Q1 2021 Applied Materials Inc Earnings Call

February 18, 2021

[music].

Welcome to the applied materials earnings conference call.

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

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

I would now like to turn the conference over to Michael Sullivan Corporate Vice President. Please go ahead Sir.

Good afternoon, everyone and thank you for joining applied first quarter of fiscal 'twenty 'twenty. One earnings call. Joining me are Gary Dickerson, 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 applied to most recent form 10-Q, and 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 materials, which are available on the IR page of our website at applied materials Dot Com Bill.

Before we begin I have a calendar announcement on April the sixth applied plans to host a virtual investor meeting to discuss our markets strategies and financial targets, we hope you'll save the date and now I'd like to turn the call over to Gary Dickerson.

Thanks, Mike I'm very pleased to report another quarter of record performance for applied materials since the beginning of our fiscal year. We've seen a continued acceleration of demand in our semiconductor business as major macro and industry trends fuel increasing consumption of silicon across a wide range of markets and <unk>.

Applications 2020 was an excellent year for applied as we outperformed our markets while growing our earnings nearly twice as fast as revenue.

We carry this strong momentum into 2021, our broad portfolio and exposure to technology inflections combined with the traction of our new products put us in a great position to substantially outgrow our markets again, this year and into the future.

I want to thank our employees and suppliers for everything they are doing to deliver for our customers and shareholders. Our operations and field teams are doing an incredible job as we run the company at record levels and successfully overcome significant logistics and other challenges created by the pandemic.

R&D our teams are working in new ways to accelerate the time to market of critical innovations for our customers and we're doing all of this while maintaining a relentless focus on keeping our colleagues and families safe.

As Mike outlined we plan to hold an investor meeting in early April at that event, we will provide our in depth analysis of the major growth drivers and inflections that will shape our markets over the next five to 10 years and describe our strategy to deliver innovative new technologies to enable.

Bill our customers power performance and cost Roadmaps accelerate their time to market and drive applied long term profitable growth.

In today's call I will focus my comments on the near term first covering the dynamics. We currently see in the market and then highlighting some of our recent accomplishments that illustrates the momentum we have across the business.

Starting with a high level view of our markets. We are seeing a diverse combination of macro and technology factors fueling very strong and sustainable demand for semiconductors.

As the World continues to navigate the current challenges and prepares for a post pandemic era. The digital transformation of the economy is being accelerated companies are rethinking and reengineering the way they operate and there's an immense Paul for advanced technology. In addition, consumers are making.

Different choices about the way they spend their time and the products and services day by I strongly believe many of the changes we're seeing today are irreversible.

New ways of working offer compelling advantages in terms of time and productivity.

Within the electronics ecosystem itself key technology inflections are driving increasing silicon consumption.

I'll highlight three examples cloud service providers or forecasting data center capex growth of more than 15%. This year on top of record spending in 2020.

With a broader adoption of five G handsets silicon content in smartphones is growing at double digit rates and then automotive where there are known supply shortfalls total semi consumption is expected to expand more than 15% this year.

Translating these factors to industry investments in foundry logic, leading edge investments are very strong and have been well articulated by our customers.

On top of that our <unk> business that serves the Iot communication auto power and sensor market is expected to grow even faster and is on track to exceed $3 billion of revenue for the fiscal year.

And then 2020 was a strong recovery year with spending up more than 30% and in 2021, we expect customers to invest at modestly higher levels.

And DRAM supply demand fundamentals look more favorable than NAND and as a result, we still expect DRAM investments to outgrow NAND this year.

All of this adds up to a very strong demand environment for wafer fab equipment and we believe this strength is sustainable well beyond 2021.

Digital transformation touches every sector of the economy and is non discretionary for many industries. In addition industry investments appear disciplined when you look at wafer fab equipment intensities, that's wafer fab equipment revenues as a percentage of semiconductor industry revenues. They are.

Well below recent peaks in all three of the device segments foundry logic NAND and DRAM.

Turning to applied business performance, our semiconductor systems revenues for the first fiscal quarter were up 26% compared to the same period last year at.

At the midpoint of our Q2 guidance semi systems will be up around 50% year on year and based on our current outlook, we expect to again grow faster than the market for the year as a whole.

There are a number of factors contributing to this outstanding performance first our business is very well balanced across devices and customers second we have the broadest portfolio of products and capabilities spanning materials creation modification removal and analysis. These technologies.

Bind with our ability to connect them in unique ways are fundamental to enabling our customers' power performance and cost roadmaps.

And third we have an incredible pipeline of new products and integrated solutions that are winning applications expanding our served opportunities and reducing the time. It takes our customers to bring important new innovations to market.

Note over node opportunity growth in both foundry logic and memory favors applied leadership businesses, including Abbvie thermal processing CMP and P. V. D. In fact, we believe our PD business can grow more than 40% this year and generate more than $3 billion.

Of revenue.

Our latest generation products have strong momentum and more than 25% of our 2021 revenues will come from critical applications that we've targeted and won since 2018.

Some highlights include CVD, where we grew revenues, 30% in 2020 and have strong customer pull for new differentiated materials solutions that are highly enabling for advanced patterning conductor etch, where we're winning new applications in DRAM and foundry logic that contribute.

To our 32% revenue growth in this market last year.

<unk> diagnostics and control, where we believe we can grow more than 25%. This fiscal year on top of the 45% growth. We delivered in 2020, thanks to new optical wafer inspection and E beam products that are still in the early stages of adoption and packaging where we.

<unk> revenues to be up 50% year on year on top of strong growth in 2020.

Also over the past few years, we've started introducing a new class of highly differentiated products that we call integrated materials solutions or IMS.

Our IMS products can combine multiple process technologies with onboard metrology and sensors within a single system that are capable of enabling unique films structures and devices. We have numerous I M. S engagements with our leading customers and this year, we will generate meaningful revenues.

From our initial IMS products.

Moving to service Ags delivered another record quarter over the past five years, we've grown our services business at a compound annual growth rate of 12%, which is twice as fast as our installed base growth.

In this period, we've increased the percentage of service and parts revenue generated by service agreements from around 40% to more than 60%.

These long term agreements enable us to deliver more value to customers with our advanced service products, while providing us with stickier and more predictable recurring revenue streams.

Our renewal rates for these agreements are also very high at over 90%.

Lee in display our outlook remains consistent with the view we shared in November we expect 2021 revenues to be similar to 2020 as we continue to manage through the current market trough, we do see encouraging leading indicators of future growth, including higher OLED adoption.

In the smartphone market with a vast majority of five G handsets being equipped with OLED screens, and increasing OLED consumption beyond phones, and Tvs and I T applications.

We still believe OLED is a compelling technology and this inflection is a great catalyst for the display market that will create expanded opportunities for applied.

Before I hand, the call over to Dan I want to again, thank all our employees for their outstanding contributions to applied success.

2021 is off to a great start with record results and outlook, we see strong and sustainable demand in our semiconductor business fueled by a combination of macro and technology drivers, we have great momentum, thanks to our broad market exposure and differentiated portfolio of new products.

And we believe we're in a great position to outperform our markets again this year.

Finally, we're looking forward to sharing our long term vision for the industry and applied materials at our Investor event in April now Dan will give his perspective on the business environment and provide more color on our financial results and operational performance Dan.

Thanks, Gary today I'll begin by summarizing applied performance in Q1, and then I'll share some of the key drivers of our growth relative to the markets in calendar 2020, and I'll finish with our guidance for Q2.

Beginning with our Q1 performance applied delivered a record revenue and non-GAAP earnings per share. We grew revenue by 24% year over year and exceeded the high end of our guidance.

I'm pleased that we increased gross margin by around 100 basis points year over year, particularly since we are still experiencing COVID-19 related manufacturing protocols and logistics costs. We also generated record non-GAAP operating profit of nearly $1 $5 billion, which was up 40% year over year.

We increased non-GAAP EPS by 42% year over year to one dollar and 39 cents our teams operating with discipline and this enabled applied to deliver record free cash flow of $1 $3 billion, which was up 47% year over year.

We increased cash and investments on the balance sheet by nearly $950 million to $8. Two 2 billion as we await the regulatory decision for the Coca side electric transaction.

Look forward to updating you on our capital allocation plans when we get together for the Investor meeting in April.

Turning to the segments.

Our semi systems group increased revenue by 26% year over year, including New quarterly records in etch metal deposition and CMP.

Operating margin grew by 320 basis points year over year.

Global services also delivered revenue above our expectations, while reporting its highest operating margin of the past two years, despite ongoing challenges related to COVID-19.

The display group exceeded its revenue target and increased operating margin by 590 basis points year over year.

Looking ahead, our demand outlook calls for growth.

We currently expect all three of our segments to post higher revenue in the second half of our fiscal year.

Next I'll comment on our semiconductor equipment revenue performance in calendar 2020, which is equal to our Q2 of fiscal 2020 through Q1 of fiscal 2021.

As I previewed on our November earnings call 2020 was a memory growth year, and which NAND equipment spending grew at nearly twice the rate of the overall market.

DRAM customer spending also grew faster than the market.

And foundry logic investments grew slower than the overall market, but still accounted for over 55% of total spending.

