Q3 2021 Applied Materials Inc Earnings Call

During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question 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 third quarter of fiscal 2021 earnings call. Joining me are Gary Dickerson, our president and CEO and Dan Durn, Our Chief Financial Officer before we begin I'd like to remind you that today's call contains forward looking statements, which are subject to risks and uncertainties that could cause our actual results to differ information.

Turning to risks and uncertainties is contained in <unk>. Most recent Form 10-Q, and 8-K filings with the SEC.

Today's call also includes non-GAAP financial measures reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at applied materials Dot com, but.

Before we begin I have some calendar announcements on the eighth of September at nine Am Pacific time, we plan to host the third event in our Master class series. This time, focusing on the <unk> markets and also on heterogeneous design and advanced packaging than on the 18th of October also at nine Am Pacific time, we plan to hold our fourth Master class will focus.

On process control and process optimization, including AI X platform technologies like E beam and AI, we hope you'll join us and now I'd like to turn the call over to Gary Dickerson.

Thank you, Mike and our third quarter of 2021 applied materials again delivered record performance capitalizing on strong broad based demand for our semiconductor products and services, while navigating a challenging supply environment.

Over the past 18 months, the pandemic has accelerated the digital transformation of the economy and adoption of advanced technology, creating a permanent structural shift for the industry.

At the same time COVID-19 has disrupted global supply chain and logistics are transitory challenge will continue navigating over the coming quarters across the company I want to thank our teams for doing an incredible job to successfully overcome these near term disruptions provide outstanding support to customers.

And keep our R&D roadmap on track.

In today's call I'll focus on three main topics first I'll provide our perspective on the market starting with our near term outlook and then recapping our longer term thesis second I'll summarize the three pillars of appliance growth strategy and third I'll explain how applied is outperforming our markets today.

And is well positioned to play an even bigger broader and more valuable role in the future.

I'll begin with our near term outlook overall, there's no significant changes to our view of the market demand is strong and sustainable with customers, making strategic investments to address long term secular trends in 2021 foundry logic is the fastest growing wafer fab equipment market.

And we believe it will represent more than 55% of total customer investment for the year.

This spending is split relatively evenly between leading edge. The three most advanced nodes in foundry and logic and technologies for Iot Communications automotive power electronics and sensor applications or what we call eye cats we.

We expect DRAM spending to be the second fastest growing Wi Fi market. This year and we see a positive set up for sustained investment in capacity and new technology.

Supply side inventories remain below normal levels and long term demand drivers are strong fueled by a memory intensive AI computing.

On an absolute basis, we expect NAND investments to be similar to DRAM for the year.

We believe NAND inventories are at normal levels, both on the supply side and demand side.

Looking further ahead I strongly believe there has never been a more exciting time for semiconductor companies. We are only at the beginning of decade long trends that will underpin secular industry growth as I've said before digital transformation is built on silicon and broad.

The drivers for semiconductor innovation demand for semiconductors is no longer about one or two killer applications, but rather an expansive structural shift in the economy towards digitization and automation.

Art and connected devices at the edge not only consume more silicon they are driving exponential growth and machine generated data to make sense and create value from the vast volumes of data available new AI computing approaches are needed fueling further demand for current and <unk>.

Generation semi conductors.

While global consumption of Silicon is accelerating adoption rates of new technology very considerably by region. As we showed in our Investor meeting we estimate that by 2025, China will have only reached the same levels of silicon spend per capita the U S saw in two.

And in 15, and India trails, China by another eight to 10 years since.

Since the impact of digital transformation is so wide, reaching national governments are increasingly recognizing the strategic importance of semiconductors.

As government incentives to become available in the U S Asia and Europe. They can provide multiyear support as the industry moves from lean and just in time supply chains to more resilient flexible and secure approaches including regionally distributed capacity.

However, putting the right manufacturing infrastructure in place is only one piece of the puzzle investment and innovation infrastructure to lead in the development and commercialization of next generation technologies is even more critical to winning the future early access to superior.

Semiconductor technologies or what I refer to as winning the Pea pack T. Reis will determine the countries and companies that thrive and those that won't.

