging that enables chips to be connected in new ways. Our packaging business is scaling generating record revenues of a half a billion dollars for the year up over 20% from fiscal 2009.
Teen we're also expanding our ecosystem footprint through a combination of organic investments and partnerships moving to service AIG has also delivered record revenues for the quarter and the year. The portion of HGS revenue generated from subscription style business also grew to.
A record levels in fiscal 2020, we increased the number of tools covered by long term service agreements by 13% as a result, 60% of our service and spare parts business now comes from these stickier and more predictable recurring revenue streams are.
Our renewal rates for long term agreements are also very high at more than 90%. This illustrates the value customers see in our advanced service products rounding.
Rounding out our portfolio with display we hit our 2020 revenue target in a challenging market our outlook for 2020.
On is similar to this year with no significant changes to the view we shared in our last call. However, we're starting to see some encouraging leading indicators of future growth that will be watching closely in 2021. These include increasing adoption of organic.
Led displays OLED for IP applications higher OLED adoption in the smartphone market with more than 70% of the Fiveg handsets launch to date equipped with OLED screens and Foldable OLED handsets approaching a price point that could spur volume adoption.
Alan.
As I've said before we're optimistic about the long term opportunities for applied in the display market as we focus on addressing the OLED inflection and expanding our available market fine.
Finally, as I look back on our accomplishments. This year I'm also very proud of our new.
Make 10 year roadmap for environmental and social responsibility that we announced over the summer. This roadmap lays out the detailed actions behind our vision to make possible a better future for everyone. We've taken a holistic approach to these plans that considers our operations.
How we work with customers and suppliers and how our technology can be used to advance sustainability on a global scale.
We call our framework, one X 100, X. 10000 X and we've used it to rally the company around challenging new goals and commitments before I.
I conclude I will take a few minutes to describe the longer term growth drivers we see for applied.
As I look ahead to the next decade, our opportunities have never been better there are numerous trillion dollar inflections that can be enabled by advances in materials engineering from next generation displays.
In a AR VR to electrification of transport and personalized healthcare. However, the one inflection that really stands out as a.
AI has the potential to change everything and it will touch every major industry and area of the economy.
AI also has major implications.
For the electronics and semiconductor ecosystem first we're moving from an application centric to a data first world, where almost all data will be generated and consumed by machines. This means that the industry's growth will no longer be limited by humans ability to create.
Or consume data.
Second the new computing approach is needed to make sense of the massive volumes of data available will work best with workload specific hardware built from customized an entirely new types of silicon. This diversification of designs and devices is great for the industry.
And third training neural networks for AI computing is incredibly power intensive so there's a huge imperative for the industry to drive improvements in the performance per watt of computing solutions the.
The advances in technology needed to unlock the potential of AI create tremendous.
This opportunities for applied materials, we've aligned our strategy and investments around this vision for the future and we are uniquely positioned to accelerate the industry's new pack T playbook to advance power performance area cost and time to market of next generation semi devices.
Since.
Before I hand, the call over to Dan Let me quickly summarize despite the unprecedented challenges of 2020 applied is delivering record performance. We're outperforming the market overall and have strong momentum in key growth areas like etch and inspection the demand for semis.
Conductors remains very strong driven by IP infrastructure digital transformation of businesses and an acceleration of longer term technology trends, especially AI.
Our future opportunities have never been better we've been investing in next generation technologies.
That are critical for the ecosystem and laying the groundwork for applieds future growth our strategy to accelerate the Pea pack T. Playbook is already yielding results for our customers and applied.
And as I look ahead, I'm very excited about the innovative new products.
And integrated solutions, we will bring to market in 2021 and beyond now I will turn the call over to Dan. Thanks, Gary Today, I'll add my perspective on our Q4 performance and full year results I'll share some noteworthy developments in our installed base business and I'll provide you with our backlog.
Okay entering our next fiscal year, along with our business outlook for Q1.
Beginning with our Q4 performance I'm pleased that our company delivered record revenue and earnings per share. Despite the ongoing challenges related to Cove. It.
Our teams managed to significantly increase our system shipments and customer support.
And we did it in a very disciplined manner that resulted in higher operating profits and free cash flow. We've now shipped all of the unmet backlog from earlier in the year.
And our Q1 guidance gives you a direct look at the healthy demand trends, we continue to see in our business.
In Q4, we delivered revenue above the midpoint of our.
Clients across all of the segments, including record revenue in semi systems and AIG, Yes, we grew revenue by 25% versus the same period last year increased non-GAAP operating profit by 49% year on year and delivered record non-GAAP EPS of $1.25 cents, which was.