Applied has balanced share in our revenue profile resembled the overall mix with our highest growth in NAND at 34%, we grew by 27% in DRAM and 23% in foundry logic, and we believe we significantly outperformed in both of these end markets.

Within the semi systems group, our growth was strongest in areas, where we've made significant investments to drive the new playbook to develop integrated materials solutions for our customers and introduce new products, where we have significant room to gain share one of our fastest growth areas was in advanced packaging, where we have the industry's broadest.

Portfolio and by far the highest share as Gary said, we expect this momentum to continue into 2021.

Our dollar growth was highest in CVD and etch, which reflects the success we've had co optimizing new CVD films with our sin three etch system to create unique patterning solutions across three D NAND DRAM and foundry logic.

Among new products, our latest optical wafer inspection system grew by 44% in 2020, achieving over $400 million in cumulative revenue.

We will officially introduced the new system in the near future to explain its unique architectural features along with breakthrough AI capabilities that are generating strong customer pool.

Turning to calendar 2021, we expect strong foundry logic spending to continue we also expect DRAM spending to grow at a faster pace than NAND.

This 2021, Nix expectation plays, particularly well to applied technology innovations and strong product roadmap.

Now I'll share our Q2 business outlook.

We expect company revenue to be approximately $5, three $9 billion, plus or minus $200 million, the midpoint would be up about 36% year over year.

We expect non-GAAP EPS to be about $1 50.

Plus or minus six cents or up about 70% year over year.

Within this outlook, we project semiconductor systems revenue of $3 $85 billion up around 50% year over year, and Ags revenue of about $1.14 billion up around 12% year over year. These forecasts do not include any revenue from shipments that still require government <unk>.

As we.

We expect display revenue of around $370 million with growth resuming in the second half.

We expect applied non-GAAP gross margin to be approximately 47% or up around 240 basis points year over year, and we expect non-GAAP opex to increase to $890 million.

Our Q2 guidance assumes a non-GAAP tax rate of 12%, 13% and a weighted average share count of around $929 million in summary, I am pleased that applied delivered another quarter of record performance in Q1 with strong year over year growth in revenue and profitability I'd like to join Gary in.

Thanking our teams for supporting our customers under challenging circumstances, and operating with discipline to generate higher margins and free cash flow.

Execution by our employees has been and continues to be nothing short of superb and what is still a challenging COVID-19 environment. We look forward to giving you more insights into our markets and our company's growth plans at the Investor meeting in April now, Mike, Let's begin the Q&A. Thanks, Dan now to help us reach as many people as we can please ask just.

One question on today's call. If you have a second question. Please just re queue and we will do our best to come back to you later in the session operator, let's please begin.

Thank you Kathryn.

You will need to press Star then one on your telephone to lift all your question. Please press the pound key.

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

Yeah, Good afternoon, and thank you for taking the question.

If you look back to 2020, it looks like you outperformed WSB by about eight percentage points and obviously you talked about favorable mix coming into 2021 led by foundry and DRAM as.

As well as I assume.

Your strong position on the legacy side. So curious if you could kind of speak to what kind of outperformance, we should be thinking about relative to <unk> in 2021.

You can point to the particular drivers that we should be focused on thank you.

Yeah. Thanks C J.

So in 2020.

If we say the market's around 60 billion in 2020.

And I would say it's up.

A little more than 16% against that backdrop, if you look at our semi systems segment.

We grew our semi systems segment revenue by 26, 5%, so significant outperformance as you've called out as.

As we look at the drivers.

In 2020 a.

Foundry logic.

Below the industry average it was really a memory driven growth year NAND about to ask DRAM, a little more than the industry average. So the company performed really well in that environment as you go to 2021.

We view this spend mix to be a more favorable environment for us as a company.

Foundry logic will continue to be strong in 2021, we see DRAM outgrowing NAND and so against that more favorable spend mix, we would expect to significantly outperform the market again. This year. So we feel really good about how we're positioned against the market opportunity we've got robust.

Our end markets and strong product momentum within those end markets. So we feel good and then as we look beyond 2021, we see from an overall market standpoint, and a company specific momentum standpoint.

We see continued strong performance into 2022, so again, we like how well we're positioned in 2021 is a more favorable mix and I would expect us to significantly outperform again.

Yeah. Jay this is Gary Thanks for the question I'll give it a little bit more color.

Uh huh.

Relative to our specific opportunities.

If you look at the industry overall.

Certainly technology is transforming every aspect of our lives that's driving.

The overall business sustainably higher.

And at the same time, we've talked about to the scaling coming to an end so really and you can even see in recent.

Meetings with some of our largest customers where they're publicly talking about the roadmap going forward around new chip architectures, new structures, new materials, new ways to connect chips together design technology co optimization again around certain structures and materials.

And so that's really where we're focused and when you think about what's going to enable the future. It really is about new structures, new materials, we talked about packaging up 50% new ways to connect chips together and we're just in a sweet spot relative to the technologies. We have when you think about creating those new store.

<unk> a new materials.

PV D is a big driver for us our RF business is going to be very strong this year.

The thermal processing CBD all of those areas are very strong and we're continuing to win and when you think about shaping those structures are select or a product.

<unk> is a leader in the industry.

Creating and shaping those those structures.

And then the modification with C M P and implant and then in P. D C. As I talked about in the prepared remarks that business is growing for us. So I can certainly give more color later on the call on that but.

So again, we're just in a really great position when you think about what's going to enable the future inflections.

And the power and performance for the infrastructure going forward.

We've never been in a better position he and see Jay maybe one more point to add to what Gary saying.

And as I went through the profile of spend one data point I left out was the aggregate size of the market in 2021, I think we will have more to say in a point specific way around.

Overall, Wi Fi size in 'twenty, one and beyond at the Investor meeting coming up here in about six weeks.

But if the overall industry consensus today is call. It high $60 70 billion I'd say, our view is a bit higher than that as we sit here today.

Thanks C J.

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

That's a little bit different than kind of the tone that some other of your peers have talked about with kind of a first half weighting of Wi Fi and it might be explained by your last comment to C. J 's question about having a little bit higher view on overall Wi Fi, but I'm kind of curious given that your fiscal year doesn't match up with the calendar year do you think on a calendar year basis.

We're going to have a stronger second half than first half and just relative to your fiscal year commentary. What gives you the bottoms up confidence of half on half growth specifically in the semi systems business.

Yes sure John Thanks for the question, let me try to unpack it a little bit. So we can talk about sort of what we're seeing in our business versus maybe what others see in theirs.

So I guess the first thing I'd point to is we've got very broad end market exposure, we're very balanced across all three device types foundry logic and DRAM really strong positions in each of those end markets, but within those markets, we've got product breadth and momentum around the number of.

Our businesses.

So we've got more balanced end market exposure than say, some who are more narrowly focused.

Second thing I'd point to and this ties into the answer I just gave a to C. J's question.

A more favorable mix set up in 2021.

With foundry logic, continuing to be strong DRAM outgrowing NAND. So I think that serves us well for continued and significant outperformance and then we talked about carrying the momentum both from a market standpoint and product standpoint into 2022, So I feel good about how that transition looks and then lastly, as you rightfully pointed out.

Within the fiscal year, we see back half momentum with each of our respective reporting segments. So again, where we sit today.

We think we're really well set up for strong performance throughout the year.

Thank you John.

Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Your line is now open.

Thanks for taking my question.

Dan.

A lot of talk of chip shortages of these days.

Do you think this 70 billion WMC for the industry sufficient to address the shortages are all kind of Wi Fi number would be higher or do you think that this actually could push out some of that demand into next year, that's about it before.

Before the shortages are fully met thank you.

Yeah, So a couple of things on that.

Vivek first of all our number for the aggregate size in 'twenty 'twenty, one we werent point specific, but we're a little higher than where the a bit higher than where the industry consensus is.

I do think there is good strong positive momentum.

I think the capacity our customers put in place is around multiyear demand statements to make these investments make sense over the long run drive a return on those investments there has to be a substantive not a transitory all demand statement that sits behind those investments our customers make and so.

We do think there's a bit of catch up spend when you think about shortages in the auto industry. We think that's going to be a good end market, but I don't think that market in and of itself is sufficiently large.

To drive.

Sufficiently large to drive.

The types of demand that we're talking about in the current environment. So when we look at greater than 70 billion in 2021.

You know the demand statement that sits behind that it's diverse it's broad all the respective end markets NAND DRAM foundry logic are strong some grow faster than others and it's on the back of these trends we've been talking about playing out over time, we think we're in the very early innings. This is gonna be a decade plus.

Investment cycle semiconductors are going to be in on the key path of enabling.

Some pretty major trends that play out.

Around the world and so our customers are going to be disciplined they'll continue to add capacity, where it makes sense, but it'll be in support of what is a more substantive long term demand statement in the market as opposed to any near term dynamic that will be temporary in nature.

Thank you.

Thank you. Our next question comes from the line of Toshi Hari with Goldman Sachs. Your line is now open.

Hi, good afternoon, and thanks for taking the question.

Want to ask about gross margins down.

You showed nice upside in the January quarter, I was curious what drove that.

For April you're guiding up margins nicely, both sequentially and year over year.