At applied we have a strong point of view that the industry future will not be like the past and we've aligned our strategy and investments Accordingly, our strategy has three pillars first and foremost we are focused on being the Pea pack T enablement company to provide the foundation for our customers' power.

Sure performance area cost and time to market Roadmaps.

We have the broadest and most enabling portfolio of process technologies that we can co optimize and combine and unique and highly enabling ways.

Second we're shifting more of our business to subscriptions as we believe this model provides significant benefits to customers and for us.

We have already converted a meaningful portion of our installed base business to recurring revenues and we are starting to monetize new products and services using subscription approaches and third we continue to optimize our portfolio of businesses that serve adjacent markets, including display.

To drive profitable growth and higher free cash flows.

This strategy is yielding results and 2021 is shaping up to be a strong year of outperformance for applied.

Starting with our unit process tools, we are seeing very strong demand for our leadership products. For example, taking the midpoint of our fourth quarter guidance, both our <unk> and thermal businesses are on track to grow more than 70%. This fiscal year, while C. N P will grow more than 60%.

And implant more than 50%.

We're also seeing outperformance in our growth areas, especially process diagnostics and control, where we expect to grow more than 60% in calendar 2021.

On top of this we have strong momentum with our co optimized and integrated solutions by revenue about 70% of the semiconductor products. We sell today have already been co optimized at some level co optimization allows us to see and saw higher value problems for customers speed up technology.

The transition to high volume manufacturing and make our solutions stickier.

Beyond co optimization, our integrated materials solutions called I M. S combined multiple processes with customized metrology and sensors in a single system typically undervalue them.

Our latest IMS product that lowers the interconnect resistance by 50% and advanced foundry logic directly addresses a multibillion dollar opportunity over the next five years.

With IMS, we can target the most complex and valuable challenges and the new Pea pack T playbook, and we have an exciting pipeline of new solutions for both foundry logic and memory.

Another area, where we're seeing strong and sustainable growth as our <unk> business that serves a broad spectrum of customers and applications in Iot communications automotive power and sensors.

Within I kept demand for 28 nanometer and larger nodes is especially robust revenue from products serving these applications is expected to double this year.

By acting early in forming a dedicated <unk> team in 2019, we've been able to increase our focus on these customers and accelerate our share of this market.

We're developing new products, specifically designed for <unk> markets, including integrated and co optimized solutions as a result, we're deepening our partnership and collaboration with these customers. For example, we recently signed a five year contract with a leading <unk> customer designed to provide.

More assured supply for them and more predictable revenues for applied today.

Today, we are demonstrating strong momentum in our leadership and growth businesses, IMS and I cats and.

And as I look ahead, I'm confident our opportunities are even better it's clear that advances in materials engineering are foundational to the industries P pack T roadmap. The Pea pack T. Playbook has five key elements, new architectures, including workload specific ASX and new memories <unk> structure.

<unk>, including gate, all around transistors varied power rail and three D DRAM, new materials for gate contact and Interconnects, new geometric shrink and advanced packaging.

We believe that the relative contribution of these five elements to P pack T at future nodes is evolving in ways that create opportunities for applied to play an even larger and more valuable role.

Let's take advanced packaging as an example, we identified this inflection early and began investing in differentiated technology years ago. Today, we enjoy a clear leadership position in the advanced packaging equipment with more than 60% share of our served market we will generate.

More than $800 million of revenue from our equipment business this year and through a combination of organic R&D and strategic partnerships. We're also developing highly enabling future technologies.

We are very excited about our opportunities in pipeline and we'll share more details with you at our upcoming packaging Master class.

Finally, when we talk to customers about P pack T. They consistently highlight the importance of tea time to market time to market acceleration is a critical component of our P. Pack T. Enablement strategy, 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 are actionable insight accelerator or a <unk> platform that we officially launched in May brings together process tools sensors metrology data analytics and machine learning, we have strong momentum and are adding new.

<unk> at multiple leading customers for example.

<unk> Pro is our process recipe optimizer within a IX and used to accelerate R&D qualification of the individual chambers and tools as well as enable larger process windows and higher chip yields.

