Q4 2021 Applied Materials Inc Earnings Call

November 18, 2021

Welcome to the applied materials earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, you'll 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 applies fourth quarter of fiscal 2021 earnings call. Joining me are Gary Dickerson, our president and CEO and Bob Halliday, 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 apply its most recent Form 10-Q, and 8-K filings with the SEC.

This 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 and now I'd like to turn the call over to Gary Dickerson. Thank you, Mike I'd like to start by thanking our employees for delivering the best year in applied.

Materials' history, while navigating a dynamic and challenging environment.

The demand for semiconductors in wafer fab equipment remains very strong and in fiscal 2021, we generated $23 billion of revenue, which represents 34% annual growth.

In fiscal Q4, we hit the midpoint of our earnings guidance, despite larger than expected supply chain constraints. These constraints worsened in the last few weeks of the quarter as we experienced delayed shipments from several suppliers without the supply shortages, we estimate that our Q4 revenues would have been at least 300 million.

Higher.

We expect supply chain headwinds to persist into fiscal 2022, and mitigating them remains our top priority.

For this reason I'll begin today's call by providing some additional details about the industry supply dynamics, both near term and longer term next I will describe the demand outlook, which is very strong and broad based I'll then talk about the progress, we're making against our growth strategy and how applied materials its position.

And to outperform the market over the coming years.

I'm also happy to welcome Bob back to the CFO seat, while we conduct a search for our next CFO later in the call Bob will share his perspective on the state of the business and provide color on our financial performance.

So let me start with the supply side of the equation applied has made and continues to make strategic investments in our own global manufacturing infrastructure. So factory capacity is not a limiting factor for us.

Like many in the industry. The primary challenge we face today is availability of certain silicon components.

For applied our issues are relatively narrow and we are proactively collaborating with our suppliers and directly with the chip companies to find solutions a work around bottlenecks I deeply appreciate their partnership and teamwork as we navigate these unprecedented circumstances together.

Looking further ahead I believe we will see permanent changes in the way supply chains are designed and operated in the semiconductor industry and beyond there's a shift from just in time to adjust encased approach, which will require higher levels of inventory more built in redundancy and more burst capacity.

Cause the economic value of capturing upside opportunities far outweighs pure efficiency savings. We're also seeing changes in supply agreements across the ecosystem as companies place a premium on having preferential access to capacity.

In addition, our customers are providing us with longer term visibility and we are collaborating more closely than ever when it comes to capacity planning on top of that the strategic importance of semiconductors is now recognized at a national level over the next few years as incentive programs become available in the U.

Europe and Asia, we expect to see a trend towards regionalized supply chains that are more resilient, but also increased capital intensity.

Now I'll characterize the demand environment, which is extremely healthy the pandemic has accelerated the digital transformation of the economy fueling semiconductor consumption and driving the need for next generation Silicon technologies. As a result, we see wafer fab equipment spending for calendar 2021 off of around <unk>.

40% year on year in other words in the mid 80 billion dollar range and constrained by supply not demand there.

There are still a long way to go before supply and demand is balanced, especially as demand drivers continue to grow. We therefore expect wafer fab equipment spending to be up again in 2022.

While we're currently focused on resolving near term challenges it's important to recognize we're only at the beginning of a major technology and market inflections that will play out over the next decade.

As everything gets smarter from our phones to our cars to our homes, we see a combination of unit growth and increasing silicon content per unit. For example, if you look at this year's high end smartphones by dollar value of the application processor semiconductor content is up about 20% compared to last year's models and.

RF content increased at twice that rate and in data center applications. The average DRAM and NAND content per server is also growing at a 20% compound annual growth rate as more and more smart devices are connected at the edge. They are driving exponential growth and machine generated data.

That must be stored moved and processed than to create value from these vast volumes of data new AI computing approaches are being developed fueling further demand for current and next generation semiconductors, when I talk with customers their message is clear and consistent they are investing strategically.

To be in the best position to capture value as these long term secular trends accelerate.