What are the puts and takes there and I guess going into the second half of the fiscal year would it be fair to assume sort of a gradual progression higher given potentially faster growth in your leadership products and hopefully.

Covid inefficiencies going away.

Jay.

Yeah. Thanks to share you know when I think about gross margins.

Company is performing well, we're up 100 basis points year over year in the most recent quarters results on the guide we're up about 240 basis points year over year and that's against the backdrop of still some some pretty sizable headwinds as it relates to the pandemic.

Safety protocols in our factories logistics costs to move material around the world and so I think the company is performing extremely well in the current environment and when I think about what's driving that you know there's a set of company specific actions that drive discipline and efficiency into the core.

<unk> of the business no matter, where our gross margins are I will never be satisfied we've had a number of actions inside of the company to drive that efficiency.

To drive that discipline into the core of the operations and we're beginning to see some of those really take hold in the current environment. So we feel good about the work streams lot of hard work inside of a company doing some really.

Hard work and fundamental things to drive that efficiency, you'll always have an element of customer mix and what we happen to be selling in any one quarter that will influence things from quarter to quarter, but there's a whole host of substantive actions that we think are serving the company really well in the current environment as they look forward into the back half of the fiscal year.

Here this is not a one quarter phenomenon.

The top end of our long term target model for gross margin.

47% and even in the Covid environment, we're operating at that level I would expect us in the back half of the year to be continued to be in the 46, 5% to 47% top end of our long term model at our analyst day, we'll talk about what we see beyond the current horizon.

Over the next several years and opportunities we see to work the gross margins up even higher off of these levels, but definitely not a one quarter phenomenon companies performing well.

Thank you congrats.

Thank you. Our next question comes from the line up of chip.

Malik with Citi. Your line is now open.

Hi, Thank you for taking my question.

So Gary Gary.

European Union looking into building.

Developing fab in Europe, there is a.

Buzz among investors that semiconductors have become strategic.

Are you engaged with any kind of discussions with Washington D. C. On this topic.

Yeah, let me so so I do think that everyone can see that.

Relative to economic growth and employment growth going forward.

It's going to look different and the digital digital transformation of Andrew every industry is being accelerated in the current environment that we're in so this is very strategic from again from an economic and employment growth perspective.

From a applied perspective, we have been engaged with.

Customers and also government initiatives around investments are in.

In different locations and what I would say for from applied perspective. There are a couple of things to think about one is as these companies are moving into new locations you have to look at the scale of the factories that they're building and Oh at least what's been announced is smaller scale somewhat less efficient.

Now supply demand eventually works itself out, but you know that.

Somewhat less of fish efficient.

The factory size is a positive for applied and the other thing what we've seen in every case, where a company is moving from one geographic location, where they have a tremendous amount of talent concentration and experience that.

That creates an opportunity for our service business as they move into a new location. So I think both of those things the factory efficiency in our service business. Our service agreements are much higher also.

Those cases that creates an opportunity for us that's going to play out over time, but certainly I think from a strategic perspective, we can all see that the Paul there is very strong.

Yes.

Great. Thanks.

Thank you. Our next question comes from the line of Krish <unk> with Cowen and company. Your line is now open.

Hi, Thanks for taking my question and congrats on the strong results, especially the op margin and John quarter, given I think it was a 14 week quarter.

A question that flow Gary was.

You spoke about process control growing over 40% last year and possibly over 20 per person.

Which is very impressive given you are outgrowing peers, just kind of curious is it all primarily coming from the new optical inspection tool or its E beam patterning, adding some extra fuel to either going to use some puts and takes it on the BDC group this year.

Yeah. Thank you Krish, so really I would say there are three major drivers one is the new optical wafer inspection system, while we've seen tremendous Paul and especially in foundry leading foundry.

We've seen a tremendous ramp of that new optical wafer inspection system and it really gives the customers tremendous performance at a much better cost of ownership. So they can insert inspection points in more places in the line.

That has a big impact on the speed of the yield ramp. So so that's really in the early phase of adoption.

<unk> optical wafer inspection system or E beam products are tremendously strong if you look at our 2021 R. R E beam growth would exceed every prior year for PDC total systems business other than 2020, so that business is very strong we have leadership in elektron.

Optics are we've introduced a new source technology that gives us much higher resolution much faster imaging in one segment of the market, we will take that core technology.

In electron optics across all of our different platforms and it creates just a tremendous opportunity for us to continue to extend our leadership in.

In the E beam part of the market. So that's growing very fast and the third thing I would say that's really important when you think about power performance area and cost.

What's really important to our customers is how fast they can drive a all of those different key metrics, so accelerating certainly for us and for them we.

Talk about P pack T is enormously important and there are cases with the especially our E beam products, where you can generate orders of magnitude orders of magnitude more data in a much faster period of time, so when you're thinking about optimizing the new.

The new structures with unique imaging and algorithms to accelerate both our internal R&D at applied and also the Pea pack roadmap for our customers that synergy is increasing.

From an overall company perspective, so again I think the optical inspection and we're in the early phase of the adoption E beam leadership in imaging, while it will extend that leadership with new capabilities and the synergies with our overall business has never been better and never been more important for us and for our customers.

Thank you Jay.

Thank you. Our next question will come from the line of Harlan sur.

With J P. Morgan your line is now open.

Good afternoon, and great job on the quarterly execution.

Shortages in the industry are across leading edge and lagging edge technologies, but probably more so on lagging edge to speak to support.

Mixed signal microcontroller products that feed into the auto and industrial markets and I think these customers are scrambling to add capacity what order activity has been like for like in etch tools and it looks like lagging edge and Iot contributed about 25% of your systems business last year you guys.

That mix to grow this year and how the operating margin for these tools compared to the overall system same thing.

Yeah. Thanks, Harlan, let me just pull up some statistics on the split so trailing node versus leading edge. This year, we kind of see.

If it was maybe yeah, it's probably a follow through on 70 30 again this year 70 per cent leading edge a.

30% trailing node geometries, you know as we go back in time, we've been talking about this.

You know a fair amount here over the last couple of years, so strength on the trailing node geometries is.

Has not been new in fact, if we go back 2010 to 2020, I think that 10 year window, if the foundry business over that time in aggregate grew just about 90% little bit less.

The trailing node geometries has been above the foundry segment average at about just over 110% growth leading edges ground at about just over 75%. So this trend has been playing out for quite some time, we're well positioned in this segment, we're delivering key technologies and.

You know the company is performing well this will be very value accretive to us as this segment of the market continues to grow and outgrow W. P.

Yeah, Harlan I can add just maybe a little bit to US you know I think this opportunity and what people refer to a specialty semiconductor a significant about two years ago. We formed an organization we call ICANN I cats focused on Iot communication auto power sensors are pulling together all of.

Our capabilities across the company.

<unk>.

We now see this as one of the fastest growing opportunities within applied materials and when you think about what drives those markets, whether it's sensor technologies or power devices RF any of those types of Oh any types of those types of businesses. It really plays to our leadership Prada.

<unk> L. P. P. B D CVD implant thermal CMP ACH in P. D C. So.

So we really have a good position there we pulled together.

Probably strong group within applied and we've also we also have a focus device integration team just on those particular devices. So we talk about integrated materials solutions and we have some really dynamite.

Integration engineers beyond the unit processes, so that our role our strategic role in enabling that market has been increasing as we've refocused the organization. So as Dan said, we're really optimistic and we think some of these markets could be some of the fastest growing markets over the next several years.

Ears.

Great insight. Thank you. Thanks.

Thanks Harlan.

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Your line is now open.

Great. Thank you Krish.

On the services business, you had a lot of upside there relative to the commentary that the guidance on the quarter can you talk about what what's driving that is that is that Tom.

You said customer Utilizations are better just what should we infer by the the upside there and how sustainable those trends could be.

Yeah. So thanks Joe.

So we talked about in.

In the prepared comments growing this business at twice the rate of our overall installed base. So this has been playing out over multiple years our.

Company has done a good job outgrowing the installed base, we're outgrowing a two to one over an extended period of time.

Embedded in that growth are a couple of things service entitlement on the new technologies is greater than what we used to ship say a decade ago or more the technology is more complex the customers' integration windows process windows are tighter. So it requires continually tighter specs and the performance of our equipment and tighter.

Windows and so that creates a nice adder as well.

And then when you think about the strategy.

Five years ago, we had around 40% of our revenue covered by long term service agreements. The vast majority of those service agreements had a tenure.

About one year in duration fast forward to today, we've penetrated to over 60% of the revenue covered by long term service agreements a third of those long term service agreements have now stretch out their tenor.

Beyond a one year. So we feel really good about the value that we're adding the customers and it's underpinning of nice growth for the business. So.

So we feel good about the strategy, we feel good about the execution of the opportunity and it's a nice stable source of profitability cash flow.

And value creation for our shareholders. So business is performing well.

I mean, it seems like a really good business I'm just surprised that there is so much upside relative to 14 weeks ago, specifically what.

I guess you got it to one point I was evident came in at 1.155.

What does that upside being driven by.

Oh, so if it's a specific comment around the most recent quarter you know everybody puts our assumptions into their models about how you respond in a current environment, where youre seeing some spikes with respect to the pandemic in different geographies and just making sure that we recovered from an execution standpoint I'm on.