Was up 56% year over year, we also increased operating cash flow to over $1.3 billion up 59% year over year.
About two months into our quarter, the U.S. government imposed a licensing requirement related to one of our foundry customers in China. This requirement reduced our revenue and.
Our Q4 and our guidance for Q1, we've already applied for licenses where needed to comply with the new rules.
Turning to our full year results I'm, especially pleased with the growth of our semiconductor related businesses semi systems and HGS combined grew by over 20% year over year.
In Q, our installed base business, which includes AG S. Plus 300 millimeter upgrades grew by over 9% year on year and continues to represent close to a third of Applieds revenue.
This growing part of our company provides an annuity like revenue stream that makes us more resilient across market cycles.
Within AIG, yes, we've seen positive developments in our long term service agreements until recently the vast majority of our agreements had one year terms, but in 2020 about a third of the agreements. We signed had terms of at least three years. We've increased these extended service agreements by a fact.
Thanks, Ken over the past three years.
This outstanding growth underscores the close working relationships, we have with customers.
Who are using our data enabled services over the life of a node to generate world class yields output in costs. In fact in 2020, we grew the installed base.
All of our data enabled pools by nearly 40%.
For the company as a whole in 2020, we delivered record revenue in both semi systems and AG assets, we increased non-GAAP gross margin by 110 basis points invest.
Invested 69% of non-GAAP Opex in research and development.
Grew non-GAAP operating profit by 32% and increased EPS by 37%.
We also generated $3.8 billion in operating cash flow setting a new record and returned $1.44 billion to shareholders. We.
We raised the dividend for the third year in a row.
Pay dividends of $787 million and allocated nearly $650 million to stock buybacks repurchasing at an average price of $56.32.
We increased cash on the balance sheet by nearly $2 billion as we prepared for the Coke side electric transaction.
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In Q4, our stock buybacks were limited to $50 million as our legal department imposed a trading blackout out of an abundance of caution in connection with our discussions with the Chinese regulatory agency that is reviewing the Cook site electric transaction, we continue to have constructive discussions and we're working.
Secure clearance for the transaction before the end of the calendar year.
Next I will share some color regarding the demand we see as we enter our new fiscal year apply.
Applieds backlog reached nearly $6.7 billion in Q4, setting a new year end record the.
The combined backlog of our semi related businesses all.
And also set a year end record growing to nearly $5.5 billion, our display backlog declined year over year and as Gary discussed we are tracking the leading indicators of the eventual recovery.
Now I'll share Q1 business outlook, we expect company revenue to be approximately 4.95 billion.
All dollars plus or minus 200 million with the mid point up about 19% year over year.
We expect non-GAAP EPS to be about $1.26 cents, plus or minus six cents or up nearly 30% year over year within this outlook, we project semiconductor systems revenue of around three.
$1.45 billion up nearly 23% year over year AG ESS revenue of about $1.07 billion up around 7% year over year and display revenue of around $400 million up about 20% year on year, we expect non-GAAP gross margin to be about 40.
45.3%, which is higher year over year and lower sequentially due to near term changes in product and customer mix we.
We expect non-GAAP opex to increase to $860 million.
Reflecting higher expenses from a 14 week quarter, plus one month of annual Merit increases.
Partially offset by holiday shutdown savings.
Our Q1 guidance assumes a tax rate of around 12%.
And a weighted average share count of around 925 million.
In summary, I'm pleased that applied delivered record performance in Q4 and has strong momentum entering our new fiscal year our backlog.
He is at record levels as our products and technology generate strong customer pull our installed base business is becoming larger and more resilient with growth in our data enabled services and multiyear service agreements I'm incredibly proud of our teams for supporting our customers under challenging global circumstances, while deliver.
During record earnings and increased cash flow to our shareholders now Mike let's begin the kuni. Thanks, Stan now to help us reach as many of you as we can please ask just one question and not more than one brief follow up operator lets please begin.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.
Question has been answered and you'd like to move yourself from the queue. Please press the pound key our first question comes in line of CJ Muse from Evercore. Your question. Please.
Yeah. Good afternoon. Thank you for taking the question I guess for my first question. If I look at your DRAM business and make assumptions around a your January quarter, it looks like you're going to grow about 30.
Mid 30% for DRAM and you know much more about again need to what were seeing industry wide. So I guess you can you discuss what's driving that outperformance, including some discussion on your success with conductor etch and how should we think about your share of wallet for DRAM given that that's probably the fastest.
Growing sub segment in calendar 21.
Yeah. Thanks, TJ I'll take the question as you pointed out our DRAM business is showing significant signs of strength. This year, we've built momentum throughout the year and we expect to close the year very strong as we think about the overall.
