Q2 2021 Applied Materials Inc Earnings Call

May 20, 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 second quarter of fiscal 2020..1 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 and 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 and our quarterly earnings materials, which are available on the IR page of our website at applied materials Dot com before we begin.

And I have a calendar announcement, we plan to host and other Master class. This time on logic technology on the 16th of June at 9 a M. Pacific time, we hope you'll join us and now I'd like to turn the call over to Gary Dickerson. Thank you Mike I'm pleased to report another record quarter for applied materials underpinned by strong.

Long and broad based demand across our semiconductor businesses as large secular trends fuel increasing consumption of silicon.

Like to thank our passionate and hard working team for delivering these great results and in particular I wanted to acknowledge our operations group and suppliers for successfully overcoming logistics and supply chain challenges in the quarter.

And our recent Investor meeting, we described our thesis for the industry laid out our growth strategy and provided our new financial and capital allocation models.

Therefore in todays call I will focus my comments on 3 main topics, how we see the current market environment, how applied is outperforming our markets today, and how we're positioned to grow faster than our markets over the longer term.

Later in the call Dan will talk about our subscription revenues the strength and our service business and provide more color on our financial performance and outlook.

I'll begin with the industry environment.

As the world starts to transition to the post pandemic economy demand for semiconductors continues to grow.

The pandemic accelerated key technology trends that makes semiconductors, and more pervasive and indispensable and People's lives.

Current capacity shortfalls and some areas of the market show the highly efficient just in time supply chains that have served the semiconductor industry well for the past 2 decades may not be the most effective strategy going forward.

There's a clear desire for the chip industry to build more resilient and flexible supply, including more regionally distributed capacity as the strategic importance of the semiconductor supply chain is increasingly acknowledged at a national level.

It's also important to recognize that we're still in the early innings of major secular trends that will play out over the next decade and drive the semiconductor and semi equipment markets structurally higher.

At the Investor meeting, we described 5 overlapping inflections first at a macro level digital transformation of the economy is rapidly advancing 4 individuals companies and nations embracing digital transformation is non discretionary because it changes the basis of competition.

And those who quickly and effectively embrace these new ways of working will emerge as winners and those who don't or can't adapt will not keep up.

Digital transformation is driving exponential growth and data generation, which leads to the second major inflection and AI computing, new computing approaches are needed to create value from these massive volumes of data AI computing works fast with workload specific software and hardware built from customized.

And entirely new types of Silicon <unk>.

Third the benefits of traditional Moore's law to day scaling are slowing down and the semiconductor industry is transitioning to a new playbook to drive power performance area cost and time to market.

As the Pea pack T. Playbook has adopted it is driving a step up and investments across the ecosystem.

Fourth theirs and increased focused on ensuring that growth is sustainable and responsible as the industry scales and advancing energy efficient computing is critical and fifth Theres a business model inflection as companies migrate away from products and transactions to outcomes and deeper collaborations.

Focused on speed and time to market.

These 5 factors add up to strong and strengthening demand for wafer fab equipment and advanced services that we believe is sustainable well beyond 2021 for.

And for the first time customers are providing capital spending guidance for multiple years into the future, which is a new leading indicator for demand and sustainability.

And 2021, we expect foundry logic to be the fastest growing wafer fab equipment market with strong investments in both leading edge and specialty devices.

DRAM is the next fastest growing market with all major DRAM manufacturers investing and new technology and capacity finally, we see NAND growing at a more modest rate. This year on the back of about 30% growth and calendar 2020.

More importantly applied as outperforming the overall market.

Recent VLSI market data confirmed that our semi equipment business grew 23% and 2000 and 'twenty versus market growth of less and 19%.

And we outperformed even though the device mix would not typically be considered favorable for applied.

There are several reasons why I'm confident in 2021 will be another strong year of outperformance to start with our leadership areas are in the fastest growing parts of the market. We expect C. M. P. M P thermal and implant to all grow more than 50% this year.

Next we're very well positioned to serve the fast growing specialty markets. We anticipated this market growth several years ago and formed a new group inside the company called I caps to focus on Iot communications automotive power and sensor applications and.

In addition, we have strong traction with new products, especially in areas, where we have space to grow share.

And 2020, we gained 240 basis points of market share and conductor etch and 220 basis points and CVD. Thanks to the momentum we have and patterning applications for DRAM and foundry logic. This year, our etch and CVD businesses combined will generate more than 7.

And $5 billion of revenue.

And process diagnostics and control, we expect to grow around 50% and 2021 and generate more than $900 million of revenue from our E beam products.

Extending our leadership and E beam has been a major focus as it is a highly strategic capability that accelerates adoption of our differentiated semi products and integrated materials solutions as well as being a key component of our actionable insight accelerator.

Finally, we are seeing increasing adoption of our integrated solutions, where we're bringing together unique combinations of technologies and capabilities and 2021, we expect to generate more than $400 million of revenue from our first integrated materials solutions. In addition.

Revenues from our advanced packaging product portfolio are on track to exceed $800 million almost doubling since 2019.

Looking beyond the strength and our business today, we believe we're in a great position to deliver sustainable outperformance over multiple years.

As the industry road map transitions from traditional 2 D. Moore's law scaling to the new Pea pack T playbook materials engineering becomes critically enabling this is because significant P pack T innovations and transistor and interconnect structures and materials are taking place and these innovations are enabled.

And by applied leadership technologies.

We will cover this topic in more detail at our upcoming logic Master class as.

As we described at our Investor meeting to serve our customers evolving needs and maximize our growth opportunities. We've built a comprehensive strategy to position applied as the Pea pack T enablement company shift more of our business to subscription revenue and optimize our investments and synergistic and.

Jason markets to drive profitable growth and higher free cash flows.

Our tea bag tea enablement strategy has 3 differentiated pillars first applied has the broadest and most enabling portfolio of technologies spanning materials creation modification removal and analysis and our recent memory Master class, we talked about how we're taking unique applied tech.

Knowledges and that were originally developed for logic, including Black Diamond locate materials and high K metal gate transistors into the DRAM market opening up new billion dollar opportunities Seth.

And we can combine our technology portfolio and unique and highly enabling ways that no 1 else can do.

A great example is our draco hard mask materials for capacitor scaling and DRAM Draco has been co optimized to work with applied etch system and our process development that we accelerated with our E beam technology.

Today, we offer a spectrum of solutions from co optimization of processes and tools like Draco all the way to fully integrated materials solutions that combine multiple processes and customized metrology and sensors within a single platform.

The third pillar is time to market acceleration, we've developed a proprietary suite of solutions to accelerate every stage of the product lifecycle from R&D to technology transfer and high volume manufacturing we call. This the actionable insight accelerator or a IX platform.

And it brings together process tools sensors, metrology and analytics and machine learning capabilities.

There is tremendous pull from customers and we already have AI ops engagements with all major memory manufacturers.

1 example of how we're applying machine learning and real World applications is extract AI that allows us to combine the most powerful attributes of optical and E beam inspection and provide a solution that is many times faster than traditional approaches and.

In simple terms optical inspection as fast and can find critical defects. While E beam is slower and that has higher resolution to accurately classify those defects.

So we use our E beam system to train the extract AI engine for defect and noise classification as applied E beam technology has best in class resolution and imaging, we get the most accurate classification to train our AI models. We then use inferencing to <unk>.

Turn and unclassified map of millions of potential defects into and actionable map of thousands of yield impacting defects.

Before I hand, the call over to Dan Let me quickly summarize, we see strong and sustainable demand and our semiconductor business underpinned by a wide range of macro and technology drivers. We believe that we're in a great position to outperform our markets again this year, thanks to our broad exposure to the.

Major industry inflections, our strong portfolio of differentiated unit process products and accelerating adoption of our integrated materials solutions and advanced packaging products, we feel very positive about the longer term secular trends that are driving semiconductor and wafer fab equipment.

Structurally higher and we're confident that we have the right strategy to accelerate P pack T and grow significantly faster than our markets Dan over to you.

Thanks, Gary today I'll begin by summarizing applied performance in Q2, then I'll recap the latest third party data on the semiconductor equipment and services markets I'll build on Gary's comments about the equipment demand environment, and then I'll give you an update on our plans to grow our subscription business and generate incremental free cash flow and <unk>.

And just to adjacent markets.

Finish with our guidance for Q3.

Beginning with our Q2 performance applied delivered record revenue that was up 41% year over year and near the top of our guidance range. Our teams executed well delivering strong gross margins and a challenging operational environment and this led to record non-GAAP earnings that exceeded our guidance range all 3 of our op.

Operating segments exceeded the revenue guidance and we continued to expect each to post higher revenue in the second half of our fiscal year.

The semiconductor systems team also delivered the highest non-GAAP operating margins and nearly 14 years, while ags delivered the highest margins and nearly 15 years.

These accomplishments helped us generate record non-GAAP operating profit and increased non-GAAP operating margin by 700 basis points year over year.