Notable things as we extrapolate those data points.

To.

Different populations around the globe, we went into that quarter a bit more conservative than we typically would as a result of those pandemic statistics, we're seeing in the fall.

Great. Thank you.

Thanks, Joe.

Thank you. Our next question will come from the line of Quinn Bolton with.

Needham <unk> company. Your line is now open.

Hey, guys I wanted to ask a clarification and a question. The clarification is just does your guidance incorporate any shutdown at the Austin manufacturing sites due to the decrease going on in Texas and then.

My final question is a follow on to <unk> question about the U S and Europe.

The European Union to the extent that they provide local support for.

Local supply chains for advanced semiconductor manufacturing would you see that WP spending being additive or is that just sort of a re allocation of WSB spending from what otherwise would have taken place in Asia to either the U S and Europe. Thank you.

Yeah. Thanks Quinn.

So from our Austin manufacturing standpoint.

I would say our business was subjected to the power fluctuations that most commercial enterprises manufacturing enterprises saw in Austin, but I would say is we don't see a material impact to the business. We think the weather gets better here another day power stabilizes.

Ben in close contact as you can imagine with our team there we've got risk mitigation plans in place we've got labor pre positioned I think we're ready to respond quickly once the power stabilizes and the guidance. We've put forward contemplate everything that's going on in that region and the way we are going to respond and drive output as quickly as possible once we get.

The stable power back and so we feel good about where we sit today in support of the guide that we put out there.

As it relates to localization of supply change disaggregation of manufacturing footprint, Here's what I would say from a business impact standpoint, and a market perspective.

I would say global supply is going to meet global demand.

And Gary mentioned that if you've got 250000 wafer start a month factories that are less capital efficient.

Manufacturing footprint than one large 100000 wafer start a month facility.

So while I don't think it's a step function change from an overall wafer fab equipment standpoint, I would say that wafer fab equipment, probably positively biased to the upside as a result of those multiple <unk>.

Smaller scale facilities, the other impact I would say from a business perspective as these supply chains are localized is we've got a great global footprint of our service organization. They do great things for our customers around the globe when our customers locate capacity in areas outside of their home geography.

That's been a nice service sater, we've seen a nice service at her and increased entitlement on that capacity.

Historically and I would expect that to continue so we think that that's going to be a nice tailwind for our service business as that trend materializes going forward.

Thanks, Steve Thanks, Glenn.

Thank you. Our next question comes from the line of Blayne Curtis with Barclays. Your line is now open.

Hey, guys. Thanks for taking my question just wanted to ask.

Non opex and I feel guilty asking given the op margin performance, but it considering it for three quarters of a decent amount maybe what's driving that other than I guess you know.

And then just any thoughts on the rest of the fiscal year.

Yeah. So a couple of things and thanks for the question Blayne, just a couple of things on the transition from Q1 to Q2.

I would observe about Q1 is as we get a holiday shutdown.

In that period at the end of at the end of the calendar year.

You also have partial impact of annual merit increases one month impact as we.

Moving into Q2.

No longer have a shut down and you get a full quarter impact of merit increases so there's an embedded cost escalator.

In that timeframe. The other thing I would say Gary spent a lot of time talking about this.

There is a very fundamental transition happening in our industry.

Traditional Moore's law is shrinking I mean traditional Moore's law to day shrinks are beginning to hit a wall the industry's pivoting to a new playbook and we have we have a meaningful key enablement role to play in each element of that new playbook.

We're going to be disciplined, but we are going to invest to grow.

We're going to drive innovation, we're gonna be a key enabler of our customers' roadmaps from a discipline standpoint, I think the company has got a good track record from an Opex perspective close to 70 per cent of what we spend as fuel for growth R&D with pretty tight containment from a discretionary spend standpoint. So we're.

To 70% of all Opex goes to R&D and then from an Opex leverage perspective, an observation I would make is and this goes to growing the company in a very disciplined manner day.

<unk> innovation, but doing it in an efficient manner over the last 12 months, we've got 340 basis points of Opex leverage that we've delivered and if I take it out to eight quarters. We've got 460 basis points of Opex leverage that we've delivered to the P&L. So I think the company has demonstrated a great track record of delivering these innovations but doing it in.

Efficient way that drives significant value for shareholders. So we feel good about it blayne.

Thanks Blaine.

Thank you. Our next question comes from the line of Timothy Arcuri with UBS. Your line is now open.

Thanks, a lot Gary I guess I had a longer term question for you. So we're gonna see gate all around.

Maybe late next year, but definitely in 2023 and then they go to see effects, maybe in 'twenty, four definitely twenty-five which seems like a long way away, but it's not really that far out there and there seems to be a drag you to litho is going to be a big headwind for the films companies like you.

But it actually seems like the same thing could happen in logic that happened and then when you start to stack.

Transistors so.

That you can capture the incremental dollars versus lift, though if you look out say three to five years. So can you just kind of talk about what's happening in logic things.

Alright, Thanks for the question Timm, So what I would say.

I mean, these are Ceos, and R&D leaders for leading foundry and logic on a very very regular basis actually more more often now than I did before.

The pandemic because we're doing all of this virtual.

I deeply believe in and you can see even this week there was one of our leading customers talking about how they're driving their technology roadmaps going forward and it's really around the five elements that we've been talking about the new structures, new chip architectures everybody's designing their own app.

Location specific chips, new materials, new ways to shrink I've talked about packaging and the growth there, but I think we're just in a tremendous position and when you think about what's going to drive power performance and cost going forward.

There's no question. It's about these new structures in these new materials and when you look at it really all of the different markets you talked about the new transistor.

Structures going forward, whether people called gate, all around or nano sheets or also the wiring the resistance in the wiring there's tremendous focus in those areas because that is really what enables power and performance going forward.

So we're just in a really tremendous position when you think about the materials that are needed to create those nano sheets or the wiring or three D DRAM or any of those big inflections that are going forward in the future. We just have by far the best portfolio of materials.

That create those structures then you think about shaping the structures.

We have strength in conductor etch, where we certainly had a strong position in memory, we're growing in foundry logic, you'll see our share continue to grow there shaping with the select for our product is also really important for nano sheets and for other new structures the modification of those those different structures.

And also accelerating the time to market I talked about the synergies with our PDC and especially our E beam business when I'm building this new transistor.

You know if I can see the materials residual materials inside that structure as I'm driving the R&D versus having the cross section one particular transistor and look inside that they're learning rates go up by orders of magnitude. So those unique imaging capabilities are combined with.

With the unique capabilities, and creating and shaping and modifying those structures.

Again I just if you look at what's being presented by our leading customers even this week.

You'll see it exactly aligned to this new playbook.

And enabling capabilities for applied so again, I I I've never been more excited about our opportunities to enable the roadmap.

Totally Gary Thank you.

Yeah.

Thank you. Our next question comes from the line of Joe box.

<unk> with Wells Fargo. Your line is now open.

Yes, thanks for taking the question.

I was curious in your Wi Fi outlook for this year, what's your assumption around domestic China and does your Ws the outlook for this year include the assumption that we don't see any license from customers that are required by the government right now.

Yeah, Hi, Joe Thanks.

Thanks for your question so from a domestic China standpoint.

I think we ended the year 2020 around $10 billion. We think we're up a few billion dollars off of that level. So we will see this year, what we've been seeing for several years now which is slow steady ecosystem development youre going to see some investment in technology Roadmaps and still some.

The modest capacity additions that sit behind that.

Those technology road maps.

And then from a licensing standpoint, you know just given where we sit in the process. We think it's prudent to forecast and guide revenue and market sizing assuming the licenses do not come through and when we received the licenses then we'll adjust the.

<unk> I would expect revenue to go up and I would expect the market sizing to go up but the current forecast expectations of greater than $70 billion. This calendar year for the overall market size does not assume that those licenses come through that'll be upside to the numbers we've talked about.

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

Our next question comes from the line of Mitch Steves with RBC capital markets. Your line is now open.

Hey, guys. Thanks for taking my question I honestly very great quarter, Great Guide.

My only little Nitpick curious if some of the display business I feel like every quarter, we kind of try to call a bottom here, but then you made comments about all of the segments kind of being up in the second half could you maybe just help us understand what the magnitude is after the display business and then secondly, if you're if you've got any sort of like actual visibility into that and confidence around this.

Waking up in the second half of the year. Thank you.

Yeah. Thanks Mitch.

Couple of things on display I think we've been very consistent in this business over time, we know that from quarter to quarter. This is a business that will bounce around a little bit, but we've been saying now for many quarters that the sizing in 2021 from an overall market spend perspective, as well as the proportion of spend.

N T V. In mobile is going to look and feel a lot like 2020.

And that's exactly what we see playing out the implications for our business revenue and we've been saying this for many quarters now the revenue that we see in our display business in fiscal 2021.

It's going to be very similar to what we produced in fiscal 2020.

We are monitoring a number of green shoots we talked about on the last earnings call a confidence interval around them continue to increase and the confidence interval around 2022 being a more robust investment point in the cycle continues to increase so we feel good about where we see.

Stand growing off of the guide we just gave in our fiscal Q2 <unk> from.