Overall growth rate of the DRAM market in this year against the backdrop of an industry, that's probably growing 10% to 15% probably at the high end of that range for overall WFP. Our overall systems business is going to be up over 25% for the calendar year ago.
Against that.
DRAM as a market is probably a couple of points higher than the overall industry. So based on the math you walk through you can see that the company is significantly outperforming on last quarter's call Gary talked about the momentum we're seeing from a conductor etch standpoint. So the team is performing really really well there.
And then as you think about things like high K metal gate to get the iOS speeds on and off the.
DRAM device, we've been talking for a while about that inflection coming into the market and we're just really well positioned from a technology standpoint to drive our customers roadmap and seeing strong adoption. So.
Feel really good about how we're performing.
Against the backdrop of a good market, but clearly strong performance and we're really encouraged by what we see going forward and we would expect this strength to continue into next year.
As we continue to push our customers Roadmaps and drive strong adoption of the technology, Yeah, maybe CJ.
So we've had a little bit more color. This is Gary for high speed.
The periphery is moving to more like as Dan said more logic like processes, where.
That's in the sweet spot of where we have leadership with a number of different products. So that's part of a unique inflection that's really fueling our growth.
In DRAM and I talked I think in the last earnings call about the growth that we've seen in our DRAM conductor etch, gaining about 30 points of shares since 2016, and so with the key technology inflections for the high speed memory.
Also the strength of the same three a nudge really thats fuel.
Fueling our growth and we feel really good that we're going to continue to enable the future inflections and continue to grow outgrow the market in DRAM.
Very helpful and then as my follow up.
I guess, perhaps if you could focus on domestic.
Domestic China overall.
China.
I think the concern out there is that.
The types of numbers, we're seeing is not sustainable, particularly given what's going on with that some I see.
But curious if you could offer thoughts on the greater breadth of spending that we'll probably see encounter 21, and then how we should think about multinationals.
Layering in.
And what impact that will have an overall capex coming out of China. Thank you.
Yes, sure CJ, let me jump in on that and see if Gary wants to add anything at the end from an overall market standpoint in calendar year 2020, we see meaningful spend by both the domestic customers.
As well as the multinational customers and if I were to think about weighting of that spend I would say it favors the domestic market.
Over the multinationals, but both both groups of customers are having meaningful spend might.
I think what you see is a broad base of investments you're seeing investments across.
200 millimeter geometries, 300 millimeter geometries and within 300 millimeter geometries Youre seeing investments in NAND DRAM foundry logic. So all device types, we think that continues into 2021.
We probably won't see the growth rates that we did in 2020.
Going to be a strong year, but you certainly won't see those growth rates.
From a growth standpoint.
I would expect multinationals to show more growth than the domestic customer.
Customers, but still strong spend in both categories.
So we see it's a good market, we continue to see strength.
It's I wouldn't expect to see that for the foreseeable future as they build their echo system in a slow disciplined manner.
Thanks Jay.
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your question. Please.
Yeah. Good afternoon, guys. Congratulations on the solid results just to follow up on few Jay's question on China Dan.
And you.
You talked about in your prepared comments that the ruling against this am I see did impact your fiscal fourth quarter fiscal first quarter Wonder if you could just confirmed with us how much of an impact was it and does that some I see now represent zero within the forward looking numbers or how are we thinking about kind of the impact there.
Yes, Thanks, John Here's what I can share with you as.
As you can imagine, we probably don't want to be too detailed on what anyone customers doing but the licensing requirement that we talked about it was put in place about two thirds of the way through our fiscal fourth quarter. So we saw about four or five weeks exposure.
To that new Rick.
Fireman as we said in the prepared comments Q4 revenue in Q1 guidance would have been higher if those restrictions had not been in place. So we're complying with the new rules.
We've already applied for licenses, where we need them.
Trade situation remains fluid so we don't want to speculate about the future.
But certainly the revenue in Q4 and Q guide for Q1 would have been higher absent that requirement as you know we've been in China for a very long time, we've got a broad base of relationships.
And it's across all device types, and we would expect the China market to continue to be strong for us.
Going forward.
And again, we're working with got.
Governments to get the licensing requirements satisfying.
That's helpful. And then maybe for my follow up for Gary Gary a lot of the conversation around us China trade tensions been concerns around restriction of shipping equipment into China, but theres clearly.
The second side of the story were a lot of countries now are looking at the strategic necessity for semiconductor capacity you have things like the chips acts in the U.S.C. of TSMC announcing a foundry in Arizona earlier. This year you officials have been talking about perhaps incentivizing more domestic production Japan the same.