And we increased operating cash flow by 87% year over year delivering over $1 billion for the third quarter and a row. We're pleased that Moody's recently upgraded applied credit rating by a notch to a too.

We also resumed the buyback program and Q2 deploying $750 million and the limited window available to us and we expect to be more active and the current quarter.

Also during the quarter the board approved a new $7.5 billion stock buyback authorization, along with a 9% dividend increase and we announced our commitment to return 80% to 100% of free cash flow to shareholders.

Next since our last earnings call VLSI research published its market sizing report for calendar 2020.

Which is important for 2 reasons, 1 it distinguishes front and equipment spending from backend Assembly and test.

2 and includes companies services and spares revenue in addition to equipment revenue, allowing observers to distinguish between recurring revenue and Wi Fi.

Applied materials was number 1 and both equipment and services for 2020.

The equipment market was $61.2 billion up nearly 19% year on year, we significantly outgrew the market, gaining 60 basis points of industry market share with gains and deposition and removal and process control and.

As Gary described major inflections are increasing and the demand for materials engineering and we're on track to significantly outperform once again in 2021.

Next I'll discuss the demand environment Lee.

Last quarter, we indicated the equipment market would be and the low $70 billion and 2021, which was above the consensus at the time demand has strengthened further and we now expect equipment spending to be and the high $70 billion for the year.

At the Investor meeting I showed you a chart with the rolling 2 year sum of equipment spending for each period since 2012, plus 2013, each successive 2 year period has been higher and I now believe that spending in 2021, plus 2022 will be greater than $160 billion.

Our demand thesis for the past several years is that data generation is growing exponentially. While 2 day scaling is slowing which means more process equipment will be needed over the long history of the industry equipment capital intensity has been close to 12% on average, but because of the higher technical complexity.

And the slowing of 2 day scaling capital intensity is closer to 14% today.

Multiple industry forecast call for the semiconductor industry revenue to reach 1 trillion by.

And by 2030, if capital intensity stays flat from here, then WSI spending could be over $140 billion and the same timeframe I realize there are questions about whether the unprecedented demand. We are seeing today is secular or cyclical when I listen to what our customers say I hear a firm belief that the data.

Economy is real and driving secular growth well into the future. This perspective is being reinforced by plans for substantial multiyear capital investments, which are needed to support demand and fuel profitable growth.

Against this backdrop, we've never felt better about our opportunity to enable our customers generate free cash flow and return cash to shareholders.

Next as we discussed at the Investor meeting. We're also focused on growing beyond equipment sales the more we deliver solutions and outcomes for our customers. The more we can increase our subscription revenues, which grow and generate free cash flow every year the.

And the report I mentioned earlier shows that over 90% of applied reported services business is composed of recurring services and parts revenue, which is the highest amongst our peers.

We generated $3.7 billion of this true services revenue in 2020, with 60% and long term agreements and renewal rates of around 90%.

And Q2, the trend towards long term subscriptions was even stronger nearly 70% of our services and parts bookings were subscriptions and 50% had terms of at least 3 years.

Our strategy and Ags and as a company is to combine our technologies and unique ways to create higher value solutions and outcomes for our customers, which are best delivered under the subscription model.

We also discussed our strategy to redeploy our technology and synergistic adjacent markets, where modest investments can generate attractive supplemental free cash flow today. The largest example of this strategy is our display business, where our CVD PV D and E beam technologies had been adapted to glass substrates over the past couple of years and we stress.

And our products for the next wave of OLED investments targeting foldable smartphones notebooks tablets and Tvs.

With these investments completed our focus is on increasing free cash flow.

And we're committed to increasing non-GAAP operating margins from the high teens level today to over 20% in the coming quarters, and then between 25 and 30% over the target model horizon.

Now I'll share our Q3 business outlook, we expect to increase company revenue to approximately $5.92 billion, plus or minus $200 million.

The midpoint would be up about 35% year over year, we expect non-GAAP EPS to be about $1.76, plus or -6.

Or up about 66% year over year.

Within this outlook, we project semiconductor systems revenue of $4 to $5 billion.

Up around 46% year over year and.

And Ags revenue of about 1 point to $3 billion.

Up around 19% year over year, we expect display revenue of around $415 million.

Applied non-GAAP gross margin should be roughly flat sequentially at 47, 7% or up around 270 basis points year over year.

We plan to increase non-GAAP opex to $930 million and as a percent of revenue non-GAAP Opex should decline by 290 basis points with nearly 70% of the spending earmarked for R&D.

Our guidance assumes and non-GAAP tax rate of around 12%.

In summary, I am pleased that applied delivered another record quarter of performance in Q2 with strong year over year growth and revenue and profitability.

And I'd like to join Gary and thanking our employees and supply chain partners for supporting our customers now Michael let's begin the Q&A.

Thanks, Dan now to help us reach as many people as we can please ask just 1 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 and the session operator, let's please begin.

Thank you into getting the key is simply press star 1 and your telephone to withdraw your question press the pound key.

<unk> from John Pitzer with credit Suisse.

Yes. Good afternoon, guys. Thanks for letting me ask the questions and congrats on the solid results.

Gary Gary and nice to see the uptick in your forecast for <unk> for the year I'm kind of curious when you look at your ability to supply customers or the ecosystems ability to supply customers relative to the high $70 billion. Wi Fi is there a potential for upside this year or are you already starting to see kind of.

The backlog for next year, Phil and just given some of the constraints and lead times on tools.

Yes, Thanks, John and this is Dan and I'll jump in on this 1.

So what we're seeing from our own business, we talked about it and the prepared comments, we see a market that's up strong from a year over year standpoint high Seventy's, probably puts us up high 20%.

97, and 28, and 29% versus where we were last year and that's off of a baseline of $61.2 billion. What I would say is we're planning for our business to be up second half over first half and we're also planning for our business to be up as we look into 2022 M.

And as I look at it by reporting segment I would say all 3 of our segments are up half over half and then all 3 of our segments are up as we look into 2022, So I can't comment for everybody. What I would say is as we've been very aggressive in terms of managing this upward gradient of the industry we started.

Several quarters ago, 3.4 quarters ago, you can see an uptick from an investment standpoint to make sure that we've got the infrastructure and capacity and capability and that's not only investments from our physical infrastructure, but also working with our supply partners to make sure that we can fully satisfy all the demand that we see from our <unk>.

Customers based on the great innovation that we're delivering to market. So we feel good about how we're positioned to outperform in this environment and as we look forward into the back half of the year and 2022, we're planning for a business to be up.

Thank you John.

And next question comes kind of C J Muse with Evercore.

Yeah. Thank you for taking my question just to clarify.

Wanted to make sure that you're talking about second half calendar 'twenty, 1 versus first half calendar 'twenty 1 in terms of up half on half and then for my main question is I think about.

Your operating margin for silicon.

And at 39, 1% this was your best.

For instance, and you look back since I think June 2007, and so I guess.

As we think about <unk> moving higher from here into 'twenty, 2 and likely beyond how should we think about the trajectory there and how important was mix and hitting the numbers that you've put up and in April and.

And again, how should we think about it going forward. Thank you.

Yeah. Thanks C. J, let me jump in on this 1 again and you get a lot embedded in there and let me try to unpack it and if I Miss something please follow up and let me know what else I can shed some color on.

So the first part of the question.

Second half over first half, that's both fiscal year and calendar year and again, we're planning on being up as we look into 2022. So we've got a market that's showing signs of strength. The first half of the calendar year. When you take a look at our actual results plus our guide our systems business is up 50% year over year. So we feel good.

About how we're positioned against this opportunity to outperform and second half over first half being up both on a fiscal and calendar year basis, when I look at our silicon business and the performance of it what I would say is as a company gross margin for our company is up 310 basis points year over year.

The company has got a lot of work on driving productivity gains operating discipline efficiency and are the core of our operations, we're adopting digital capabilities inside the 4 walls of our company to make sure. We are far more agile as a company to respond to upward and downward gradients and there's more.

And work to do we'll never be satisfied with where we are but we've got a whole host of initiatives at work to help this company become more efficient over time and you see that base.

Profiling into the results of the company as an overall company and you see our operating margin up 700 basis points year over year from a semi systems standpoint.

The margins will always be influenced to a certain extent by customer.

Customer mix product mix factory loadings, but I think you can see them both in absolute and relative basis. This is a company that's performing very very strong right now and I would.

Expect us to continue with trajectory of strong performance as they go forward and so I guess the last thing I would say it all starts with innovation.

And your ability to drive economic value creation for your investors starts with innovation, we've got the industry's broadest portfolio of industry, leading technologies and at our Investor meeting, we talked about combining them and unique ways to solve really high value problems for our customers and a way that is incredibly valuable to.

And their roadmaps delivery of those roadmaps from a time perspective that they can make their customers successful. So we will continue to drive the industry's best technology will drive efficiency and operating discipline and while we do that and we think we've got and opportunity to create significant value over time for our investors.

Thank you C J.