Over the next 12 months, we expect to double the number of applied pro customer engagements from around 25, this year to more than 50%.

Before I hand, the call over to Dan I'll quickly summarize, we see strong and sustainable demand for our semiconductor business underpinned by a wide range of positive macro and technology drivers, while COVID-19 related supply chain disruptions persist. Our teams are doing a great job working through these.

Challenges, we believe applied materials will outperform our markets again this year, thanks to our strong portfolio of differentiated unit process tools for both leading edge and I kept markets combined with accelerating adoption of our IMS and advanced packaging products as we look at.

Ahead, we're confident that the strength of longer term secular trends will drive semiconductor in wafer fab equipment markets structurally higher and we believe applied is in the best position to accelerate our customers' P pack T roadmaps and grow significantly faster than our markets.

Dan over to you.

Thanks, Gary today I'll begin by summarizing applies overall performance in Q3.

Then I'll discuss our semi systems results, including new details about our foundry logic business.

I'll also give you a number of metrics surrounding the large recurring revenue portion of applied global services segment.

Then I'll add my perspective on the demand trends in our markets and provide our guidance for Q4.

Beginning with our Q3 performance applied generated the strongest revenue in company history with each of the segments exceeding guidance, we increased gross margin to 48%, which is the highest in 14 years. Despite the ongoing cost headwinds related to Covid. We also delivered the companys highest ever operating profit op.

Operating margin and earnings per share our results included record operating cash flow and record free cash flow of $1.5 billion in.

In fact, we've generated nearly 5 billion in cumulative free cash flow over the past four quarters at.

At the Investor meeting in April we made a long term commitment to return, 80% to 100% of free cash flow to shareholders and in Q3, the buyback window was available to us for the full quarter, we repurchased one $5 billion of applied stock during the quarter and returned 111% of free cash flow to shareholders.

<unk> dividends, we ended the quarter with around $6.5 billion remaining in our share buyback authorization.

Given the secular growth trends in our end markets and our view of the intrinsic value of the company. We expect to continue to be active in the market for our shares finally last quarter I mentioned that Moody's upgraded <unk> credit rating to <unk> I'm pleased that earlier this month standard and Poor's also upgraded our rating from a minus to a.

Now I'll provide some insights into the strong performance of our semi systems business, which generated its highest ever revenue in Q3 or.

Our demand is broad based across foundry logic, and memory and within foundry logic across a wide variety of nodes.

We're increasing our technology leadership in many areas and that's being reflected in our operating margin, which crossed 40% for the first time.

About half of our foundry logic revenue is being generated by our caps business, which focuses on all but the three most leading nodes are I kept business has a large global presence and serves a very large number of customers throughout North America, Europe and Asia.

Many of the <unk> applications have long product cycles, which generates lasting opportunities for us both in equipment and services, we have high share and the margins are accretive to the company.

We look forward to giving you more insights into the <unk> markets and our strategies at the Master class next month.

Turning to applied global services or building a solutions based recurring revenue business that delivers predictable free cash flow across market cycles. Our segment reporting gives you good insights into the business and I'll continue to help you with key performance indicators that demonstrate the unique qualities of applied services business.

And the progress of our strategies.

From a segment reporting you know that Ags delivered record revenue of one point to $9 billion in Q3 up.

24% year over year.

87% of Ags revenue was recurring services parts and software. The remaining amount was primarily legacy 200 millimeter equipment. So applied generated $1.1 billion in recurring revenue this quarter.

This is by far the highest among our process peers and demonstrates our progress in generating lifetime value from the industry's largest installed base today are semi installed base is just over 40000 systems and we have over 160000 chambers in the field.

At the Investor meeting, we shared our goal to increase revenue per system by 20% between 4044 as of Q3, we're already halfway to achieving our goal.

Now I'll put some metrics to our strategies for adding customer value to further grow our recurring revenue.

Connecting the installed base to our AI X servers enables us to perform data enabled services for our customers.

Today, we have just over 4300 connected tools, which is up over 30% from our 2020 baseline.