So I'm just kind of curious given your vantage point in the industry how important of a trend do you think this will be this idea of regionalization of semi capacity and what kind of potential growth driver could it be for your business.
Yeah. Thanks for the question John So.
First off I would say that.
Really the major focus for all our customers as the driver their roadmaps deliver the lowest power highest performance chips at the best cost and I deeply believe that the future roadmap is going to look very different than the past I've talked before about classic Moore's law into these scaling not big enough to enable the future <unk>.
Infrastructure at the edge and in the cloud. So I do believe you know kind of aligned with your question that this is highly strategic for many countries in many regions and I do we do see that certainly we see some near term trends with big customers moving to new regions.
In the line.
And with that trend and I think that that is going to continue so it definitely.
Creates an opportunity for applied going forward certainly as these customers are moving to new regions. The support in terms of accelerating their R&D their ramp transfer of technologies into these new regions all of that creates a great service opportunity for.
Yes, and then even more important I as I said I.
I do believe the future is going to look different than the past in the past we're at an inflection point in the industry relative to how you drive the technology forward one of our biggest customers two months ago talked about their roadmap beyond 2022 double.
Energy efficient computing every two years and if you go look at the slide two months ago exactly aligns what I've been talking about what the five elements of the playbook around new architectures, new materials, new structures, and new ways to shrink and new ways to connect chips together with advanced packaging so exactly.
And we've been talking about and applied is in a really great position with innovative products and integrated solutions to enable that new P. Pack T. Playbook. So I think we've never been in a better position and.
Again, I do believe that the industry is an inflection point and the countries and the company.
Needs that are best aligned to this new playbook and get their first are going to win it's very very important for the whole AI infrastructure going forward.
Thank you John.
Okay.
Thank you. Our next question comes from the line no to share Hari from Goldman Sachs. Your question. Please.
Hi, guys. Good afternoon, and thank you for taking.
Hi, My question.
Gary My first question is on inspection I think in your prepared remarks, you talked about your business being up 46% I think it was your systems business was up 46% in fiscal 2020.
You probably outperform most of your peers, if not all your peers during that timeframe.
Where are you seeing the most trucks.
Gentlemen, and inspection and how should we think about sustainability for that business into 2021.
A quick follow up yes.
Yeah. Thanks Toshiya for the question so absolutely the inspection business is a real bright bright spot for the company and as you mentioned, we grew the system's revenue by 46%, we havent new optical inspection system.
Shannon New E beam products, they're seeing strong initial adoption with leading customers.
And in both areas, we have a lot of room to grow and we'll make an official launch fairly soon on some of these new capabilities and the other thing I would say certainly the end this business we have some really.
Hey, great leading technology and the other aspect that's important for applied is the connection.
In driving the Pea pack T roadmap for the analysis of all of these new innovations when you think about wiring to lower resistance to improve the power or.
Gate all around for high performance transistors.
Having these unique imaging capabilities and we have launched a product that has dramatically higher resolution than any product even product. That's on the market today being able to see those gate all around structures and and.
Understood.
Hi, Dan how to drive the different films and shaping the structures and modifying the structure is all of that tied together is also tremendously synergistic with the rest of our business and driving the peapack T. roadmap. So we're really in the early adoption of some of these new capabilities.
I'm very confident that 21 and beyond we're going to have really good results from our PDC business, but also im real excited about the connectivity to the rest of appliance business in accelerating the peapack t. roadmap for customers.
Great. Thanks for that Gary and then Dan as my follow up just.
On gross margin.
I know there are multiple sort of levers to both of you upside on the downside that could impact gross margins.
And you guided to a slightly lower number four for fiscal Q1, but when you think about gross margins longer term I think your most recent analyst day.
You put up a 40.
Just 7% number if I recall correctly, but is that still sort of the right target for you internally or is it higher or lower how should we think about gross margins on a multi year cadence. Thank you.
Yes, thanks to Shanghai.
So from a gross margin standpoint, the company is performing really well if you think about what Gary said.
The prepared comments in fiscal year, 20 were up 110 basis points year over year or fiscal Q4, we just reported were up 190 basis points year over year, and then like you pointed out we see some.
Different mix as we look into our fiscal Q1.
It's down a little bit sequentially, but still up year over year, we think thats a little temporary.
And that mix is going to reverse itself as we look out into fiscal Q2. So we think the company is executing well in a difficult environment. When we think about the long term gross margin I think the best way to describe it would be 45.
5% plus or minus two points, depending on where we are in the cycle and if you look at the quarter, we just printed 40.
45.7, and then you factor in some of the headwinds we're experiencing in the current environment due to Covidien. The pandemic, we would be at the upper end of that range, we've referenced of 45.