Our next question comes and Stacy <unk> with Bernstein research.

Hey, guys. Thanks for taking my question and no question on the DRAM business within the semiconductor and system. So.

It's the only business of yours that Hasnt really inflected, both foundry and NAND Flash we're up.

Pretty decently sequentially and year over year, DRAM was kind of down.

And both sequentially and year over year, and yet you're still looking for it to grow pretty materially.

For the year, so I guess and.

And I know, we don't supply and that market is actually very tight. So I guess can you talk a little bit about the dynamics, you're seeing in DRAM and maybe talk a little bit about the contribution of DRAM to the guidance next quarter is that primarily what's driving that and does that sort of ramp more materially and some of the other than to the secondhand or are we still waiting for it.

Yeah, Hi, Stacy thanks for the question so.

So I guess the best way to start the conversation, let's talk about 2020, and then use that as a jumping off point for what we saw in calendar Q1, our fiscal Q2, and then what we expect for the rest of the year. So in 2020, we talked about and overall Wi Fi market that was up high teens I would say the DRAM market.

Was pretty much in line with that maybe a little better than that against that opportunity. Our DRAM business was up over 27, almost 28% last year and significantly outperformed others and the industry that we're up a few percent and down a few percent. So we had a really strong showing in 2020 and.

And if you recall 3 months ago on last quarter's call. We had signaled that the profile around the DRAM market, we view it as significantly back half loaded. So we expect off of calendar Q1, our fiscal Q2 momentum and that business to significantly pick up as our customers add bit supply.

To be more in line with demand and so we see that market playing out roughly in line with our expectations.

And how calendar Q1 played out I would say, it's pretty much in line with how we viewed the market 3 months ago, probably 6 months ago, and it's playing out as expected we see DRAM is it back half loaded market this year.

Got it thank you.

Yeah.

Yes, Stacy and maybe I can add this is gary relative to the major inflections and DRAM.

And certainly high speed DRAM, they're going to logic like structures and the periphery, where applied has leadership I think we talked about that and our memory Master class a couple billion dollar opportunity as those inflections are being adopted capacitor scaling is another 1 where applied has real strength new patterning applications towards day.

And said you know we had really great performance last year and as our customers are moving to these new structures DRAM structures.

We anticipate that will continue to outperform.

Thank you guys.

Thank you. Our next question is from Vivek Arya with Bank of America.

Thanks for taking my question I wanted to revisit the cyclical versus secular aspect that I think kind of your Dan mentioned is WMC elevated right now because of capacity shortages, which would be more of a cyclical driver or does it elevated more because of the secular reasons, which would be.

Rising complexity.

I wanted to get your perspective on that because when we ask the semiconductor companies. They say the shortages are perhaps not as much on the foundry side and more on the backend.

So just wanted to get your perspective that what we are seeing right now is it a cyclical thing or is it more of a secular aspect.

Yeah. Thanks, Vivek I appreciate the question.

And here's our point of view on this what we see is we are and the very early innings of a multiyear secular growth trend around this industry and I think we've been talking about it for a couple of years and now we see it really hitting its stride.

And when we think about the general consensus from third Party research.

You're at about a trillion dollars of semiconductor revenues by 2030, the demand driving that as broad based you're seeing a handoff from consumer oriented devices to something thats far larger and more substantive around this fourth wave of compute the data economy by 2025 machines will generate 99.

Cent of the data humans will generate 1%.

Youre seeing a decoupling of semiconductor demand for the first time and the industry's history from population and population growth and consumer behavior content is increasing across devices servers autos handsets. So what we see a strong secular growth drivers and we're in the early innings of that playing out.

And I would say that that is more of what is driving our end markets today than anything else and so when I look at that backdrop combined with things like AR and upward bias over time of capital intensity.

I think the opportunity for our markets going forward is quite attractive and given what we talked about with the new playbook at our investor meeting our opportunity to outperform as we drive those key inflections with our customers our opportunity to outperform against that multiple year secular growth tailwind around this industry. We think is quite substantial.

Yeah, Let me just add that certainly today, we hear a lot about supply chain issues from an automotive perspective, but.

As Dan said and as we talked about and our Investor meeting. We're in the early innings of every industry being transformed and the fundamental nature of competition being completely different.

Semiconductor content is going to be at the foundation of that infrastructure certainly the way we work the way we learn the way we shop transportation health care today, we're talking about automotive, but content is going to increase more I believe than what anyone can see today, and it's really about who deliver.

Its power performance and cost faster than others, and enabling that infrastructure that is the basis of competition of every single industry.

So and then from and applied standpoint, and we've talked about a classic to the Moore's law really ended a few years ago.

And the foundation for the chips from the edge the trillion edge devices to the high speed computing and the data center is really about new materials, new structures, new ways to connect chips together, new architectures and new ways to shrink and applied is just and a really tremendous position when you'd think about.

Again, the basis of enabling a competitive advantage time to market on all of that is incredibly important for the entire.

Global economy, and certainly from a country standpoint countries are starting to recognize the importance of semiconductors as a foundation for competition. So yes definitely we see this as a secular change and I really do believe people don't understand the magnitude of this yet.

Thank you thank you vivek.

Thank you. Our next question is from Toshi add Whit and Goldman Sachs.

Hi, Thank you for taking the question and congrats on the strong results.

Dan I wanted to double click on your NAND business, it was up significantly and the quarter, both sequentially and year over year.

At the same time I think it was Gary you talked about having relatively modest expectations for WMC for calendar 2021. So I guess the question is are you guys gaining share or is the expectation for NAND to be first half weighted.

And this year or is it a little bit of both.

And kind of related to that Dan and you talked about more than a 160 billion and Wi Fi for this year and next year combined within the sort of context, how are you thinking about NAND. Thank you.

Yeah, Thanks to share and here's your perspective on NAND, if we were to go back.

3 months to last quarter, we said that NAND was the 1 segment that was first half weighted versus second half and the and the subsequent 3 months that brings us to today, let's say a perspective on NAND.

And it strengthened a little bit but of the 3 segments, we've seen foundry logic strength and quite a bit.

DRAM strength, and quite a bit and and NAND strengthened a little bit and while foundry logic and NAND. We view is second half weighted from a segment standpoint, I think there's a question mark on NAND, where we sit today is it first half weighted or second half weighted and it's too early to tell and so we got.

Out of the gate very strong and calendar Q1 on NAND.

So we expect that the growth rate to moderate quite a bit as we go throughout the year and.

And from a first half second half weighting again, I think it's too early to call when I take a step back and I think about the combination of 2021, plus 2022, what I would shape from an expectation standpoint around 2021.

Foundry logic is greater than 55% NAND is less and 45%.

I'm, sorry, foundry logic, greater than 55% memory, less and 45% I think that construct still holds in 2022.

As we think about a market that's up high 20% range.

And the current year, we think about foundry logic significantly outgrowing the industry average DRAM being in line plus or minus with the industry average NAND growing but significantly below the industry average I think all 3 of those markets are strong levels of spend next year and we.

And upward trajectory on the overall industry, but I think it's too early to shape expectations by device type, let's let some more time elapse, let's crystallize the contours of the industry. This year and assess how our customers are going to invest to drive even higher returns for their investors.

And and in a few quarters I think we'll have more to say and a few quarters from now.

Thank you Bill.

Our next question is from <unk> <unk> with Citi.

Hi, Thank you for taking my question and I have a question on display LCD spending mix has benefitted during the pandemic and.

And at the recent <unk> display conference supply talked about the future of OLED Tvs and micro Leds.

If you can update us on the Green shoots commentary you made 90 days ago and what's the outlook for display for next year.

Hi tests, let me take a crack.

A crack at this so I think the display industry. This year is going to play out very much in line with our expectations from our business perspective, we're well penetrated in the segments, we participate and we've got a good read on the market and we see our business and calendar or and <unk>.

Fiscal 2021 being very similar to fiscal 2020, we talked about the environmental strength and now we.

We still see older generation capacity coming out of the LCD market. We see increased consumer demand combination of that is leading to increased panel pricing spot pricing and the panel market is going up and that's leading to increased profitability. So theres goodness. There we continue to see average area size increase.

OLED screens are continuing to penetrate <unk> handsets and OLED penetration of handsets and general is on an upward trajectory. The next leg of OLED growth into the I T market and the TV market.

And foldable phones, becoming more widely adopted from a consumer standpoint, all of that is is intact. So we see and.

And increase and the levels of investment as we go into next year, we feel good about that the other thing I'd offer here is we talked about.

And investment profile and our products to deepen our moats around our market position and get our product portfolio ready for the next leg up from an OLED investment standpoint exiting the year. The vast majority of those estimates will be in the rear view mirror and youre going to see us start to reposition this business for enhanced cash flow and profitability.

<unk>.

We'll get into the low Twenty's and then by 2023 and 2024 will be consistently operating this business with an operating margin between 25% and 30%. So we feel good about market development revenue growth as we look into 2022, and then complementing that with an enhanced level of profitability to drive that.