We're also growing the number of secure remote connections, which allows us to connect our best experts to the install base to perform remote analytics diagnostics and optimization from anywhere in the world.

The number of remote connected tools now exceeds 3200, which is up over 36% from our 2020 baseline.

Another key focus is transitioning our recurring revenue to subscriptions in the form of long term service agreements.

Today, we're generating 60% of our recurring revenue from subscriptions and our goal is to reach around 70% by 2024.

We also have a subscription renewal rate of around 90%.

We track all of these kpis very closely I hope they give you a good sense of the size and growth of our recurring revenue and the strong customer pull or generating by focusing on customer time to market as well as cost output and yield.

Finally, another key metric we disclose is Ags segment operating margin, which provides a good indicator of the value our services bring to customers in Q3 across 30% for the first time in 15 years.

Next I'll add my perspective on the demand environment.

While Q3 was a record quarter, we see further growth ahead in fact, our overall backlog is close to $10 billion with record levels in both semi systems, and Ags and strength across all of our geographies.

We still expect equipment spending to be higher in the second half of calendar 2021 for both foundry logic and DRAM I expect <unk> to be up in 2022, and I expect all of our reporting segments to be higher.

Now I'll share our Q4 business outlook, we expect to increase company revenue to approximately $6.3 billion to $5 billion, plus or minus $250 million or up around 35% year on year.

We've widened the revenue range this quarter because of near term risks within our supply chain.

We expect non-GAAP EPS to be around one dollar and 94 cents plus or minus seven.

Or up around 55% year on year.

Within this outlook, we project semiconductor systems revenue of about $4.60 billion up around 50% year over year and Ags revenue of about 130 billion.

Nearly 18% year over year.

We expect display revenue to be around $400 million.

<unk> non-GAAP gross margin should be flat sequentially at 48% or up around 230 basis points year over year.

We plan to increase non-GAAP opex to $960 million, which is around 15, 2% of revenue and below our longer term target of 16%.

Our guidance assumes a slightly higher non-GAAP tax rate of around 12, 5%.

In summary, I am pleased that applied delivered another record quarter of financial performance in Q3 with strong margins and free cash flow. The demand environment continues to be strong and I'd like to join Gary in thanking all of our teams and partners for their hard work and a robust a challenging environment now lets speak.

The Q&A.

Thanks, Dan to help us reach as many people as we can please ask just one question on today's call. If you have a second question. Please re queue and we will do our best to come back to you later in the session operator, let's please begin.

As a reminder to ask a question you will need to press star one on your telephone.

With John Your question press the pound key.

Please standby.

<unk> roster.

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

Yeah. Good afternoon. Thank you for taking the question was hoping to dig a little bit deeper into your <unk> business, you talked about foundry logic being 55 plus percent of the mix this year and Ikea.

Perhaps half of that.

Did I hear that correctly.

And as you think about spending there.

Can you walk a little bit.

More detail around leadership versus growth penetration for you and how we should think about the sustainability of spending there into 2020, Q as well as the <unk>.

Positive mix shift.

Gross margins and then finally as part of that is there a subscription angle that's a greater part of the story, there given lagging edge or Dale. Thanks, so much.

Hi C. J this is Dan.

I'll start and Gary can jump in with some perspectives. After I'm done so as we think about the <unk> market and the setup around foundry logic I think the contours you drew.

Create.

Create the right perspective, greater than 55% of Wi Fi. This year is foundry logic, when we look into foundry logic and look at leading edge versus I caps nodes, you're seeing balance in those two markets.

We had balanced in those two markets in 2020, we've got balance again in 2021. So we're really encouraged by the strength, we're seeing across the entire node profiling geometries within foundry logic, we think we're incredibly well positioned on the leading edge to drive key enabling technologies as the new playbook roles.

We're equally well suited in the eye caps nodes to drive those roadmaps going forward innovation is back across the entire node profile.

Our customers pursue unique opportunities in Iot communication auto power sensors, there's very unique.

Technologies and capabilities that need to be driven as intelligence finds its way to the edge. Those roadmaps are vibrant we've got key enabling technologies, that's driving really good market positions for us at attractive margins. So we think we're really well set up to.