Plus or minus two points. So I think that model that framework around gross margin holds and the company is performing well to that.
As the.
The legacy impacts and the headwinds from the pandemic begin to wane I think you would see the performance in the current environment, reflecting that.
Framework around long term gross margin.
Thank you.
Thank you. Our next question comes from the line of antique Malik from Citi. Your question. Please.
Hi, Thank you for taking my question.
Gary you made an interesting comment in your prepared remarks that you guys can grow independent.
I think the mix, which is an important distinction from some of your peers, which are more leveraged towards memory or logic and you talked about the outperformance in etch inspection markets looking into next year, where you are most excited about.
Edge or inspection or different market.
Yes.
Thanks for the question. So I would say you know if I look at what am I. Most excited about it's what I talked about earlier that I really believe that the industry is at an important inflection point and you can see this also many leading customers and companies ecosystem aligning around our view that classic Moore's law.
And to the scaling is not going to be able to add.
Enable the future AI infrastructure at the edge and in the cloud and.
You see this playing out in terms of the marketplace from a competitive standpoint, the companies that deliver lower power higher performance at the best cost faster than others that.
The fundamental driver of all of our customers and ecosystem. So applies in a great position to outperform because we have many unique technologies and combination of products that are used to create shape modify analyze and connect structures and devices.
So I think I talked on the last.
Call about our performance in some of our deposition businesses last year, we gained eight points of combined share in APB CBD amounting to about $5.2 billion. This year, we grew our metals deposition business, 42% to $2.2 billion. So these italy.
The leadership businesses are very key to enabling next generation transistor and wiring materials and structures and combined with other unique comp capabilities I am really optimistic about our opportunities as we go forward.
To drive the Peapack roadmap and as you mentioned.
And as you know etch, we're also performing very well in etch significant growth in this last year, we've expanded beyond our strength in memory to foundry and logic, where we're winning stats were winning you. These steps as customers are moving to future technology nodes and really really real.
Really great performance there, it's that's really based on our new Sim three platform, probably the best platform in the history of applied materials and there are real fundamental advantages. One is conductance conductance is where are you remove the etch materials from the chamber, so you're not redeposit being on these structures and causing.
Yield and performance issues also particles that are deposited on the chamber. So that's just a fundamental advantage of that particular technology also I'm on the phone often with a R&D.
R&D leaders last night with one of the our top logic customers and we are seeing.
In yield benefits with the centsthree or they're seeing yield benefits with the same three with new coatings that we have enabled on that platform that again is giving us better particle performance. So etch again, very very good momentum and I talked already about inspection and we are in the early phases.
As the option of some new products I'm also very optimistic about that business as we go forward, but the really key thing that I'm. Most excited about is I do believe the industries that inflection point the future is not classic Moore's law to the scaling and you look at what I talked about relative.
To creating and modifying analyzing.
Connecting all of the structures in devices, we're really in a unique position so again.
Again, we are doing really well in different environments from a mix perspective, and I believe that were at the foundation of enabling the technologies for.
Future AI infrastructure.
Great and my follow up Dan domestic China, WFP still in that nine to 10 billion range for this year.
Yes, Thats correct, our view on that hasn't changed we've been pretty consistent on that over time, it's going to be in that $9 billion to $10 billion range.
Thank you.
Thanks.
Thank you. Our next question comes from the line of Krish Shankar from Cowen and company. Your question. Please.
Hi, Thanks for taking my question I had two of them first one for Dan Dan.
Still targeting a December and close with a focus acquisition or can it be delayed further and.
And along the way.
This bad or any kind of buyback increases, it's really tied to the outcome of what happens with Coca side, and then I had a follow up flow Getty.
Sure. Thanks Krish.
So as you know we've gotten five of the six regulatory authorities to approve the transaction, we're constructively engaged with them remaining.
Gaining authority and we continue to be optimistic that we're going to receive clearance by the end of the calendar year. So we'll stay focused on that.
From a buyback standpoint once.
Once we close the transaction integrate the asset.
I think we'll come back to the investment community and put forward a combined company model over the next several years.
Seems to give investors a perspective of how the combined company will perform as part of that communication will talk about what our capital allocation strategy going forward is.
But you know I wouldn't be surprised if it's what we've been doing now for quite some time, which is very shareholder friendly in terms of giving all excess.
Back to shareholders and big buyers of our stock given what we see happening from an overall market standpoint, the structural growth, we see and the execution of this company against that opportunity, we see our industry going structurally larger higher highs higher lows and we think theres, a real opportunity to put capital to work from a share report.