And for investors.

Great. Thanks, Thank you Allison.

Our next question is from Krish Shankar with Cowen and company.

Yes, hi, and thanks for taking my question other kind of a long term question for Gary and he got even when you look at the.

And with the technology inflections like gate, all around coming up.

And it seems like the critical technologies of the horizontal and vertical FTE selective removal and conductor etch and this 1.

And find out from your vantage point, what are the important technologies and more importantly can you.

Quantify the dollar opportunity meaningful and Matt.

Yeah. Thanks for the question.

So all of our customers are focused as I said earlier to deliver lower power and higher performance and better cost ahead of others, and we talked and the investor meeting about the wiring innovations, we're driving and improving wiring, a 50% and and gate all around and that's another very.

Very important technology, if you look at the overall ecosystem.

So that opportunity I think we've estimated around $1 billion incremental opportunity and you think about the key enabling technologies certain certainly epitaxial deposition and selective removal are very important we're working with every 1 of the leading customers on gate all around technology.

The other thing I would say that's important is our and and there are a number of other technologies, where we have very strong positions leadership position.

So that'll all ramp when gate all around goes into high volume manufacturing, but.

Time to market is also important to tee up the Pea pack T M.

And our E beam technology leadership is really fundamental whether its and the transistor the wiring of the draco and and the memory or any of these different innovation, it's really mapping out and fingerprint and goes processes because they're so complex with so many different.

Variables and.

And then being able to tune those recipes and the process and as fast as possible.

So gate all around certainly is 1 of those cases, we're seeing things like residual germanium or seeing in those structures incredibly incredibly important and.

And having enough of a picture across the chip or whether you have isolated or debt structures across the wafer, but that speed and the learning rate is very fundamental so we have leadership and some of these foundational technologies for a gate all around but also our leadership and E beam.

Is really important for gate, all around and other key inflections and the industry.

Thanks, Gary.

Okay.

Thank you. Our next question is from Harlan sur with JP Morgan.

Hi, good afternoon, and great job on the quarterly execution and results on the mature foundry logic and specialty manufacturing segments of the market your <unk> business.

You guys had said lastly.

And you expected this business to be $3 billion plus business for the team this year, but since then and I mean, the supply demand gap for the analog and microcontroller power amended guidance has actually widened to somewhere around 20% to 40%. In addition to the secular content gains that you guys talked about and auto and industrial.

And some of these customers are saying that they can't get tool deliveries and orders placed to day till next year. So do you guys have a revised estimate on your <unk> business. This.

And this year and similar to your overall business do you guys expect <unk>.

And to grow in 2022.

Thanks, Harlan, let me jump in and see if Gary wants to offer additional color.

After I take a crack at this so you.

We saw this trend towards more robust spending from a trailing node geometry, and specialty node geometry, and several years ago, we reorganized the organization we've got leadership.

Driving this group and the company is performing incredibly well against this opportunity.

We talked about this segment of our business being greater than 3 billion and we don't Wanna be more specific than that for competitive reasons, but it's it's much greater than 3 billion, but we'll just leave it at greater than $3 billion for now company has got great technology, Great leadership positions and then from a margin structure standpoint, it's accretive to the overall company margin.

And so as this business continues to grow for us and we'd be continue to outperform we think it's gonna be value accretive for our investors and so we feel good about how we're positioned and our ability to drive this market.

Like we talked about we're planning for our business to be up second half over first half, we've got and ability to continue to drive output and delivery of technology to customers. So we feel good about how we're positioned in this market is a key enabler of our customers to be able to satisfy.

Their customers so.

Again, we saw this trend early and it's going to be a really value accretive part of our business nice piece of our business going forward.

Yeah, absolutely. Thank you.

Thanks, Charlie.

Thank you. Our next question is from Patrick Ho with Stifel.

Thank you very much and congrats on the nice quarter and outlook Gary made for you in terms of the process control business you have overall, good share or actually great share and the E marketplace given the gains you've made with the pro vision tool. It recently, you've introduced the new optical inspection and kind of a hybrid.

And with AI capabilities can you discuss where the future lies between EV versus optical inspection and how are you.

Are your customers.

I guess received and the feedback in terms of the differing technologies.

Well thanks for the question Patrick So maybe first let me start with our our top level PDC business and then I'll get into this optical E beam question.

So really theres 2 major focuses for our PDC business or certainly a this is a growth opportunity.

But also what is increasingly important as PDC accelerating billions of dollars of applied enabled P pack T inflections and I talked about earlier gate, all around and the wiring and the memory and all of these different areas and we have the highest resolution E beam platform and the industry.

Where.

50% higher resolution. So we can see things that other platforms cannot see we also have an advantage and the speed of imaging. So mapping out these fingerprints to dial in these processes faster with bigger process margins.

That synergy applied is the only company and and the industry that has that combination of the unit processes integrated materials solutions and leading E beam technologies. So that is strategically important and and I think.

That.

Really we see a great opportunity to accelerate our PTC revenue going forward, we talked about 50% growth. This year on the top of 25% last year, but also that Paul and the synergy with the rest of applied materials is incredibly valuable.

And very important relative to optical inspection and we did introduce this new platform and light, we see very strong Paul and adoption, especially and leading foundry and the combination of these technologies basically you have a.

Optical inspection system that is incredibly cost effective for.

<unk> 4 line monitoring types of application and and certainly and the discussions that I have with many of the R&D leaders tremendous pull for that technology.

So combining that with industry, leading resolution to accurately classify defects and then having that capability.

To combine with AI gives customers a better overall performance and finding yield limiting defects. So so we're seeing definitely strong adoption of this concept with customers, but the key thing for me.

Really is the E beam leadership that is fundamental we're more than 5 times larger than our overall largest PDC competitor, we have clear imaging leadership, we will be introducing a new imaging technologies that will further strengthen our leadership and.

And that part of our and and that part of PDC and the synergy in the T..4 P pack T is very very very important.

Thank you Patrick.

Thank you. Our next question is from Quinn Bolton with me him and company.

Hey, guys. So just wanted to ask you about the China business, China looks like it was a record on a dollar basis and about a third of revenue did that business skew a little bit more to NAND given the NAND strength are you still seeing that being pretty broad based.

Yeah. Thanks, Quinn as we look at our China business. It was a strong performance and the most recent quarter, but it's in line generally with the historical profile of that business over time, you know some quarters will be a little better than others, but certainly in line with the historical profile on a percent of our overall business as I take a look and <unk>.

Click at the China domestic market and think about the level of investment there.

I would say that there is slow steady development of the ecosystem I see investments from a 200 millimeter and 300 millimeter standpoint, and then within and 300 millimeter geometries, we see investments across all device types, we see NAND, we see DRAM, we see foundry logic. So I wouldn't say, it's driven by 1 specific market specific.

Customer, it's really broad based both from a customer perspective, as well as a market perspective, we feel good about how we're positioned against this opportunity and we will do well over time as that business continues to grow.

The case win.

Yeah.

Thank you.

Our next question is from <unk> for I, do with and New Street research.

Hi, Thanks for taking my question.

So Don you mentioned that if we if we give it some time.

And if we releasing and industry heading towards a tree and dogs, we could have like with I think.

We've been spending and the.

And going forward, so let's see.

So maybe a bit more we could see student C. W. W. E W.

And then Gary you talked about like the.

I mean inflection points to reach we feel very close now.

You know mark that Youll hear almost sticking or taking other reasons.

Critical dimension reduction and.

So so my question wise.

In a world in which the industry spends 150 being built out and where we've been spending.

Incremental.

70 billion, which would be spend compared to what you spent to date.

Where would that go if you could give like.

And you will you would be the most significant drivers of gross flow of industry, although that kind of flow and valued where we double again.

Spending.

Yeah.

Yeah. Thanks for the question Pierre.

So for me I spent a lot of my time with a.

Customers across our entire.

All the different market segments, the leading customers.

And I spent a tremendous amount of time, there are more than ever and and.

And I have a very strong.

And perspective, and and we can see things that we can't talk about publicly relative to where our customers are going but I really believe that where.

Where we're at the point, where we have the biggest economic condition competition of our lifetime with technology transforming every industry and semiconductors are part of the key infrastructure of the day that economy going forward and it really is about power performance and cost from the edge.

To the cloud and everything in between.

And I do believe it and and we can see it when you go from 5 to 3.3 to 2 and what's going.

Beyond that that the playbook that we discussed before and you even see customers.

Supporting this view that the.

And the classic 2 D Moore's law.

We will not enable the future infrastructure I think that is crystal clear and it really is certainly theres going to be shrink as part of that 2 day shrink, but that's not going to enable power and performance across the whole infrastructure for.

For the future. So it's about the new materials, it's about the new structure the gate all around the 50% reduction and wiring a high speed memory.

For a number of different applications, we're adding logic.

To the periphery.

You know.

Shaping the chip architectures, and a and a very different way and the other thing and we've talked about I talked about this.