Perform extremely well as both of these sides of foundry logic.

Profile going forward in a very balanced way, so we like how well we're positioned.

Yeah C. J. This is Gary thanks for the question. So I think I caps, maybe some people would think of.

Trailing technology nodes, but you know if you really think about the digitization.

Of everything in this big inflection you know people are talking about the future, having a half trillion or trillion connected devices at the edge and certainly you know as we talk to system companies.

That are deploying those eyes and ears in sensors and all of those different applications that are transforming every industry there needs to be a tremendous amount of innovation and power performance cost in both the chips and the packages. So we.

We will cover this some more in the September 8th Master class, but I would think about edge innovation certainly in the cloud you need high performance to extract the actionable insights, but that latency power cost all of those things on the edge that innovation.

It is really important and I think relative to the sustainability.

Certainly you can see the explosion of data, especially Mitch machine generated data.

This market is very very strong and we think if you as you go to a half trillion connected devices at the edge in the future, it's going to stay very strong and as Dan talked about we made a strategic change in our organization in 2019 pulling together key parts of our company 200 millimeter 300.

[noise] millimeter unit process innovation, we have some dynamite technologists focus on these markets and again, we'll share more of that at our September 8th Master class.

Okay. Thank you C. J operator can we have the next question. Please.

Thank you. Our next question comes from the line of Stacy RASM from Bernstein Research. Your line is now open.

Hi, guys. Thanks for taking my question.

I had a question on memory first on DRAM. So obviously grew.

Pretty nicely sequentially in the quarter and it sounds like you're still pretty positive, though on the trajectory and its still below prior peak levels and given the strength of your positioning and everything you've talked about is there any reason to believe that like whenever we hit <unk>.

Our M. P. Whenever that is is there any reason to believe that that that level wherever it is I shouldn't be higher potentially significantly higher than where we saw the prior peak, which was several years ago.

And I think on the other piece of memory NAND, you talked about foundry and logic and DRAM you didn't really mentioned NAND at all I know last quarter. Your views on NAND were a little more muted than the rest of it have your views on the trajectory of that market into the back half I'm down at all.

Where you were three months ago, because one of your competitors down down ticked a little bit.

Around Wi Fi this year, there's very little change we said, it's now over 80 billion, we think its a mid 30% grower plus minus and embedded within that we see strength across all device types your fastest growing foundry logic second half weighted.

Next fastest growing DRAM second half weighted still see strong demand and pull from customers. There. So we feel good about that.

Last quarter, we put a question mark on the profile of NAND is it flat is it down a bit.

He needs a bit more time to tell I think we're still in that category I think there's a question Mark is it flattish is it down a bit so very little has changed in terms of the shape of the profile throughout the year.

Taking a step back and taking a look at our DRAM progress. This is a business that we've had strong momentum in now for several years and as we take a look at the roadmap, we talked about increasing our opportunity node over node and that seems to be playing out in the market.

Right now you're adopting logic like structures within the DRAM market in this place to a traditional source of strength for us and so we're playing a key enabling role for our customers and you see that playing out in the most recent results and we would expect that strength to continue through the back half of the year as we look into 2022.

We do see the overall Wi Fi market up year over year, we see continued strength in all three device types foundry logic.

DRAM NAND.

And so we like how well we're positioned against that opportunity and the way we see it.

Right now we're planning for all three of our reporting segments to be up year over year. So the concept of peak is a really interesting one in this context, if we take a step back and look at the secular trends shaping this industry. We know industries are going through a digital transformation increasingly going to drive adoption of.

And I'd say the demand for semiconductors five years from now it's going to be greater than it is today and certainly greater than it was five years ago. So all of that is playing out nicely. What I would also say in the DRAM market that your node over node shrinks are producing less bit growth than they have historically, so you're seeing capital Intel.

City rise in that market.

Seeing capital intensity rising all device types, frankly, but when I look at the investments our customers are making in this environment and I compare it on a historical basis as a percent of profitability to what we've seen historically you go back about a decade and where the customers are spending more from a Wi Fi standpoint.