From an order standpoint, we can see it from an order standpoint growth into the back half of the year and we can also see it from a customer deposit perspective, and so we feel good about how we're shaping expectations around this market and I've got no anxiety.

80, given where it is.

What we see and where we sit around the second half being stronger than the first half in that business.

Hey, Thanks Mitch.

Thank you. Our last question comes from the line of Patrick Ho with Stifel. Your line is now open.

Thank you very much and congrats on a nice finish to the calendar year, Gary maybe just a follow up on some of the questions and given the strength that you had in the advanced packaging business that Lee.

Looks like it's another growth opportunity for you are you able to leverage the products from your core leadership in existing portfolio or are you also developing new products given the changes that are going on in advanced packaging, particularly as they become more front end manufacturing and alike.

Yeah. Thanks for the question Patrick So.

I'll start off by saying.

We've talked about this as being one of the five key drivers for the P. P pack roadmap going forward and if you look at what.

Leading customers are talking about packaging is incredibly important for power and performance and cost.

That's all for me personally I've engaged much more so with the R&D leaders in this particular industry than I ever was relative to your question about our existing products versus new products I would say it's both.

Look at wafer level packaging, we're number one in wafer level packaging.

Advanced wafer level packaging with TVD CVD CMP plating, we have a new Sim three via etch are also where we won a one of the largest one of our largest customers that business. So we have all of those combinations of products and packaging.

And we also announced recently a new integrated hybrid bonding system.

Working with another company.

That is really important and we have very strong Paul from every one of the our leading customers with that new technologies. So I you know again, it's a combination of both.

Where we're innovating with our existing products also looking at accelerating the big inflections in packaging.

And hybrid bonding is one example of that so I think it's just a tremendous opportunity for the company I think this is going to become more important as we go forward and we're in a unique position with the combinations of capabilities that we have.

Yeah.

Thank you.

Thank you Patrick for your question and then Dan would you like to help us wrap the call Yeah sure Mike. Thanks.

So as I look at this quarter, a few things stand out for me first the growing strength of our end markets second really strong outperformance in calendar 'twenty 'twenty.

And I guess third and even better setup for applied as we look forward into 2021, I see strength throughout the year and that includes fiscal second half growing across all three reporting segments semi systems Ags and display I really like the gross margin improvement.

Spent a lot of hard work, especially during COVID-19, and I really want to thank all of our teams one more time for this.

Great progress.

We all hope that the regulatory decision on Coca side goes in our favor and Gary and I along with the rest of the management team look forward to seeing you in about six weeks during the Investor meeting, Michael Let's close the call now.

Thanks, Dan and we'd like to thank everybody for joining us today, a replay of the call will 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 good day.

[music].

Welcome to the applied materials earnings conference call.

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

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

I would now like to turn the conference over to Michael Sullivan Corporate Vice President. Please go ahead Sir.

Good afternoon, everyone and thank you for joining applied as first quarter of fiscal 2021 earnings call. Joining me are Gary Dickerson, 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 applied its most recent form 10-Q, and 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 materials, which are available on the IR page of our website at applied materials Dot com.

Before we begin I have a calendar announcement on April six applied plans to host a virtual investor meeting to discuss our markets strategies and financial targets. We hope you will save the date and now I'd like to turn the call over to Gary Dickerson.

Thanks, Mike I'm very pleased to report another quarter of record performance for applied materials. So that's the beginning of our fiscal year. We've seen a continued acceleration of demand in our semiconductor business as major macro and industry trends fuel increasing consumption of silicon across a wide range of markets and <unk>.

Implications 2020 was an excellent year for applied as we outperformed our markets while growing our earnings nearly twice as fast as revenue.

We carried our strong momentum into 2021, our broad portfolio and exposure to technology inflections combined with the traction of our new products put us in a great position to substantially outgrow our markets again, this year and into the future.

R&D our teams are working on new ways to accelerate the time to market of critical innovations for our customers and we're doing all of this while maintaining a relentless focus on keeping our colleagues and families safe.

Bill our customers power performance and cost Roadmaps accelerate their time to market and drive applied long term profitable growth.

Starting with a high level view of our markets. We are seeing a diverse combination of macro and technology factors fueling very strong and sustainable demand for semiconductors as the world continues to navigate the current challenges and prepares for a post pandemic era, the digital transformation of the.

Economy is being accelerated companies are rethinking and reengineering the way they operate and there's an immense Paul for advanced technology. In addition, consumers are making different choices about the way they spend their time and the products and services day by I strongly believe many of them.

The changes we're seeing today are irreversible.

New ways of working offer compelling advantages in terms of time and productivity.

Within the electronics ecosystem itself key technology inflections are driving increasing silicon consumption.

I'll highlight three examples cloud service providers are forecasting data center capex growth of more than 15%. This year on top of record spending in 2020.

With a broader adoption of five G handsets silicon content in smartphones is growing at double digit rates and then automotive where there are non supply shortfalls total semi consumption is expected to expand more than 15% this year.

Translating these factors to industry investments in foundry logic, leading edge investments are very strong and have been well articulated by our customers.

On top of that our I cat's business that serves the Iot communication auto power and sensor markets is expected to grow even faster and is on track to exceed $3 billion of revenue for the fiscal year.

And then 2020 was a strong recovery year with spending up more than 30% and in 2021, we expect customers to invest at modestly higher levels.

And DRAM supply demand fundamentals look more favorable than NAND and as a result, we still expect DRAM investments to outgrow NAND this year.

All of this adds up to a very strong demand environment for wafer fab equipment and we believe this strength is sustainable well beyond 2021.

Digital transformation touches every sector of the economy and is non discretionary for many industries. In addition industry investments up here disciplined when you look at wafer fab equipment intensities that wafer fab equipment revenues as a percentage of semiconductor industry revenues. They are.

Well below recent peaks in all three of the device segments foundry logic NAND and DRAM.

Turning to applied business performance, our semiconductor systems revenues for the first fiscal quarter were up 26 per cent compared to the same period last year.

At the midpoint of our Q2 guidance semi systems will be up around 50% year on year and based on our current outlook, we expect to again grow faster than the market for the year as a whole.

Bind with our ability to connect them in unique ways are fundamental to enabling our customers' power performance and cost roadmaps.

Note over node opportunity growth in both foundry logic and memory favors applied leadership businesses, including Abby thermal processing C. M. P. M. P V. D. In fact, we believe our PD business can grow more than 40% this year and generate more than $3 billion.

Of revenue.

Our latest generation products have strong momentum and more than 25% of our 2021 revenues will come from critical applications that we've targeted and won since 2018.

Some highlights include CVD, where we grew revenues, 30% in 2020 and have strong customer Paul for new differentiated materials solutions that are highly enabling for advanced patterning conductor etch, where we're winning new applications in DRAM and foundry logic that contribute.

To our 32% revenue growth in this market last year.

Fact revenues to be up 50% year on year on top of strong growth in 2020.

Also over the past few years, we started introducing a new class of highly differentiated products that we call integrated materials solutions or I M. S.

From our initial IMS products.

Moving to service a G S delivered another record quarter over the past five years, we've grown our services business at a compound annual growth rate of 12%, which is twice as fast as our installed base growth.

In this period, we've increased the percentage of service and parts revenue generated by service agreements from around 40% to more than 60 per cent.

These long term agreements enable us to deliver more value to customers with our advanced service products, while providing us with stickier and more predictable recurring revenue streams are.

Our renewal rates for these agreements are also very high at over 90%.

Finally in display our outlook remains consistent with the view we shared in November we expect 2021 revenues to be similar to 2020 as we continue to manage through the current Mark a trough, we do see encouraging leading indicators of future growth, including higher OLED adoption.

Option in the smartphone market with a vast majority of five G handsets being equipped with OLED screens.

And increasing OLED consumption beyond phones, and Tvs and I T applications. We still believe OLED is a compelling technology and this inflection is a great catalyst for the display market that will create expanded opportunities for applied.

Before I hand, the call over to Dan I want to again, thank all our employees for their outstanding contributions to applied success too.

And we believe we're in a great position to outperform our markets again this year.

Beginning with our Q1 performance applied delivered a record revenue and non-GAAP earnings per share. We grew revenue by 24% year over year and exceeded the high end of our guidance.

We increased non-GAAP EPS by 42% year over year to one dollar and 39.

Our teams operating with discipline and this enabled applied to deliver record free cash flow of $1 $3 billion, which was up 47% year over year.

We increased cash and investments on the balance sheet by nearly $950 million to $8. Two 2 billion as we await the regulatory decision for the Coca side electric transaction.

Look forward to updating you on our capital allocation plans when we get together for the Investor meeting in April.

Turning to the segments.

Our semi systems group increased revenue by 26% year over year, including New quarterly records in etch metal deposition and CMP.

Operating margin grew by 320 basis points year over year.

Applied Global services also delivered revenue above our expectations, while reporting its highest operating margin of the past two years, despite ongoing challenges related to COVID-19.

Display group exceeded its revenue target and increased operating margin by 590 basis points year over year.

Looking ahead, our demand outlook calls for growth.

We currently expect all three of our segments to post higher revenue in the second half of our fiscal year.

Next I'll comment on our semiconductor equipment revenue performance in calendar 2020, which is equal to our Q2 of fiscal 2020 through Q1 of fiscal 2021.