Earlier on the call packaging is.

Think underappreciated and very important this year packaging will be over $800 million for us and you think about connecting chips or chip, let's or IP blocks that is going to be an enormous opportunity going forward and applied is in a great position, we have very strong <unk>.

Products and P V D. C V D. A C. M. P. Plating. This new hybrid bonding technology, where you can bond 2 chips together, we're the only company and the industry that has a full flow advanced packaging lab. So P. R. I think theres going to be tremendous and innovation that's happening there.

And again that's another.

Our segment of the industry, where I think people under appreciate how important from a competitive standpoint, and and a Pete pack T. Enabling standpoint, that's going to be so again those are the things that are that we see as we go forward, it's really about those 5 elements over the new playbook and the other aspect is time to me.

Market, that's where we're focused with a IX and and especially our industry leadership and E beam tool.

And to drive the tea.

Thank you peer.

Thank you and our next question is from Timothy Arcuri with UBS.

Hi, Thanks, Dan and I guess I had a 2 part question just about Wi Fi and your share.

So you gave a 2020 wip number from DIY side, it's like 61 billion.

And you did 12 wanted.

As to your last year, so that's about 20% W Fi share.

And if I take your July SSG guidance.

We know that Youre doing about $8.2 billion and the first half and you're saying that it's gonna be up and the back half. So that's like 16.5 to 17 for the year, which off of your high 70 billion WP number is like 21, 5% that would be a few shares. So that's up like 150 basis points. This year. So I guess my question is where where is that share coming from can you sort of done.

Real quick on that and that you highlighted process control, but I'm wondering if you can kind of double click on that and then the second part of the question was for domestic China, you had talked about 10 billion and Wip. This year is that still the thinking.

Yeah. So Tim Thanks for the question I think it's important to really get the facts on the table for 2020, if you look at our semi systems business and calendar 2020, it's up 26.5% against the market that was up high teens and so significant outperformance. We viewed is gaining 60 basis points.

Sure. So we ended 2020 at 25% Wi Fi share and so you referenced the 21, 5% share in 2021.

We think we're going to significantly outperform this year you saw us grow almost 2 to 1 and foundry logic last year, you saw us significantly outperform peers and our 2.

2020, and the DRAM market, and we showed strength and our NAND business and when I look at the customer's node over node, whether it's memory or foundry and logic, our opportunity is going up when I look at the end market profile, we talked about strength in foundry logic, DRAM and strong business in and so we feel good.

Good about a the market perspective, and then when I look at the product portfolio, we showed share gains and deposition and removal and process control Gary talked about packaging and we talked about 240 basis points of conductor etch and 220 basis points of CVD, we talked about strength and PV D and E therm.

<unk> 'twenty 'twenty, 1 I would expect to do even better across that product portfolio. We talk about the new Pea pack T. Playbook, we talked a lot about the enabling technologies at our Investor meeting we've held 1 master class, we've got and upcoming Master class on foundry logic we.

We see these inflections Israel, we've got the industry's broadest portfolio of industry, leading technologies and we've got unique ability to combine those technologies and bring them together in a way to solve our customers' highest value problems and so we feel good about our.

Vision, our momentum and our ability to outperform and these markets.

And so from Oh, and I'm, sorry, Tim Your second question.

Sorry, Dan. Thanks, Yeah, I was just asking about domestic China WSI.

I thought you said something like flat year over year around 10 billion. This year I was just kind of wondering if you had an update there.

Yeah. So what we said on the last earnings call as we see it up several billion on a year over year basis, and that's more of the year progresses I think what we see is domestic China, maybe profiling in line with the overall Wi Fi market. So we'll keep an eye on it and we'll keep updating each and every quarter, but we kind of see it up in line with the overall market.

Okay, great operators and I think we're at the end of the hour. So Dan would you like to help us close off the call Yeah sure Mike. Thanks, So what I'm really struck by this quarter. It's just a broad validation of the trends we've been talking about for quite some time from the data economy and the opportunity that it creates for the semi industry and that's it.

Virtually every node to the challenges that Gary talked about with 2 day scaling the industry just needs new ways to deliver the Pea pack T roadmap.

Our customers are committed to very large multi year investments, but they're also coming at it from a position of financial strength, which is really great and bodes well for the industry long term, we're going to fully support them with the R&D investments that we make that will drive the roadmap solve our customers' highest value problems were.

And to generate profitable growth and we're going to return a lot of cash to shareholders over time, Gary and I hope to see many of you at the virtual conferences and the next few weeks and then I hope you'll join us and our technical leaders on the logic Master class that we're gonna have on June 16th Michael Let's go ahead and wrap up the call. Okay, great. Thanks, Dan and we'd like to thank everybody for joining us.

A replay of our call will be available on our website by 5 P. M Pacific time.

And for your continued interest and applied materials.

And this concludes today's conference. Thank you for your participation and you may now disconnect.

And.

[music].

Good afternoon, everyone and thank you for joining applied second quarter of fiscal 2021 earnings call. Joining me are Gary Dickerson, our president and CEO and Dan Durn, Our Chief Financial Officer before.

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 and applied its most recent form 10-Q, and 8-K filings with the SEC. Today's call also includes non-GAAP financial measures and reconciliations to GAAP measures are found in today's earnings press release, and and 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 and we plan to host and other Master class. This time on logic technology on the 16th of June at 9 a M. Pacific time, we hope you'll join us and now I'd like to turn the call over to Gary Dickerson. Thank you Mike.

I'm pleased to report another record quarter for applied materials underpinned by strong and broad based demand across our semiconductor businesses as large secular trends fuel increasing consumption of silicon and I'd like to thank our passionate and hard working team for delivering these great results and in particular.

I wanted to acknowledge our operations group and suppliers for successfully overcoming logistics and supply chain challenges and the quarter.

And our recent Investor meeting, we described our thesis for the industry laid out our growth strategy and provided our new financial and capital allocation models.

Therefore in todays call I will focus my comments on 3 main topics.

How we see the current market environment, how applied is outperforming our markets today, and how we're positioned to grow faster than our markets over the longer term later in the call Dan will talk about our subscription revenues the strength and our service business and provide more color on our financial performance.

And that's and outlook.

I'll begin with the industry environment and the world starts to transition to the post pandemic economy demand for semiconductors continues to grow.

The pandemic accelerated key technology trends that makes semiconductors, more pervasive and indispensable and People's lives.

Current capacity shortfalls, and some areas of the market show the highly efficient just and time supply chains that have served the semiconductor industry well for the past 2 decades may not be the most effective strategy going forward.

There's a clear desire for the chip industry to build more resilient and flexible supply and quoting more regionally distributed capacity as the strategic importance of the semiconductor supply chain is increasingly acknowledged at a national level.

Those who quickly and effectively embrace these new ways of working will emerge as winners and those who don't or can't adapt will not keep up.

Digital transformation is driving exponential graph and data generation, which leads to the second major inflection and AI computing, new computing approaches are needed to create value from these massive volumes of data AI computing works fast with workload specific software and hardware belt from customize.

<unk> and entirely new types of Silicon <unk>.

And it's the P pack T. Playbook has adopted it is driving a step up and investments across the ecosystem.

And fourth there is an increased focus on ensuring that growth is sustainable and responsible as the industry scales and advancing energy efficient computing is critical and.

And fifth there's a business model and inflection as companies migrate away from products and transactions to outcomes and deeper collaborations focused on speed and time to market.

These 5 factors add up to strong and strengthening demand for wafer fab equipment and advanced services that we believe is sustainable well beyond 2021 for.

And for the first time customers are providing capital spending guidance for multiple years into the future, which is a new leading indicator for demand and sustainability.

In 2021, we expect foundry logic to be the fastest growing wafer fab equipment market with strong investments in both leading edge and specialty devices.

DRAM is the next fastest growing market with all major DRAM manufacturers investing and new technology and capacity finally, we seen and growing at a more modest rate. This year on the back of about 30% growth and calendar 2020.

More importantly applied as outperforming the overall market.

Recent VLSI and market data confirmed that our semi equipment business grew 23% and 2020 versus market growth of less than 19%.

And we outperformed even though the device mix would not typically be considered favorable for applied.

There are several reasons why I'm confident in 2021 will be another strong year of outperformance to start with our leadership areas are and the fastest growing parts of the market. We expect C. M. P. M P thermal and implant to all grow more than 50% this year.

In addition, we have strong traction with new products, especially in areas, where we have space to grow share.

And a half billion dollars of revenue.

And process diagnostics and control, we expect to grow around 50% and 2021 and generated more than $900 million of revenue from our E beam products.

Revenues from our advanced packaging product portfolio are on track to exceed $800 million almost doubling since 2019.

Looking beyond the strength and our business today, we believe we're in a great position to deliver sustainable outperformance over multiple years.

And by applied leadership technologies will cover this topic in more detail at our upcoming logic Master class.

Jason markets to drive profitable growth and higher free cash flows.