But Wi Fi as a percent of EBITDA is down 40% over the last decade to the monetization of these investments is greater today than it's ever been so we really like the long term shack hewler drivers around our industry and while every year may not be at peak the trend line is definite.

<unk> up and we do think it leads to higher highs and higher lows as this industry continues to drive its roadmap and deliver the power performance roadmap, we think we're incredibly well set up to.

<unk> performed really well as as those trends play out.

Got it that's helpful. Thank you.

Thanks Stacy.

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

Yeah. Good afternoon, guys. Thanks for let me ask the question Gary you sort of notwithstanding the comments you made in your prepared comments about how world governments have finally figured out how strategically important semi production is and we're going through a period of regionalization of semi production.

Look over the last two quarters, you've grown revenue over $1 billion and the biggest chunk of that but by far has been China and so I'm wondering if you can help us just better understand the makeup of spend in China today and to the extent that we're all expecting this regionalization of supply.

And how do you think that takes place.

Yes, Thanks, John let me take a crack at it and so what we would say is as we take a look at the business. We do in China, We've got three reporting segments the numbers.

Report.

Our both semi systems to domestic China market participants as well as the international market participants that are building facilities. There all of the services that go into supporting those facilities as well as the display equipment that we ship into the market and so there's a lot of moving pieces that produce revenue in China and.

In any given quarter as I take a step back and look at what's going on this year and we compare it to maybe the $10 billion of domestic China spend in Wi Fi last year. What I would say is is that you are seeing meaningful spend across all three device types foundry logic DRAM NAND.

And I would say the weighting this year is towards I caps market in China and from a growth perspective, I would say, it's probably growing a little bit above the overall industry average. So we feel really good about how well we're set up against this opportunity with long standing relationships key enabling technology, but we've got a broad and diverse business.

That serves this market across three reporting segments and so we feel good about how we're positioned and continue to.

Drive strong performance as the market evolves.

John.

On the other part of your question about when do those investments happen from a regional perspective.

There's no question.

I'm involved in a number of different discussions theres tremendous poll.

Across many different regions U S Europe Asia and in what I would say is that certainly it's important from a.

Supply chain continuity to have more regional capacity I think that's a big area of focus but personally I think even more important as having not just physical infrastructure of manufacturing infrastructure innovation infrastructure and if you think about the infrastructure that's going to enable this.

Multitrillion dollar digital inflection it really gets back to as I talked about earlier edge innovation cloud innovation and everything in between for power performance cost ahead of others. So.

We certainly see an opportunity and that is moving forward relative to our physical infrastructure and regionalize and capacity are also certainly for applied the United States.

And many governments.

Having those foundational technology puzzle pieces for innovation.

To win this Pea pack T race of the future is incredibly important in and certainly applied is in a position where we were going to continue to invest on top of what we've already done in the United States with the Meda and Technology Center in Silicon Valley, The meta Center in New York.

But this is the race of our lifetimes and this innovation infrastructure I think is another key aspect of what needs to happen to win the future and then very quickly John.

Very quickly John just from a timing perspective and impact of the markets. We're not counting on anything from government spend in 2022. Our view is as you start to see it in 'twenty three and 'twenty four if it happens faster than that then it's upside to the perspective, we have from a market standpoint, but 'twenty three 'twenty four as it is what we're currently seeing as the right time.

<unk> about around that spend to regionalize capacity.

Perfect. Thank you guys.

Hey, Thanks, John.

Yeah.

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

Thanks for taking my question.

You mentioned that you expected are you expecting <unk> to grow next year I'm curious how much additional capacity are you planning to bring online.

Next year and as part of that how does it impact your margin structure, because when I look at your.

Gross and EBIT margins, they are pretty close and in some cases have even exceeded your fiscal 'twenty four targets. If you could give us some insight into how much additional capacity you are planning to bring online and then where do margins go from here. Thank you.

Yeah. Thanks Vivek.

So if you notice we've been investing.

At a nice rate as a company now for multiple.

Multiple quarters, you saw us begin to take that up invest in our infrastructure. We took a point of view on where we saw this industry going was going and we made sure that we had capacity in place to serve our customers and make them successful. So we will continue to do that along the way.