As I previewed on our November earnings call 2020 was a memory growth year, and which NAND equipment spending grew at nearly twice the rate of the overall market.

DRAM customer spending also grew faster than the market.

In foundry logic investments grew slower than the overall market, but still accounted for over 55% of total spending.

Within the semi systems group, our growth was strongest in areas, where we've made significant investments to drive the new playbook developed integrated materials solutions for our customers and introduce new products, where we have significant room to gain share one of our fastest growth areas was in advanced packaging, where we have the industry's broadest.

Portfolio and by far the highest share as Gary said, we expect this momentum to continue into 2021.

New products are latest optical wafer inspection system grew by 44% in 2020, achieving over $400 million in cumulative revenue.

We will officially introduced the new system in the near future to explain its unique architectural features along with breakthrough AI capabilities that are generating strong customer Paul.

Turning to calendar 2021, we expect strong foundry logic spending to continue we also expect DRAM spending to grow at a faster pace than NAND.

This 2021, Nix expectation plays, particularly well to applied technology innovations and strong product roadmap.

Now I'll share our Q2 business outlook, we expect company revenue to be approximately $5, three $9 billion, plus or minus $200 million, the midpoint would be up about 36% year over year.

We expect non-GAAP EPS to be about $1 50.

Plus or minus six cents are up about 70% year over year.

Within this outlook, we project semiconductor systems revenue of $3, eight 5 billion up around 50% year over year, and Ags revenue of about $1.14 billion up around 12% year over year. These forecasts do not include any revenue from shipments that still require government licenses.

As we.

We expect display revenue of around $370 million with growth resuming in the second half.

We expect applied non-GAAP gross margin to be approximately 47% or up around 240 basis points year over year, and we expect non-GAAP opex to increase to $890 million.

Our Q2 guidance assumes a non-GAAP tax rate of 12% to 13% and a weighted average share count of around $929 million.

In summary, I'm pleased that applied delivered another quarter of record performance in Q1 with strong year over year growth in revenue and profitability I would like to join Gary in thanking our teams for supporting our customers under challenging circumstances, and operating with discipline to generate higher margins and free cash flow.

Just one question on today's call. If you have a second question. Please just re queue and we will do our best to come back to you later in the session operator, let's please begin.

Thank you Jay asked a question you will need to press Star then one on your telephone to lift all your question. Please press the pound key.

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

Yeah, Good afternoon, and thank you for taking the question.

I guess, if you look back to 2020, it looks like you outperformed WSB by about eight percentage points and obviously you talked about favorable mix coming into 2021 led by foundry and DRAM.

As well as I assume.

You're in a strong position on the legacy side. So curious if you can kind of speak to what kind of outperformance, we should be thinking about relative to <unk> in 2021.

And as you can point to that particular drivers that we should be focused on thank you.

Yeah. Thanks C J.

So in 2020.

If we say the market's around 60 billion in 2020.

And I would say it's up.

Little more than 16% against that backdrop, if you look at our semi systems segment.

We grew our semi systems segment revenue by 26, 5%, so significant outperformance as you've called out.

As we look at the drivers in 2020, a foundry logic grew below the industry average it was really a memory driven growth year NAND about to ask DRAM, a little more than the industry average. So the company performed really well in that environment as you go to 2021.

We view the spend mix to be a more favorable environment for us as a company foundry logic will continue to be strong in 2021, we see DRAM outgrowing NAND and so against that more favorable spend mix, we would expect to significantly outperform the market again this.

This year, so we feel really good about how we're positioned against the market opportunity. We've got robust end markets and strong product momentum within those end markets. So we feel good and then as we look beyond 2021, we see from an overall market standpoint, and a company specific momentum standpoint.

We see continued strong performance into 2022, so again, we like how well we're positioned 2021 is a more favorable mix and I would expect us to significantly outperform again.

Hey, Jay this is Gary Thanks for the question I'll give it a little bit more color.

Uh huh.

Relative to our specific opportunities.

If you look at the industry overall.

Certainly technology is transforming every aspect of our lives that's driving.

The overall business sustainably higher and at the same time, we've talked about two D scaling coming to an end so really and you can even see in recent.

Rogers of new materials.

PV D is a big driver for us our RF business is going to be very strong. This year are the thermal processing CBD all of those areas are very strong and we're continuing to win and when you think about shaping those structures are select or a product.

<unk> is a leader in the industry.

Creating and shaping those those structures are and then the modification with C. N P and implant and then in P. D. C is.

<unk> talked about in the prepared remarks that business is growing for us, but I can certainly give more color later on the call on that but you.

So again, we're just in a really great position when you think about what's going to enable the future inflections.

And the power and performance for the infrastructure going forward.

We've never been in a better position.

And see Jay maybe a one more point to add to what Gary, saying and as I went through the profile of spend a one data point I left out was the aggregate size of the market in 2021, I think we'll have more to say in a point specific way around overall Wi Fi size in 'twenty, one and bill.

At the Investor meeting coming up here in about six weeks.

But if the overall industry consensus today is call. It high $60 70 billion I'd say, our view is a bit higher than that as we sit here today.

Thanks C J.

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

Good afternoon, guys. Thanks for letting me ask the questions and congratulations on the solid results and guide did Dan it's probably not all that surprising that half on half growth as expected both in services and display but in the semi system businesses, that's a little bit different than kind of the tone that some other of your peers have talked about with kind of a first half.

Weighting of Wi Fi and it might be explained by your last comment to C. J 's question about having a little bit higher view on overall Wi Fi, but I'm kind of curious given that your fiscal year doesn't match up with the calendar year do you think on a calendar year basis that we're going to have a stronger second half than first half and just relative to your fiscal year commentary what gives you the <unk>.

Items up confidence of half on half growth specifically in the semi systems business.

Yeah sure John Thanks for the question, let me try to unpack it a little bit. So we can talk about sort of what we're seeing in our business versus maybe what others see and there's so I guess the first thing I'd point to is we've got very broad end market exposure, we're very balanced across all three device types foundry logic <unk>.

In DRAM really strong positions in each of those end markets, but within those markets, we've got product breadth and momentum around the number of our businesses. So we've got more balanced end market exposure than say, some who are more narrowly focused.

Second thing I'd point to and this ties into the answer I just gave a to C. J's question, we've got a more favorable mix set up in 2021.

Within the fiscal year, we see back half momentum with each of our respective reporting segments. So again, where we sit today.

We think we're really well set up for strong performance throughout the year.

Thank you John.

Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Your line is now open.

Thanks for taking my question for Gary.

And there's a lot of talk of chip shortages of these days.

You think this 17 billion WMC for the industry sufficient to address the shortages are all kind of Wi Fi number would be higher or do you think that this actually could push out some of the demand into next year, that's about it before.

Before the shortages are fully met thank you.

Yeah. So a couple of things on that Vivek first of all our number for the aggregate size in 'twenty and 'twenty. One we werent point specific but were a little higher than where they are a bit higher than where the industry consensus is.

I do think there's good strong positive momentum.

I think the capacity our customers put in place is around multi year demand statements to make these investments make sense over the long run drive a return on those investments there has to be a substantive not a transitory all demand statement that sits behind those investments our customers make and so.

To drive sufficiently large to drive.

The types of demand that we're talking about in the current environment. So then we look at greater than $70 billion. In 2021, you know the demand statement that sits behind that it's diverse it's broad all the respective end markets NAND DRAM foundry logic are strong some grow faster.

And others and it's on the back of these trends we've been talking about playing out over time, we think we're in the very early innings. This is gonna be a decade, plus investment cycle semiconductors are going to be in on the key path of enabling.

Some pretty major trends that play out.

Thank you.

Thank you. Our next question comes from the line of Toshi Hari with Goldman Sachs. Your line is now open.

Hi, good afternoon, and thanks for taking the question.

You asked about gross margins down.

You showed nice upside in the January quarter, I was curious what drove that.

For April you're guiding up margins nicely, both sequentially and year over year.

Covid inefficiencies going away.

Jay.

Yeah. Thanks to share you know when I think about gross margins.

Company is performing well and were up 100 basis points year over year in the most recent quarters results on the guide we're up about 240 basis points year over year and that's against the backdrop of still some some pretty sizable headwinds as it relates to the pandemic safety protocols in our factories logistics cost.

To move material around the world and so I think the company is performing extremely well in the current environment and when I think about what's driving that you know there's a set of company specific actions that drive discipline and efficiency into the core operations of the business no matter, where our grow.

Margins are I will never be satisfied we've had a number of actions inside of the company to drive that efficiency to drive that discipline into the core of the operations and we're beginning to see some of those really take hold in the current environment. So we feel good about the work streams lot of hard work inside.

A company doing some really hard work and fundamental things to drive that efficiency, you'll always have an element of customer mix and what we happen to be selling in any one quarter that will influence things from quarter to quarter.

But there's a whole host of substantive actions that we think are serving the company really well in the current environment as they look forward into the back half of the fiscal year. This is not a one quarter phenomenon you know the top end of our long term target model for gross margin was 47% and even in the <unk>.