T back T. Enablement strategy has 3 differentiated pillars first applied has the broadest and most enabling portfolio of technologies spanning materials creation and modification removal and analysis and our recent memory Master class, we talked about how we're taking unique applied tech.

<unk> that were originally developed for logic, and including Black Diamond locate materials and high K metal gate transistors and into the DRAM market opening up new billion dollar opportunities Seth.

And we can combine our technology portfolio and unique and highly enabling ways that no 1 else can do.

A great example is our draco hard mask materials for our capacitor scaling and DRAM Draco had been co optimized to work with applied etch system and our process development that we accelerated with our E beam technology.

And it brings together process tools sensors, metrology and analytics and machine learning capabilities.

There is tremendous pull from customers and we already have AI ops engagements with all major memory manufacturers.

And can find critical defects while E beam is slower that has higher resolution to accurately classify those defects. So we use our E beam system to train the extract the AI engine for defect and noise classification as applied to E beam technology has best in class resolution and.

Imaging, we get the most accurate classification to train our AI models, we then use and fencing to turn and unclassified map of millions of potential defects into and actionable map of thousands of yield impacting defects.

Structurally higher and we're confident that we have the right strategy to accelerate P pack T and grow significantly faster than our markets Dan over to you. Thanks.

Synergistic adjacent markets I'll finish with our guidance for Q3.

Operating segments exceeded the revenue guidance and we continued to expect each to post higher revenue in the second half of our fiscal year.

The semiconductor systems team also delivered the highest non-GAAP operating margins and nearly 14 years, while ags delivered the highest margins and nearly 15 years.

These accomplishments helped us generate record non-GAAP operating profit and increased non-GAAP operating margin by 700 basis points year over year.

We increased operating cash flow by 87% year over year, delivering over $1 billion for the third quarter and a row. We're pleased that Moody's recently upgraded applied credit rating by a notch to a too.

We also resumed the buyback program and Q2 deploying $750 million and the limited window available to us and we expect to be more active and the current quarter.

Next since our last earnings call VLSI research published its market sizing report for calendar 2020.

Which is important for 2 reasons, 1 it distinguishes front and equipment spending from backend Assembly and test.

2 and includes company services and spares revenue in addition to equipment revenue, allowing observers to distinguish between recurring revenue and Wi Fi.

Applied materials was number 1 and both equipment and services for 2020.

As Gary described major inflections are increasing and the demand for materials engineering and we're on track to significantly outperform once again in 2021.

Next I'll discuss the demand environment.

And the slowing of 2 day scaling capital intensity is closer to 14% today.

Multiple industry forecast call for the semiconductor industry revenue to reach 1 trillion dollars by 2030, if capital intensity stays flat from here and then WSI spending could be over $140 billion and the same timeframe I realize there are questions about whether the unprecedented demand we are seeing today is secular.

Or cyclical when I listen to what our customers say I hear a firm belief that the data economy is real and driving secular growth well into the future. This perspective is being reinforced by plans for substantial multiyear capital investments, which are needed to support demand and fuel profitable growth.

Against this backdrop, we've never felt better about our opportunity to enable our customers generate free cash flow and return cash to shareholders.

The report I mentioned earlier shows that over 90% of applied to reported services business is composed of recurring services and parts revenue, which is the highest amongst our peers.

We generated $3.7 billion of this true services revenue in 2020, with 60% and long term agreements and renewal rates of around 90%.

And Q2, the trend towards long term subscriptions was even stronger nearly 70% of our services and parts bookings were subscriptions and 50% had terms of at least 3 years, our strategy and Ags and as a company is to combine our technologies and unique ways to create higher value solutions and outcomes for our customer.

<unk>, which are best delivered under the subscription model.

And our products for the next wave of OLED investments targeting foldable smartphones notebooks tablets and Tvs.

With these investments completed our focus is on increasing free cash flow.

And we're committed to increasing non-GAAP operating margins from the high teens level today to over 20% in the coming quarters, and then between 25 and 30% over the target model horizon.

Now I'll share our Q3 business outlook, we expect to increase company revenue to approximately $5.92 billion, plus or minus $200 million.

The midpoint would be up about 35% year over year, we expect non-GAAP EPS to be about $1.76, plus or -6 cents or up about 66% year over year.

Within this outlook, we project semiconductor systems revenue of $4 to $5 billion up around 46% year over year and.

And Ags revenue of about 1 point to $3 billion up around 19% year over year, we expect display revenue of around $415 million.

Applied and non-GAAP gross margin should be roughly flat sequentially at 47, 7% or up around 270 basis points year over year.

We plan to increase non-GAAP opex to $930 million and as a percent of revenue non-GAAP Opex should decline by 290 basis points with nearly 70% of the spending earmarked for R&D.

Our guidance assumes and non-GAAP tax rate of around 12%.

In summary, I am pleased that applied delivered another record quarter of performance in Q2 with strong year over year growth and revenue and profitability.

And I'd like to join Gary and thanking our employees and supply chain partners for supporting our customers now Michael let's begin the Q&A.

Thank you and forgetting the queue simply press star 1 and your telephone to withdraw your question press the pound key.

First question from John Pitzer with credit Suisse.

Yes. Good afternoon, guys. Thanks for let me ask the questions and congrats on the solid results.

Gary Gary and nice to see the uptick in your forecast for <unk> for the year I'm kind of curious when you look at your ability to supply customers or the ecosystems ability to supply customers relative to the high $70 billion. Wi Fi is there potential for upside this year or are you already starting to see kind of.

And the backlog for next year, Phil and just given some of the the constraint and lead times on tools.

Yeah, Thanks, John and this is Dan and I'll jump in on this 1.

And and I look at it by reporting segment I would say all 3 of our segments are up half over half and then all 3 of our segments are up as we look into 2020..2 so I can't comment for everybody. What I would say is as we've been very aggressive in terms of managing this upward gradient of the industry we started.

Several quarters ago, 3 or 4 quarters ago, you can see an uptick from an investment standpoint to make sure that we've got the infrastructure and capacity and capability and that's not only investments from our physical infrastructure, but also working with our supply partners to make sure that we can fully satisfy all the demand that we see from our <unk>.

Thank you Jonathan.

Our next question comes from C J Muse with Evercore.

Yeah. Thank you for taking my question just to clarify.

Wanted to make sure that you're talking about second half calendar 'twenty, 1 versus first half calendar 'twenty 1 in terms of.

Half on half and then for my main question as I think about.

Your operating margin for silicon.

At 39, 1% this was your best.

For instance, and you look back since I think June 2007, and so I guess.

As we think about WSI moving higher from here into 'twenty, 2 and likely beyond how should we think about the trajectory there and how important was mix and hitting the numbers that you put up and in April and.

And again, how should we think about it going forward. Thank you.

So the first part of the question second half over first half that's both fiscal year and calendar year and again, we're planning on being up as we look into 2022.

So we've got a market that's showing signs of strength. The first half of the calendar year. When you take a look at our actual results plus our guide our systems business is up 50% year over year. So we feel good about how we're positioned against this opportunity to outperform and.

And second half over first half being up both on a fiscal and calendar year basis, when I look at our silicon business and the performance of it what I would say is this as a company gross margin for our company is up 310 basis points year over year. The company has got a lot of work on driving.

Road activity gains operating discipline efficiency and are the core of our operations, we're adopting digital capabilities inside the 4 walls of our company to make sure. We are far more agile as a company to respond to upward and downward gradients and there's more work to do we'll never be satisfied with where we are but we've got a whole.

The host of initiatives at work to help this company become more efficient over time and you see that profiling into the results of the company.

And overall company you see our operating margin up 700 basis points year over year from a semi systems standpoint.

The margins will always be influenced to a certain extent by customer mix product mix factory loadings, but I think you can see them both in absolute and relative basis. This is a company that's performing very very strong right now and I would.

Expect us to continue with trajectory of strong performance as I go forward and so I guess the last thing I would say it all starts with innovation.

Thank you C J.

Our next question comes and Stacy Iraq on with Bernstein Research.

Hey, guys. Thanks for taking my question and no question on the DRAM business within the semiconductor and system. So.

It's the only business of yours that Hasnt really inflected, both foundry and NAND Flash we're up.

Pretty decently sequentially and year over year, DRAM was kind of down.

Both sequentially and year over year, and yet you're still looking for it to grow pretty materially through the year, So I guess and and I know, we know supply and that market is actually very tight. So I guess can you talk a little bit about the dynamics you see in DRAM and maybe talk a little bit about the contribution of DRAM to the guidance next quarter is that primarily withdraw.

And is that sort of ramp more materially and some of the other than the secondhand or are we still waiting for it.

Yeah, Hi, Stacy Thanks for the question. So I guess, the best way to start the conversation, let's talk about 2020, and then use that as a jumping off point for what we saw in calendar Q1, our fiscal Q2, and then what we expect for the rest of the year. So in 2000 and 'twenty, we talked about and overall Wi Fi market that was.