We won't be point specific about how much capacity that we're bringing online as you can imagine for competitive reasons, but we will have that invest ahead of that materializing and continue to do what we've been doing now for several years as this industry continues to go structurally larger and we put a capacity statement in place to <unk>.

Support it from a margin standpoint, what I'd say is as the company is performing really well in this environment you see it in the current results. We told you it wasn't a one quarter phenomenon, we see follow through at these levels.

And this is despite the near term headwinds, we see from a COVID-19 environment and so as.

As those headwinds begin to dissipate.

I think you'll see an upward bias off of these levels on a like for like basis.

From a margin standpoint, and then I'd also say you know the long term model that we put out at our analyst day talked about 48, 5% I think we're making good progress against that it's a good way to think about the company.

But no matter what.

Our gross margin is I would say, we'll never be satisfied with it we'll be constantly looking for ways to increase the baseline level of productivity at the company and do even better than we're doing today. So we feel good about how we're set up will continue to make investments to support the business and we'll continue to drive results.

Thank you Dan.

Thanks Vivek.

Thank you. Our next question comes from the line of Shia Ari from Goldman Sachs. Your line is now open.

Good afternoon. Thanks, so much for taking the question.

Gary I wanted to ask you about your leadership products you gave some growth rates in your prepared remarks, I think for Appian thermal you said above 70% growth this year above 60% for CMP and above 50% for implant all three outperforming what I believe is your full year implied guide for first time your systems.

I guess my first question is what are some of the key drivers there and then my second part is how should we think about sustainability into fiscal 'twenty two based on whats in your backlog today and based on the conversations you're having with your customers and asked the question because it obviously has important implications for for mix and gross margins. Thank you.

Yeah Toshi thanks for the question.

So when I I'm.

In constant conversations with R&D leaders many hours actually in each of the last two weeks and also Ceos for our leading customers and what I would say when you think about the Pea pack T roadmap power performance and cost.

And in time getting there ahead of others, that's what determines who wins and loses in the industry and when you think about the relative the key drivers for that we've talked about five drivers new new chip architectures, new materials, new structures new ways to.

Shrink and new ways to connect chips together.

So if you look at what our customers are saying on even I think earlier today, but in many different forms people are talking about new materials and the periodic table of elements and packaging technologies and new structures like gate, all around or design technology co optimization.

With technologies like varied power rails or contact over active active gate and then some of those cases with no.

Smaller pitch you can drive a significant area of savings so when I look at the roadmap and you see this today in our leadership businesses.

We also talked about in our Investor meeting, a new innovation, where we can enable a 50% reduction in wiring with integrated material solutions, where we're combining many technologies undervalue them a L. D. P V D CVD copper re flow surface prep technologies to dry.

A 50% reduction in wiring across many different levels that is enormous when you think about power and performance and that one integrated system is worth billions of dollars. That's what we've communicated so until she Ah I I think that the opportunity for applied has never.

Never been better when you think about really the relative contribution of power performance and cost going forward, whether it's in the leading edge, where you're processing all of that data in the cloud the edge innovation that I've talked about earlier today, new memory technologies.

Where it's really in the sweet spot for applied for materials innovation structure innovation, we have a very strong position in advanced packaging, we are driving innovations not only with our breadth and our unit processes, but also in combinations with partners with new integrated <unk>.

<unk> solutions, we're going to share more of that in <unk>.

Our master class on September eight so I think the strength that you're seeing.

If I look out for the next few years and I look at the relative contribution to P. Pack T. I just think we've never been in a better position in our leadership areas and the strategies and investments that we've been driving our are paying off now that will pay off even a bigger way going forward.

Very helpful. Thank you.

Thank you. Our next question comes from the line of <unk> Malik from Citi. Your line is now open.

Hi, Thank you for taking my question I have a question for Gary on the display.

<unk> when should we expect an inflection on the display side.

And how long we are going to go through this LCD to OLED conversion phase and then should the new capacity come on for display.

Yeah. Thanks, Alex let me jump in on that one.