That environment, we're operating at that level I would expect us in the back half of the year to be continues to be in the 46, 5% to 47% top end of our long term model at our analyst day, we'll talk about what we see beyond the current horizon over the next several years and opportunity.

We see to work the gross margins up even higher off of these levels, but definitely not a one quarter phenomenon companies performing well.

Thank you congrats.

Okay.

Thank you. Our next question comes from the line up of chip.

<unk> with Citi. Your line is now open.

Hi, Thank you for taking my question a question for Gary Gary.

European Union looking into building already developing fab in Europe.

There's a great deal of buzz among investors that semiconductors have become strategic.

Are you engaged with any kind of discussions with Washington D. C. On this topic.

Okay.

Yeah, let me so so I do think that everyone can see that the.

Relative to economic growth and employment growth going forward.

From a applied perspective, we have been engaged with our customers and also government initiatives around investments are in different locations and what I would say for from applied perspective. There are a couple of things to think about one is as these companies are.

We're moving into new locations you have to look at the scale of the factories that they're building.

And you know at least what's been announced is smaller scale somewhat less efficient now supply demand. Eventually works itself out, but you know that are somewhat less of Finch efficient factory size is a positive for applied and the other thing what we've seen in every case.

Where our company is moving from one geographic location, where they have a tremendous amount of talent concentration and experience that.

That creates an opportunity for our service business as they move into a new location. So I think both of those things.

Factory efficiency and the service business. Our service agreements are much higher also and those cases are that creates an opportunity for us that's going to play out over time, but certainly I think from a strategic perspective, we can all see that the Paul there is very strong.

Yeah.

Great. Thanks.

Thank you. Our next question will come from the line of Krish <unk> with Cowen <unk> Company. Your line is now open.

Yeah, Hi, Thanks for taking my question and congrats on the strong results, especially the op margins in Jan quota given I think it was a 14 week quarter.

The question I had for Gary was.

You spoke about process control growing over 40% last year and possibly over 20 per from D. C.

Which is very impressive given you are outgrowing peers, just kind of curious is it all primarily coming from the new optical inspection tool audits E beam patterning, adding some extra fuel Toledo can you use some puts and takes it on the BDC. Good this year.

Yeah. Thank you Krish, so really I would say there are three major drivers one is the the new optical wafer inspection system, while we've seen tremendous Paul and especially in foundry leading foundry.

And that has a big impact on the speed of the yield ramp. So so that's really in the early phase of adoption of the new wave optical wafer inspection system or E. Beam products are tremendously strong. If you look at our 2021 R. R E beam growth would exceed every prior year for PTC.

Total systems business other than 2020, so that business is very strong we have leadership in electron optics are we've introduced a new source technology that gives us much higher resolution much faster imaging in one segment of the EBIT market, we will take that core.

Gee, our intellectual and optics across all of our different platforms and it creates just a tremendous opportunity for us to continue to extend our leadership.

And the easy part of the market. So that's growing very fast and the third thing I would say that's really important when you think about power performance area and cost.

What's really important to our customers is how fast they can drive a all of those different key metrics. So accelerating certainly for us and for them. We talk about P. Pack T is enormously important and there are cases with the especially our E beam products.

You can generate orders of magnitude orders of magnitude more data and a much faster period of time, so when you're thinking about optimizing the new materials, new structures with unique imaging and algorithms to accelerate both our internal R&D at applied.

And also the Pea pack roadmap for our customers that synergy is increasing a from an overall company perspective. So again I think the optical inspection and we're in the early phase of the adoption E beam leadership in imaging, while it will extend that leadership with new capabilities and the synergies with our overall.

Business has never been better and never been more important for us and for our customers.

Thank you Jay.

Thank you. Our next question will come from the line of Harlan sur with Jpmorgan. Your line is now open.

Good afternoon, and great job on the quarterly execution.

Shortages in the industry are across leading edge and lagging edge technologies, probably more so on lagging edge to speak to support analog mixed signal microcontroller products that feed into the auto and industrial markets and I think these customers are scrambling to add capacity what order activity has been like for like an etch tool.

And it looks like lagging edge and Iot contributed about 25 per cent of your systems business last year.

I would expect that mix to grow this year and how the operating margins for these tools compared to the overall system same thing.

Yeah. Thanks, Harlan, let me just pull up some statistics on the split so trailing node versus leading edge of this year, we kind of see.

You know if it was maybe yeah, it's probably a follow through on 70 30 again this year 70 per cent, leading edge, 30% trailing node geometries, you know as we go back in time, we've been talking about this.

You know a fair amount here over the last couple of years, so strength on the trailing node geometries is.

Has not been new in fact, if we go back 2010 to 2020, I think that 10 year window, if the foundry business over that time in aggregate grew just about 90% little bit less.

The trailing node geometries has been above the foundry segment average at about just over 110% growth leading edge has grown at about just over 75%. So this trend has been playing out for quite some time, we're well positioned in this segment, we're delivering key technologies.

And you know the company is performing well, but it'll be very value accretive to us as this segment of the market continues to grow and outgrow WMC.

Yeah, Harlan I can add just maybe a little bit to US you know I think this opportunity and what people refer to as specialty semiconductor is significant about two years ago. We formed an organization we call ICANN I cats focused on Iot communication auto power sensors are pulling together all.

Our capabilities across the company.

And.

<unk> L. P. P V D C V D implant thermal CMP ACH in P. D C. So.

So we really have a good position there we've pulled together.

Strong group within applied and we've also we also have a focus device integration team just on those particular devices. So we talk about integrated materials solutions and we have some really dynamite.

The integration engineers beyond the unit processes, so that our role our strategic role in enabling that market has been increasing as we've refocused the organization. So as Dan said, we're really optimistic and we think some of these markets could be some of the fastest growing markets over the next several years.

Yes.

Great insight. Thank you. Thanks.

Thanks Harlan.

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Your line is now open.

Great. Thank you Krish is on the services business you had a lot of upside there relative to the commentary Rick the guidance on the quarter can you talk about what what's driving that is that is that telling us it customer utilizations are better or just what should we infer by the.

Right, there and how sustainable those trends could be.

Yeah. So thanks, Joe So we talked about in the prepared comments growing this business at twice the rate of our overall installed base and this has been playing out over multiple years. Our company has done a good job outgrowing the installed base. We're outgrowing at two to one over an extended period of time embedded in.

That growth are a couple of things service entitlement on the new technologies is greater than what we used to ship say a decade ago or more the technology is more complex the customers' integration windows process windows are tighter. So it requires a continually tighter specs and the performance of our equipment and tighter windows.

So that creates a nice adder as well.

And then when you think about the strategy.

You know five years ago, we had around 40% of our revenue covered by long term service agreements. The vast majority of those service agreements had a tenure of about one year in duration fast forward to today, we've penetrated to over 60% of the revenue covered by long term service agreements a third of those long term <unk>.

Service agreements have now stretch out their tenor.

Hum beyond a one year. So we feel really good about the value that we're adding the customers and it's underpinning of nice growth for the business. So we feel good about the strategy, we feel good about the execution of the opportunity and it's a nice stable source of profitability cash flow and value creation for our shareholders. So.

Our business is performing well.

I mean, it seems like a really good business I'm just surprised that there is so much upside relative to 14 weeks ago.

Specifically what was I guess, you got it to 107% came in at 1.155.

What does that upside being driven by.

So if it's a specific comment around the the most recent quarter you know everybody puts our assumptions into their models about how you respond in a current environment, where youre seeing some spikes with respect to the pandemic in different geographies and just making sure that we were covered from an execution standpoint on unknown.

Both things as we extrapolate those data points to.

Different populations around the globe, we went into that quarter a bit more conservative than we typically would as a result of those pandemic statistics, we are seeing in the fall.

Great. Thank you.

Thanks, Joe.

Thank you. Our next question will come from the line of Quinn Bolton with Needham and company. Your line is now open.

Hey, guys wanted to ask a clarification and a question. The clarification is just does your guidance incorporate any shutdown at the Austin manufacturing sites due to the decreases going on in Texas and then.

My final question is a follow on to <unk> question about the U S and Europe.

The European Union to the extent that they provide local support for.

Local supply chains for advanced semiconductor manufacturing would you see that that W. E spending being additive or is that just sort of a re allocation of wip spending from what otherwise would have taken place in Asia to either the U S and Europe. Thank you.

Yeah. Thanks Quinn.

So from and Austin manufacturing standpoint.

In place, we've got labor pre positioned I think we're ready to respond quickly once the power stabilizes and the guidance. We've put forward contemplate everything that's going on in that region and the way we are going to respond and drive output as quickly as possible. Once we get the the stable power back and so we feel good about where we sit today in support of <unk>.

The guide that we put out there.

As it relates to localization of supply change disaggregation of manufacturing footprint, Here's what I would say from a business impact standpoint, and a market perspective.

I would say global supply is going to meet global demand.

And Gary mentioned that if you've got 250000 wafer start a month factories that are less capital efficient.

Manufacturing footprint than one large 100000 wafer start a month facility.

So while I don't think it's a step function change from an overall wafer fab equipment standpoint, I would say to that wafer fab equipment is probably positively biased to the upside as a result of those multiple <unk>.