High teens I would say the DRAM market was pretty much in line with that maybe a little better than that against that opportunity. Our DRAM business was up over 27, almost 28% last year and significantly outperformed others and the industry that we're up a few percent and down a few percent. So we had a really.

Strong showing in 2020.

<unk> to be more in line with demand and so we see that market playing out roughly in line with our expectations.

Got it thank you.

Yeah.

Yeah, Stacy and maybe I can add this is gary relative to the major inflections and DRAM are certainly high speed DRAM, they're going to logic like structures and the periphery, where applied has leadership I think we talked about that and our memory Master class a couple of billion dollar opportunity as those inflections are being.

[noise] adopted capacitor scaling is another 1 where applied has real strength new patterning applications. So as Dan said, you know we had really great performance last year and as our customers are moving to these new structures DRAM structures.

We anticipate that will continue to outperform.

Thank you guys.

Thank you. Our next question is from Vivek Arya with Bank of America.

Thanks for taking my question I wanted to revisit this cyclical versus secular aspect and I think I'm kind of your Don mentioned is W. E elevated right now because of capacity shortages, which would be more of a cyclical driver or does it elevated more because of the secular reasons, which would be.

And a rising complexity.

I wanted to get your perspective on that because when we ask the semiconductor companies. They say the shortages are perhaps not as much on the foundry side, there and more on the back and.

So just wanted to get your perspective that what we are seeing right. Now is it is it a cyclical thing or is it more of a secular aspect.

Yeah. Thanks, Vivek I appreciate the question here.

You know you're at about a trillion dollars of semiconductor revenues by 2030, and the demand driving that as broad based you're seeing a handoff from consumer oriented devices to something that's far larger and more substantive around this fourth wave of compute the data economy by 2025 machines with <unk>.

<unk>, 99% of the data humans will generate 1% a.

You're seeing a decoupling of semiconductor demand for the first time and the industry's history from population and population growth and consumer behavior content is increasing across devices servers autos handsets. So what we see our strong secular growth drivers and we're in the early innings of that playing out.

Yeah, Let me just add that certainly today, we hear a lot about supply chain issues from an automotive perspective, but.

Really where as Dan said and as we talked about and our Investor meeting. We're in the early innings of every industry being transformed and the fundamental nature of competition being completely different so semiconductor content is going to be at the foundation of that infrastructure and certainly the way we work the way, we learn and the way we.

<unk> transportation health care today, we're talking about automotive, but content is going to increase more I believe than what anyone can see today, and it's really about who delivers power performance and cost faster than others and enabling that infrastructure that is the basis of competition of every single Indo.

St.

And so and then from and applied standpoint, as we've talked about a classic to the Moore's law really ended a few years ago.

Again, the basis of enabling a competitive advantage time to market on all of that is incredibly important for the entire glue.

Thank you thank you vivek.

Thank you. Our next question is from Toshi I deal with and Goldman Sachs.

Hi, Thank you for taking the question and congrats on the strong results.

Dan I wanted to double click on your NAND business, it was up significantly and the quarter, both sequentially and year over year at the same time I think it was Gary you talked about having relatively modest expectations for WMC for calendar 2021. So I guess the question is are you guys gaining share or is the expectation.

For NAND to be first half weighted.

This year or is it a little bit of both.

And kind of related to that Dan and you talked about more than $160 billion and Wi Fi for this year and next year combined.

And within the sort of context, how are you thinking about Nancy Thank you.

Yeah, Thanks to share and here's our perspective on NAND, if we were to go back.

3 months to last quarter, we said that NAND was the 1 segment that was first half weighted versus second half and the and in the subsequent 3 months that brings us to today, let's say a perspective on NAND, it's strengthened a little bit but of the 3 segments, we've seen foundry and logic strength and quite a bit.

Ram strength, and quite a bit and and NAND strengthened a little bit and while foundry logic and NAND. We view is second half weighted from a segment standpoint, I think there's a question mark on NAND, where we sit today is it first half weighted or second half weighted and it's too early to tell and so we got a.

Out of the gate very strong and calendar Q1 on NAND. So we expect that the growth rate to moderate quite a bit as we go throughout the year and from a first half second half weighting again, I think it's too early to call when I take a step back and I think about the comp.

The nation of 2021, plus 2022, what I would shape from an expectation standpoint around 2021.

Foundry logic is greater than 55% NAND is less and 45%.

I'm, sorry, foundry logic, greater than 55% memory, less and 45% I think that construct still holds and 2022.

As we think about a market that's up high 20% range.

And and and a few quarters I think we'll have more to say and a few quarters from now.

Thank you Jay.

Our next question is from Jason with Citi.

Hi, Thank you for taking my question and I have a question on display LCD spending mix has benefitted during the pandemic and.

And that the recent S display conference applied talked about the future of OLED, Tvs and micro Leds and <unk>.

If you can update us on the Green shoots are commentary you made 90 days ago and what's the outlook for display for next year.

Hi tests, let me take a crack at this.

So I think the display industry. This year is going to play out very much in line with our expectations from our business perspective, we're well penetrated in the segments, we participate and we've got a good read on the market and we see our business and calendar or fiscal.

Fiscal 2021, being very similar to fiscal 2020, we talked about the environmental and strengthening.

We still see older generation capacity coming out of the LCD market. We see increased consumer demand combination of that is leading to increased panel pricing spot pricing and the panel market is is going up and that's leading to increased profitability. So theres goodness. There we continue to see average area size increase.

Oh led screens are continuing to penetrate <unk> handsets and OLED penetration of handsets and general is on an upward trajectory. The next leg of OLED growth into the I T market and the TV market.

And foldable phones, becoming more widely adopted from a consumer standpoint, all of that is is intact. So we see an ela and.

And increase and the levels of investment as we go into next year, we feel good about that the other thing I'd offer here is we talked about and investment profile and our products to deepen our moats around our market position and get our product portfolio ready for the next leg up from an OLED investment standpoint.

Existing the year the vast majority of those estimates will be in the rear view mirror and youre going to see us start to reposition this business for enhanced cash flow and profitability.

I'll get into the low Twenty's and then by 2023 and 2024 will be consistently operating this business with an operating margin between 25% and 30%. So we feel good about market development revenue growth as we look into 2022, and then complementing that with an enhanced level of profitability to drive value.

And for investors.

Great. Thanks, Thank you Allison.

Our next question is from Krish Shankar with Cowen and company.

Yes, hi, and thanks for taking my question other kind of a long term question for Gary and you got even when you look at the sum.

Some other technology inflections like gate, all around coming up.

It seems like the critical technologies other horizontal and vertical FTE selective removal and conductor etch and wanted to find out from your vantage point what are the important technologies and more importantly can you help quantify the dollar opportunity meaningful and Matt.

Yeah. Thanks for the question. So are all of our customers are focused as I said earlier to deliver lower power and higher performance and and better cost ahead of others and and we talked and the investor meeting about the wiring innovations, we're driving and improving wiring a 50% and.

And gate all around and that's another very important technology. If you look at the overall ecosystem.

So that opportunity I think we've estimated around $1 billion incremental opportunity and you think about the key enabling technologies, certainly certainly epitaxial deposition and selective removal are very important we're working with every 1 of the leading customers on gate all around technology.

The other thing I would say that's important is our and and there are a number of other technologies, where we have very strong positions leadership position.

So that'll all ramp when gate all around goes into high volume manufacturing, but.

Time to market is also important to tee up the Pea pack T M.

And our E beam technology leadership is really fundamental and whether it's in the transistor the wiring of the draco and and the memory or any of these different innovation, it's really mapping out and fingerprint and goes processes because they're so complex with so many different.

Variables and.

And then being able to tune those recipes and the process and as fast as possible.

So gate all around certainly is 1 of those cases, we're seeing things like residual germanium or seeing in those structures incredibly incredibly important and.

And having enough of a picture across a chip or whether you have isolated or debt structures across the wafer, but that speed and the learning rate is very fundamental so we have leadership and some of these foundational technologies for a gate all around but also our leadership and E beam.

Is really important for gate, all around and other key inflections and the industry.

Thanks, Gary.

Okay.

Thank you. Our next question is from Harlan sur with JP Morgan.

Hi, good afternoon, and great job on the quarterly execution and results on the mature foundry logic and specialty manufacturing segments of the market your <unk> business.

You guys had said lastly, you.

And you expected this business to be $3 billion plus business for the team this year, but since then and I mean, the supply demand gap for the analog and microcontroller power Mems guys is actually widening to somewhere around 20% to 40%. In addition to the secular content gains that you guys talked about and auto and industrial.

And some of these customers are saying that they can't get to deliveries and orders placed to day till next year. So do you guys have a revised estimate on your <unk> business.

This year and similar to your overall business do you guys expect <unk>.

To grow in 2022.

Thanks, Harlan, let me jump in and see if Gary wants to offer additional color. After I take a crack at this so you know we saw this trend towards more robust spending from a trailing node geometry and specialty node geometry.