Purchase standpoint, so we'll probably continue what we've been doing now for many years, but we'll have that conversation.
Once we get the investment community together post close of the transaction.
Got it thanks, Dan and then a longer term question for Gary.
On China I'm not looking at this from a political angle from a but from a long.
Adam business and philosophical standpoint, do you think it's good business doctor practices in that or the other you a semi cap to ship to China because on one side is balancing the needs of your customers, but also on the flipside it might enable local competition or reverse engineering or how do you particular, IP. So I'm kind of curious how do.
You balance those two as China gets bigger.
Yeah. Thanks for the question you know the local competition has been a factor for us for for many many years in many different regions.
And I, just keep coming back to the leading companies want to work with them.
Just innovative technologies and products and there's just no way to go forward with the technology Roadmaps. If you don't have the combinations of those different technologies and as I've said before I just deeply believe that the future doesn't look like the past I don't believe that the following the classic.
The movie Moore's law playbook is the path forward for the industry or to enable this AI infrastructure. So I, there's going to be tremendous innovation I mentioned earlier, one of the one of our leading customers two months ago. If you look at their architecture day.
And they talked about the road forward beyond 2000 Twentys.
For energy efficient computing to double every two years and it was exactly aligned with the things that I've been talking about over the last two years with the new architectures, new structures, new materials, Iavi enhancements and new ways to connect the chips together with a three d. advanced packaging. So I just believe.
Theres going to be tremendous innovation all of this is going to be a moving target relative to the products and the other thing is you have the opportunity to connect these products and technologies together in unique ways to manage the interfaces and the interfaces on these structures are becoming much more critics.
<unk> than they've ever been in the past. So we know we've talked about some innovations in the transistor, where we can enable enormous improvements in leakage current or drive current and it really comes from being able to combine these technologies together not oxidized ore damage those interfaces.
Those are completely unique capabilities that you really having this portfolio is a tremendous advantage and very unique advantage for applied so I think that the world will operate the best certainly with fair and free trade.
And that that these.
The collections that were seeing today around AI biggest inflections of our lifetimes will transform every industry and applied is right at the foundation of those inflections.
Thanks, Krish. Thanks again.
Thank you. Our next question comes from the line of Timothy Arcuri from you be asked your question. Please.
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Hi, Thanks, I had two I guess, Gary first I know you think about capital intensity allot and I've seen your charge and I totally agree with the 10.5% to 11% longer term WSE intensity.
And it seems like if you strip out some of the duplicative spending today, there's probably at least three to 4 billion in China. That's that's a that's not backed by.
Infinite so it seems like if you strip that out we're probably closer to like 12% right. Now. So I know when you think longer term you do a lot of modeling about longer term Wi Fi, but when you. When you kind of think about where double if you can go and you build out a underlying semiconductor revenue number.
Is it fair to use like a 12% sort.
A real or a core WSE intensity number and then you can like you know layer on top of that spending that you think might happen because the issues that John had mentioned before but that's not real dollars. That's backed by revenue. So so the question is is that 12%.
Good number.
Hi, Ken This is Dan I'll jump in on this one.
So I do think 12% is a good number to start with you I think theres a upward bias on that over time, given what we see from a technology roadmap standpoint, yes.
Yes, I think you can make that argument, but I think 12% is a good number to lock in on.
Just a couple of more perspectives on it you.
We talk about when 300 millimeter came in around the 2000 timeframe. We saw multiple concurrent investments in both wafer size technologies and we saw probably 17%. So that's probably an all time high and what you saw as the 300 millimeter wafer size technology came into the industry.
History.
And all of the efficiency gains that came with it as well as the consolidation of our customer base, we hit a low point in 2013 at about 9% and it's been on a steady upward trajectory. Since then and so we think the trend is is.
A pretty good one other thing I would point you.
Two and maybe this is a little bit of a different way of thinking about the industry. If you take that low point of capital intensity and you combine 2012 in 2013 as a combined two year window and then compare it to the next two year combined window of 13 and 14 compare that for the next two two year window.
14, and 15 and onwards can you do that exercise out to 2021, and what you'll see is each successive two year windows within upwardly sloping line and so we think our industry has gone from no growth cyclical.
To growth with a upward sloping trend line.
And we will see higher highs and higher lows as that thesis plays out and so we feel really good about where this industry is going and support of all that the medic trends that Gary.
Has talked about for many quarters now.
Yes.
We've got again thanks.
And then I guess my second question is just on DRAM I know.
Gary you sort of emphasize that DRAM is going to outgrow NAND.
On a percentage basis next year, which I guess sounds little ominous for DRAM, but can you put that in the context of demand. It seems like DRAM Wi Fi is certainly coming off of a much lower base. This year and obviously on the supply side, we're in a far better point right now that we are in NAND. So can you sort.