So we talked for several quarters now about strengthening fundamentals in the overall display market capacity coming out strengthening panel prices screen sizes continue to.

Increased U C. Five GL led penetration in the handset and then future roadmap foldable displays in the handset you talked about OLED penetration of larger format displays I T. TV all of the strengthening market fundamentals I think give us a good sense that in 2022.

Two you're probably going to enter a more attractive a point of the investment cycle I don't think it's gonna be a dramatic step up off of these levels, but you will certainly start to see better levels of investment. So I think we're on the cusp of that right now too early to tell exactly when it hits in the beginning of 'twenty, two and the back half of <unk>.

<unk> two but we're on the cusp of entering that more attractive point I think there's technical solutions that need to be solved in the OLED market to drive it into large format displays and start to replace LCD. So I think that's a little ways out, but we're certainly watching the <unk>.

Customers' roadmap the success with the technology inflection and then putting capacity behind that inflection once that happens I think you've got an opportunity to take this market is structurally larger and it will be a long term technical shift in the industry's roadmap on those large four.

Matt displays those solutions will be more capital intensive than LCD technologies today and from a <unk>.

Applied materials and display business standpoint, it'll be an attractive piece of business for us when it happens, but I still think we're a little ways away of that inflection actually hitting the market and customers putting capital behind it.

Thanks, Dan.

Thanks, a lot.

Thank you. Our next question comes from the line of Krish Shankar.

Allen <unk> company. Your line is now open yes.

Yeah, Hi, Thanks for taking my question, Dan I had a question on inventory.

The sales have grown in the last few quarters on a sequential basis, yet your inventory dollars have stayed roughly flat at around the $4 billion give or take and then.

Some of your component and subsystem suppliers being constrained you demolish and other factors.

Are you pulling from inventory and are you worried at some point youll supplies challenge kind of manifest into good drilling your own revenue potential down the road. Thank you.

Yeah. Thanks, Thanks Krish.

So what I would say is as I think we all know that the supply chain as the global economy begins to fire back online.

Theres pockets of non linearity and some disruption and certainly our industry is no different on that front I think what you see is a disciplined efficient operation of the company and the challenging environment, we feel good about how we're operating.

My expectation in the current quarter and gave them what we see going forward is as you would begin to see that inventory rise in anticipation of what we see on the horizon, but we'll take it one quarter at a time make smart decisions about how we engage with our supply chain to make sure. We're set up to successfully satisfy our customers' needs and make them successful.

So as I look back on on the last several quarters.

Really comfortable and pleased with the way the companies operating in the environment and growing the company in a very disciplined way.

Thank you Chris.

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

J P. Morgan your line is now open.

Hi, good afternoon, and congratulations on the solid results and execution.

Did very well in the $6 billion plus controls segment last year.

Thank your prior view was that you were going to grow this segment by 50% this year and all the team is staying up 60% plus this calendar year.

Clearly sustaining the strong momentum from last year.

Obviously, we know there is a strong focus on new process debug and production yield improvements as time to market for these new processes. It's so critical what areas is the team going to see the strongest growth or potential share gains. This year in process control and how does the growth prospects look for process control into next year.

Oh, Hi, Harlan Thanks for the question. So when I think about our PDC business. There are really two aspects. One is certainly were seeing tremendous growth with N. P. D C.

That's R. Certainly E beam leadership, we're extending our E beam leadership I'll talk about that we have the new optical product in light, where we're expanding traction of that product, but the other aspect. That's really important is the synergy with those technologies and our unit in IMS.

Innovation I talked about in the prepared remarks, they apply applied pro process recipe optimization extending that from 25 different engagements to more than 50 next year and so basically what we're doing is taking our E beam leadership, we have.

The highest resolution.

And we can generate massive data with unique imaging and algorithm. So we can look at fingerprinting across a chip for things like pattern loading or across the wafer and really dialing those recipes in for our unit process and IMS innovations, whether it's wiring our game.

All around or capacitors structures in DRAM or any of those kinds of things that's worth billions of dollars to us and it's worth a tremendous amount for every one of our customers. So that combination in the synergy is also a very powerful and.

And relative to the revenue growth within PTC.