Several years ago, we reorganized the organization, we've got leadership I'm.

Driving this group and the company is performing incredibly well against this opportunity.

We talked about this segment of our business being greater than 3 billion and we don't Wanna be more specific than that for competitive reasons, but it's it's it's much greater than 3 billion, but we'll just leave it at greater than $3 billion for now.

Company has got great technology, Great leadership positions and then from a margin structure standpoint, it's accretive to the overall company margin and so as this business continues to grow for us and we'd be continue to outperform we think it's gonna be value accretive for our investors and so we feel good about how we're positioned and our ability to drive this.

<unk>.

Like we talked about we're planning for our business to be up second half over first half, we've got and ability to continue to drive output and and delivery of technology to customers. So we feel good about how we're positioned in this market is a key enabler of our customers to be able to satisfy their.

Their customers. So again, we saw this trend early and and it's going to be a really value accretive part of our business nice piece of our business going forward.

Yeah, absolutely. Thank you.

Thanks, Charlie.

Thank you. Our next question is from Patrick Ho with Stifel.

Alright, Thank you very much and congrats on the nice quarter and outlook, Gary maybe for you in terms of the process control business you have overall, good share or actually great share in the marketplace given the gains you've made with the pro vision tool you have recently, you've introduced the new optical inspection and kind of a hybrid.

And with AI capabilities can you discuss where the future lies between E versus optical inspection and how your customers are.

<unk> received and the feedback in terms of the differing technologies.

Well thanks for the question Patrick So maybe first let me start with our our top level PTC business and then I'll get into this optical E beam question.

And so really there's 2 major focuses for our PDC business certainly a this is a growth opportunity.

And we're probably 50% higher resolution. So we can see things that other platforms cannot see we also have an advantage and the speed of imaging. So mapping out these fingerprints to dial in these processes faster with bigger process margins that synergy applied is the only company and and the industry.

And that has that combination of the unit processes and integrated materials solutions and leading E beam technologies. So that is strategically important and and I think.

<unk>.

Berkshire and we did introduce this new platform. The in light, we see very strong, Paul and adoption, especially and leading foundry and the combination of these technologies basically you have a.

And optical inspection system that is incredibly cost effective for line monitoring types of applications and and certainly and the discussions that I have with many of the R&D leaders tremendous pull for that technology, but also combining that with industry leading resolution to accurate.

Classify defects and then having that capability.

And as fundamental were more than 5 times larger than our overall largest PDC competitor, we have clear imaging leadership, we will be introducing a new imaging technologies that will further strengthen our leadership and.

That part of our and and that part of PDC and the synergy in the T..4 P pack T is very very very important.

Thank you Patrick.

Thank you. Our next question is from Quinn Bolton with me him and company.

Click at the China domestic market and think about the level of investment there I would say that there is slow steady development of the ecosystem I see investments from a 200 millimeter and 300 millimeter standpoint, and then within and 300 millimeter geometries, we see investments across all device types, we see NAND, we see DRAM.

And we see foundry logic.

And wouldn't say, it's driven by 1 specific market 1 specific customer it's really broad based both from a customer perspective as well as a market perspective, we feel good about how we're positioned against this opportunity and we will do well over time as that business continues to grow.

The case 1.

Yeah.

Thank you.

Our next question is from P. M for I do with and New Street research.

Hi, Thanks for taking my question.

So Don you mentioned that if we if we give it some time and releasing and you'll see heading towards a tree and dogs, we could have like with I think we've been spending and a.

Wondering if I'll give you and bill so let's say 5 years.

Maybe a bit more we could see just didn't see the value that you see Doug linear.

And then Gary you talked to look about like this.

I mean inflection points to reach we feel very close now.

Yeah.

Must be Io and <unk>.

Sticking her cooking rhythms over.

A critical dimension reduction and so so my question wise.

World in which the industry spends $150 billion and west.

<unk> spending.

Is it incremental.

M 70 billion, which would be spend compared to what you spend today.

Where would that go.

Geez like what you knew you would be the most significant drivers of growth for the industry overall, and thats kind of flown by and valued where we can double again.

And.

Yeah. Thanks for the question Pierre So for me I spent a lot of my time with our.

Customers across our entire.

All the different market segments, the leading customers I kept I spent a tremendous amount of time, there are more than ever and and I have a very strong.

<unk> perspective, and and we can see things that we can't talk about publicly relative to where our customers are going but I really believe that where.

Where we're at the point, where we have the biggest economic conditions competition of our lifetime with technology transforming every industry and semiconductors are part of the key infrastructure of the day the economy going forward and it really is about power performance and cost from the edge.

The cloud and everything in between.

And I do believe it and and we can see it when you go from 5 to 3.3 to 2 and what's going on beyond.

Beyond that that the playbook that we discussed before and you even see customers.

Supporting this view that the.

And the classic 2 D Moore's law.

And for the future. So it's about the new materials, it's about the new structure. The gate all around the 50% reduction and wiring a high speed memory for a number of different applications, we're adding logic.

To the periphery.

Shaping the chip architectures, and a and a very different way and the other thing and we've talked about I talked about this.

Earlier on the call packaging is I think underappreciated and very important this year packaging will be over $800 million for us and you think about connecting chips or chip, let's or IP blocks that is going to be an enormous opportunity going forward and applied is.

And in a great position, we have very strong products and P. V. D. C V D. A C. M. P. Plating. This new hybrid bonding technology, where you can bond 2 chips together, we're the only company and the industry that has a full flow advanced packaging lab. So P. R. I think.

There's going to be tremendous innovation, that's happening there and again that's another.

Segment of the industry, where I think people under appreciate how important from a competitive standpoint, and and a Pete pack T. Enabling standpoint, that's going to be so again those are the things that are that we see as we go forward, it's really about those 5 elements over the new playbook and the other aspect is time to mark.

That's where we're focused with a I ask and and especially.

Actually our industry leadership and E beam are to drive the tea.

Thank you peer.

Thank you and our next question is from Timothy Arcuri with UBS.

Hi, Thanks, Dan and I guess I had a 2 part question just about Wi Fi and your share. So you gave a 2020 wip number from DIY side, It's like 61 billion and you did 12 point wanted.

I spoke to you last year, so that's about 20% W Fi share.

And then if I take your July SSG guidance.

We know that Youre doing about $8.2 billion and the first half and you're saying that it's gonna be up and the back half. So that's like 16.5 to 17 for the year.

Rich off of your high 70 billion WP number is like 21, 5% that would be a few shares. So that's up like 150 basis points. This year. So I guess my question is where where is that share coming from can you just sort of double click on that I know you highlighted process control, but I'm wondering if you can kind of double click on that and then the second part of the question was for domestic China U.

About 10 billion in February this year is that still the thinking.

Okay.

Yes, Tim Thanks for the question I think it's important to really get the facts on the table for 2020, if you look at our semi systems business and calendar 2020.

26.5% against the market that was up high teens and so significant outperformance. We viewed is gaining 60 basis points a share. So we ended 2020 at 25% Wi Fi share and so you referenced the 21, 5% share in 2020.1 we.

We're going to significantly outperform this year you saw us grow almost 2 to 1 and foundry logic last year, you saw us significantly outperform peers, and our 2020 and the DRAM market and we showed strength and our NAND business and when I look at the customer's node over node, whether it's Matt.

Memory or foundry and logic, our opportunity is going up when I look at the end market profile, we talked about its strength in foundry logic, DRAM and strong business in and so we feel good about our the market perspective, and then when I look at the product portfolio, we showed share gains and deposition and removal and process control.

Gary talked about packaging and we talked about 240 basis points of conductor etch and 220 basis points of CVD, we talked about strength and P. V D and E. Thermals are 'twenty 'twenty, 1 I would expect to do even better across that product portfolio. We talk about the new Pea pack T playbook, we talked of.

A lot about the enabling technologies at our Investor meeting, we've held 1 master class, we've got and upcoming Master class on foundry logic, we see these inflections Israel, we've got the industry's broadest portfolio of industry, leading technologies and we've got unique abilities to combine those technologies and bring them together in a way to <unk>.

All of our customers' highest value problems and so we feel good about our position our momentum and our ability to outperform and these markets.

And so from and and I'm sorry, Tim Your second question.

Sorry, Dan. Thanks, Yeah, I was just asking about domestic China WSI.

I thought you said something like flat year over year around 10 billion. This year I was just kind of wondering if you had an update there.

Virtually every node to the challenges that Gary talked about with 2 day scaling the industry just needs new ways to deliver the Pea pack T roadmap.

Our customers are committed to very large multi year investments, but they're also coming at it from a position of financial strength, which is really great and bodes well for the industry long term, we're going to fully support them with the R&D investments that we make that'll drive of the roadmap solve our customers' highest value problems were.

A replay of our call will be available on our website by 5 P. M Pacific time.

And for your continued interest and applied materials.

And this concludes today's conference. Thank you for your participation and you may now disconnect.

Q2 2021 Applied Materials Inc Earnings Call

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