Back those numbers into what that means for the supply demand balance next year. Thanks.
Yes, sure Tim I'll I'll jump in on that one again and I think the best way to get at this and unpack. It for the investment community is talk about what we see in 2020, and then use that as a jumping off point to describe the contours around 2021.
So starting with 2020, we continue to see the overall market up 10% to 15% will probably at the high end of that range.
We talked about applied systems business against a market that's up 15% our systems business is going to be up a 20.
25% for the calendar year.
By device type.
One, we see foundry logic greater than 55% in 2020, but.
But its growing below the market average.
DRAM and the memory side of the house DRAM, it's growing a little faster than the overall market I think the real story in 2020 is NAND NAND is growing to x.
The overall market in 2020, and so I think thats, maybe a little contrary to what the conventional thinking is around 20 2020.
2020, as a memory growth year, especially for NAND.
And against that backdrop of a memory growth year applied as per is outperforming very nicely.
So we feel good.
2020 as.
As we look into 2021, we expect another strong year for the industry.
And for applied.
And while we're not sharing specific forecast around Wi Fi I think it's premature to be point specific at this time, we see foundry logic is going to continue to.
About strong and we see it as over 55% of total WFP again next year.
But what you will see on the memory side of the house is going to be a reversal from a growth standpoint.
NAND, we expect to be flattish year over year, and DRAM set up to significantly outgrow.
The market.
So this is a great set up for applied given the strong share gains we've been talking about now throughout 2020 in DRAM gives us confidence as we look into 2021 left the set up from an overall end market standpoint, strong foundry logic flattish NAND strong DRAM to goods.
Good setup for applied as we look into next year.
Excellent then.
Thank you our.
Our next question comes from the line of Harlan sur from JP Morgan Your question. Please.
Good afternoon day juggling of hitting your execution on your commentary on leading edge systems driving much of the incremental.
New growth this year with lagging edge system shipments muted just given the weakness in auto industrial and analog segments of the market the.
The recovery in these markets, we're seeing now and into next year should be a tailwind for the business and so what's your expectation on the mix of leading edge versus lagging edge over the next few years just given the number.
For a new 12 inch analog fabs and microcontroller content in analog content growth and all electronic applications.
And what's your positioning in these segments of the market.
Hi, Harlan I'll jump in on that one I think you pointed out rightfully. This is a little bit of a weaker market.
For the trailing geometries.
Couple of quarters ago, or even last quarter, we talked about auto and industrial markets showing some signs of weakness as a result of the pandemic since.
Since then we've seen.
Those end markets continuing to perform stronger, but I think its going to follow the natural progression, we would see in any one of our.
Our end markets off of low utilization levels, we see utilization rise once utilization gets to a certain level then you'll see customers begin to layer.
In capacity and so I would expect to see legs up in those markets trailing no geometries as we look into next year longer term.
We think the trailing no geometries as a result of you know communications infrastructure industrial auto Internet of things, there's a whole host of drivers that are taking that industry structurally larger over time, and we would expect that trailing no geometry segment.
Outgrow the overall market over a multi year window. So we feel good about it in the near term while customers are pulling really hard multiple customers multiple nodes on the leading edge you've seen a rotation from a very balanced foundry logic market between leading engine trailing node to probably more.
Weighted to leading edge technologies in the current environment overtime, we would expect that to moderate a bit and get back to a more balanced profile than what we've seen maybe in 2020 or 2021, but we do think that those markets are set up to do well and we're encouraged by that because anytime you broaden.
And the growth drivers of an industry. It just makes it structurally stronger less cyclical less volatile and we think that thats going to benefit this industry significantly from a positioning standpoint, we're well positioned competitively across that entire node profile and so we're going to continue to deliver.
For labeling technology to the market and we continue to see strong pull from customers top to bottom across the new profiles.
Yeah. Thanks for the insights there and then as the industry moves towards more innovative and complex packaging technologies multi chip modules chipset strategy actually in some cases, even seem to return a wish list.
Her integration.
Pleasantly surprised by the size of applied to advanced packaging business is 500 million in revenue. This year, how big is just markets do you estimate and what type of growth outlook do you guys see for this emerging segment of the business.
Yeah. Thanks for the question so.
As I mentioned before the packaging.
Part of the the ecosystem is one of the key drivers there the five drivers that I talked about before and then you see this being also discussed by many leading companies our customers other companies in the ecosystem for.
Like most companies.
Relative to the importance of packaging I I definitely think if you look at the power performance and cost going forward packaging packaging is really really really important and we have a very strong position. We're number one in advanced wafer level packaging.