Smaller scale facilities are the other impact I would say from a business perspective as these supply chains are localized is we've got a great global footprint of our service organization. They do great things for our customers around the globe when our customers locate capacity in areas outside of their home geography.

That's been a nice service sater, we've seen a nice service at her and increased entitlement on that capacity historically and I would expect that to continue. So we think that that's going to be a nice tailwind for our service business as that trend materializes going forward.

Thanks, Steve Thanks, Glenn.

Thank you. Our next question comes from the line of Blayne Curtis with Barclays. Your line is now open.

Hey, guys. Thanks for taking my question just wanted to ask on Opex.

Yeah.

Margin performance, but it considering of course every quarter its not a decent amount.

Maybe what's driving that other than I guess you know.

Higher Commission and then just any thoughts on the rest of the fiscal year.

Yeah. So a couple things and thanks for the question Blayne, just a couple of things on the transition from Q1 to Q2.

What I would observe about Q1 is as we get a holiday shutdown.

In that period at the end of at the end of the calendar year. You also have partial impact of annual merit increases one month impact as we.

Moving into Q2.

No longer have a shut down and you get a full quarter impact of merit increases. So there's an embedded cost escalator in that timeframe. The other thing I would say and Gary spent a lot of time talking about this there is a.

Very fundamental transition happening in our industry.

We are going to be disciplined, but we are going to invest to grow our.

We're going to drive innovation, we're going to be a key enabler of our customers' roadmaps from a discipline standpoint, I think the company has got a good track record from an Opex perspective close to 70 per cent of what we spend as fuel for growth R&D with pretty tight containment from a discretionary spend standpoint. So we're.

<unk> to 70% of all Opex goes to R&D and then from an Opex leverage perspective, an observation I would make is and this goes to growing the company in a very disciplined manner.

Delivering innovation, but doing it in an efficient manner over the last 12 months, we've got 340 basis points of Opex leverage that we've delivered and if I take it out to eight quarters. We've got 460 basis points of Opex leverage that we've delivered to the P&L. So I think the company has demonstrated a great track record of delivering these innovations but doing it in.

Inefficient way that drives significant value for shareholders. So we feel good about it blayne.

Thanks Blaine.

Thank you. Our next question comes from the line of Timothy Arcuri with UBS. Your line is now open.

Thanks, a lot Gary I guess I had a longer term question for you. So you know we're gonna see gate all around.

Maybe late next year, but definitely in 2023 and then they go to see if that's maybe in 'twenty four definitely 25, which seems like a long way away, but it's not really that far out there and there seems to kind of be a broad you. The litho is going to be a big headwind for the films companies like you, but but but it actually seems like the same thing could happen.

In logic that happened and then when you start to stack.

Transistors so.

That you can capture the incremental dollars versus litho. If you look out say three to five years. So can you just kind of talk about what's happening in logic.

Alright, Thanks for the question Timm, So what I would say.

I mean, these are Ceos, and R&D leaders for leading foundry and logic on a very very regular basis actually more more often now than I did before.

The pandemic because we're doing all of this virtual I deeply believe in and you can see even this week. There was one of our leading customers talking about how they're driving their technology roadmaps going forward.

And you know, it's really around the five elements that we've been talking about the new structures, new chip architectures everybody's designing their own application specific chips, new materials, new ways to shrink I've talked about packaging and the growth there, but I think we're just in a tremendous position and when you think about what.

It's going to drive power performance and cost going forward.

There's no question. It's about these new structures in these new materials and when you look at it really all of the different markets you talked about the new transistor.

We're just in a really tremendous position when you think about the materials that are needed to create those nano sheets or the wiring or three D DRAM or any of those big inflections that are going forward in the future. We just have by far the best portfolio of materials.

That create those structures then you think about shaping the structures, we have strength in conductor etch, where we certainly had a strong position in memory, we're growing in foundry logic, you'll see our share continue to grow there shaping with the select or a product is also really important for nano sheets and for.

Other new structures the modification of those those different structures and also accelerating the time to market I talked about the synergies with our PDC and especially our E beam business. One in building. This new transistor you know if I can see the.

Those residual materials inside that structure as I'm driving the R&D versus having the cross section you know one particular transistor and look inside that they're learning rates go up by orders of magnitude. So those unique imaging capabilities.

Combined with the unique capabilities, and creating and shaping and modifying those structures.

I just if you look at what's being presented by our leading customers even this week.

You'll see it exactly aligned to this new playbook and enabling capabilities for applied so again I I I've never been more excited about our opportunities to enable the roadmap.

Totally Gary Thank you.

Yeah.

Thank you. Our next question comes from the line of Joe <unk> with Wells Fargo. Your line is now open.

Yes, thanks for taking the question.

Yeah, Hi, Joe Thanks for your question, so from a domestic China standpoint.

We think we ended the year 2020 around $10 billion. We think we're up a few billion off of that level. So we will see this year, what we've been seeing for several years now which is slow steady ecosystem development, you're going to see some investment in technology Roadmaps and still some pre.

Modest capacity additions that sit behind those technology road maps.

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

Our next question comes from the line of Mitch Steves with RBC capital markets. Your line is now open.

Hey, guys. Thanks for taking my question, obviously, a very great quarter and Great Guide.

My only little Nitpick curious if somebody display business I feel like every quarter, we kind of try to call a bottom here, but then you made comments about all of the segments kind of being up in the second half could you maybe just help us understand what the magnitude is after the display business and then secondly, if you're if you've got any sort of like actual visibility into that and confidence around this.

Waking up in the second half of the year. Thank you.

Thanks Mitch.

So a couple of things on display I think we've been very consistent in this business over time, we know that from quarter to quarter. This is a business that will bounce around a little bit, but we've been saying now for many quarters that the sizing in 2021 from an overall market spend perspective, as well as the proportion of spend.

N T V. In mobile is going to look and feel a lot like 2020.

And that's exactly what we see playing out the implications for our business revenue and we've been saying this for many quarters now the revenue that we see in our display business in fiscal 2021.

<unk> is going to be very similar to what we produced in fiscal 2020.

And so I think that gives you the math you know what we've done in fiscal Q1, you know what we've just guided to in fiscal Q2 that gives you a sense of the step up that we see in the back half of the year and then as we look forward into 2022, you know we are monitoring a number of green shoots we talked about on the last earnings call arent comps.

And central around them continue to increase and the confidence interval around 2022 being a more robust investment point in the cycle continues to increase so we feel good about where we stand growing off of the guide we just gave in our fiscal Q2.

From an order standpoint, we can see it from an order standpoint growth into the back half of the year and we can also share from our customer deposit perspective, and so we feel good about how we're shaping expectations around this market and I've got.

No anxiety give them already what we see and where we sit around the second half being stronger than the first half in that business.

Hey, Thanks Mitch.

Thank you. Our last question comes from the line of Patrick Ho with Stifel. Your line is now open.

Thank you very much and congrats on a nice finish to the calendar year, Yeah, maybe just a follow up on some of the questions and given the strength that you had in the advanced packaging business that looks like it's another growth opportunity for you or are you able to leverage the products from your quote leadership in existing portfolio.

Or are you also developing new products given the changes that are going on in advanced packaging, particularly as they become more front end manufacturing like.

Yeah. Thanks for the question Patrick So.

I'll start off by saying we've.

We've talked about this as being one of the five key drivers for the P. P pack roadmap going forward and if you look at what.

Leading customers are talking about packaging is incredibly important for power and performance and cost are talking for me personally I've engaged much more so with the R&D leaders in this particular industry than I ever was relative to your question about the existing products versus new products I would say.

It's both if you look at wafer level packaging, we're number one in wafer level packaging, our advanced wafer level packaging with P. V. D. C V. D. C. M. P plating, we have a new century via ACH or also where we won.

One of the largest one of our largest customers that business. So we have all of those combinations of products and packaging.

And we also announced recently a new integrated hybrid bonding system are working with another company.

That is really important and we have very strong Paul from every one of the our leading customers with that new technologies. So I you know again, it's a combination of both where we're innovating with our existing products also looking at accelerating the big inflections in packaging.

And in hybrid bonding is one example of that so I think it's just a tremendous opportunity for the company I think this is going to become more important as we go forward and we're in a unique position with a combinations of capabilities that we have.

Okay.

Thank you.

Thank you Patrick for your question and then Dan would you like to help us wrap the call Yeah sure Mike. Thanks.

So as I look at this quarter, a few things stand out for me first the growing strength of our end markets second really strong outperformance in calendar 'twenty, 'twenty and I guess third and even better setup for applied as we look forward into 2021, I see strength throughout the year and that includes.

Fiscal second half growing across all three reporting segments semi systems, Ags and display I really like the gross margin improvement.

Spent a lot of hard work, especially during COVID-19, and I really want to thank all of our teams one more time for this great product.

<unk>, we all hope that the regulatory decision on Coca side goes in our favor and Gary and I along with the rest of the management team look forward to seeing you in about six weeks during the Investor meeting, Michael Let's close the call now okay. Thanks, Dan and we'd like to thank everybody for joining us today, a replay of the call will be available on our website by five o'clock Pacific time, and we'd like to thank you.

And 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 good day.

Q1 2021 Applied Materials Inc Earnings Call

Request a DemoDemo

AMAT

Applied Materials

Earnings