And we're working with a number.
Number of different ecosystem partners, we talked about a partner with another company to deliver the first industry's first fully integrated solution for hybrid bonding, where you can connect two chips together and die form.
And that enables shorter interconnect distance fourx increase in Io density. So there's a lot of innovation that's going.
I'm going to happen in that market and we have very very strong positions. If you look at just that one particular innovation you need to optimize etch CMP deposition wafer sort of surface cleaning, where metrology inspection defect particle particle control.
We can add to enable that influx.
Section and then we also have the center of excellence that applied to advanced packaging Technology Center in Singapore.
And we have some very large leading customers working with us.
On some of these new innovative architecture. So I'm really excited certainly it's a meaningful part of our business today, but I think.
I think we're really at the early phase of the adoption of many of these new technologies and we are number one in advanced packaging.
Expanding with partnerships through the ecosystem. So I'm excited about it I don't want to give a specific number right now, but I think it's going to become much more and much more important.
And then most people realize in the ecosystem.
Yes. Thank you.
Thanks, Harlan and operator, we have time for two more questions. Please.
Certainly then our next question comes in line of Quinn Bolton from Needham Your question. Please.
Hey, guys congratulations on the nice results and outlook.
To take anything away from what.
Steve This year in the foundry logic, and DRAM segments, but if I look at your NAND revenue at least in fiscal 2008 revenue was roughly flat year on year, where it sounds like the overall NAND Wi Fi maybe up close to 30%. So it looks like you've lost share this year wondering.
We look forward are there opportunities to step.
Given that share loss in fiscal 21.
Or just your outperformance really depend on continued strength in DRAM and foundry logic. Thanks.
Yes, Hi, Quinn.
I think he might be drawing the wrong conclusion.
You know when we talk about the WFP and Mark.
Circuit, and we talk about NAND.
That's a calendar year comment and so if you look at the first three quarters of calendar year 20, you see our NAND business up significantly more than the flat you referenced and at the midpoint of our guide we won't talk about by device type, but I think.
Think you will see the performance of that business roughly in line with the overall market. It just the peculiarities of quarters, when they happen to hit and the revenue expectations.
Within those quarters and so if you look at the quarterly profile for the trailing 12 months, you will see that the one quarter out.
They are from a historical standpoint was quite large showing performance this year on a fiscal year basis.
Flattish the first three quarters of 2020, you see a very different number and but when we're talking three months from now at next quarter's results. I think you will see a business that's more roughly in line.
The overall market. So we're very comfortable confident with how we're positioned within that end market and we're going to continue to drive our business and technology and look to do better overtime.
Great Thanks for that.
Thank you. Our final question then comes from.
And we have to keep from Wells Fargo. Your question. Please.
Yeah. Thanks for taking the question I was curious on your prepared remarks, you talked about a long term service agreements now one third of those being over three years. When you look at your current kind of book of contracts for your install base. How do you think about that trending over the next.
Next few quarters.
So.
Hi, Joe.
This has been playing out over a multiyear period. If we go back in time, you know at one point, 30% of our revenue was generated from long term service agreements. Then we grew at the 40 than 50 now you see.
At at 60.
I think you know we've got the right strategy around this business you see those long term service agreements extending out in tenure, which provides even more stability and we're going to look to drive that number north off of the 60% of revenues over time, we're going to look to continue to drive that number north.
So we'll take it one quarter at a time one year at a time and continue to execute against our strategy, but we see more headroom against that number and look to push this business forward in a much more state.
Stable growth oriented way.
Hey, Thanks, Joe for your question and down would you like to help us close out the call today.
Yes, Thanks, Mike.
I'm really pleased that in a year, we're all going to remember for its extraordinary challenges applied delivered record revenue earnings operating cash flow year end backlog and I'd like to sincerely. Thank our employees and partners for everything they did to support our customers in that difficult environment.
Looking into next year, just a few quick thoughts to leave you with a.
I think the growth opportunities for the semiconductor industry are bigger than ever.
The industry roadmap is clearly moving towards our new playbook, and our balanced market exposure, let us perform well regardless of the spending mix our installed base business is growing.
And making us more resilient across the cycles and I'm encouraged by the early Green shoots were seeing in display Gary and I look forward to seeing many of you at the credit Suisse Conference next month and until then I Hope you all enjoy a happy and safe Thanksgiving take care.
Alright, Thank you very much.
That concludes.
Only conference call and thank you for your continued interest in applied materials.
Thank you, ladies and gentlemen for participation in today's conference. This does conclude the program you may now disconnect good day.
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Hi, Alan.
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