In our core market foundry logic is about 60% of wafer fab equipment spending in 2021, and we expect it to remain at this level or higher over the next several years within foundry logic. The spending mix is relatively balanced between the most advanced nodes, where we see a fierce battle.

We're leadership, playing out and I cats, I kept snowed serve the fast growing Iot communications automotive power electronics and sensor markets.

And memory supply and demand fundamentals remained healthy and we expect investments to be up next year, although not as much as foundry logic. Finally capital intensity is also providing an important tailwind with the deceleration of traditional Moore's law scaling and the transition to the new Pea pack T playbook complex.

D is increasing simply put more innovation is needed to get from one node to the next and this higher complexity translates to higher capital intensity.

Against this backdrop I'll now describe applies performance and progress towards our strategic goals.

In fiscal 2021, we grew semiconductor equipment revenues, almost $5 billion or 43% year on year outpacing the market growth rate during that period.

However, as I described earlier, we were unable to fully meet demand in our fourth quarter due to component shortages and we expect to remain supply constrained going into fiscal 2022.

As a result, we've grown our backlog at a company level to $11.8 billion, which is up 77% compared to the same period last year.

Our near term results do not fully reflect the underlying strength in our business or the progress, we're making against our long term strategy.

As a reminder, our strategy has three pillars first to be the Pea pack T enablement company and provide the foundation for customers' power performance area cost and time to market Roadmaps second to shift more of our business to subscriptions and third to generate incremental free cash flows and profitability from our <unk>.

<unk> and adjacent markets, we've aligned our organization and investments around these critical focus areas and are demonstrating strong momentum applied P. Pack T. Enablement strategy is built upon three differentiated elements, we have the broadest and most enabling portfolio of unit process solutions.

We can co optimize and integrate these technologies and the unique and highly enabling ways and we're focused on time to market acceleration with our AI acts or actionable insight accelerator data platform.

Starting with our unit process tools demand in our traditional leadership areas is very strong our appian thermal businesses. Both grew 70% this fiscal year and C. M. P grew more than 60% and our targeted growth areas. We expect our process diagnostic and control revenues to be up more than six.

The percent in calendar 2021.

Packaging is another very exciting area for us our equipment revenues are up more than 55% year on year and we're on track to exceed $800 million for calendar 2021, we're also bringing highly enabling future technologies to market through a combination of organic R&D and.

Jake partnerships moving to our co optimized and integrated products the customer pull for these solutions is strong and increasing for future nodes co optimization allows us to see and solve higher value problems for customers speed up commercialization of new innovations and capture more of the available opportunity.

One example is dielectric materials, where we're driving parallel innovations in materials deposition modification and removal.

Our CVD group has more than 15, new materials either in development or recently released these enable new structures or manufacturing techniques in both foundry logic and memory. The revenue opportunity. We've opened up for the co optimized etch and CMP steps is almost twice as large as the market for the stand alone.

Our position equipment.

Another example is advanced patterning, where we're co optimizing CBD a L D and C. M P with our symmetry etch, enabling us to gain more than five points of share in patterning. This year.

Integrated materials solutions or IMS go one step beyond co optimization by combining multiple processes with customized metrology and sensors in a single system typically undervalue them with I M. S weakened targets, the most complex and valuable challenges and the new Pea pack T playbook.

For example, this year, we delivered five new low or low resistance metallization integrated solutions to customers that address next generation applications in foundry logic DRAM and NAND. This included our copper barrier seed IMS that combined seven different process Tech.

<unk> and one system under vacuum a L. D. P. B D CVD copper re flow surface treatment interface engineering in metrology.

This enables at 50% reduction in interconnect resistance at the most advanced foundry logic nodes and creates a multibillion dollar opportunity for applied materials over the next five years.

The final component of our P pack T enablement strategy is time to market acceleration.

New digital tools that accelerate R&D technology transfer and high volume manufacturing are a major focus area for our customers in the coming years. These technologies will have a huge impact on productivity and innovation and commercialization speed. They will also play a key role in making regional supply chains each.

<unk> competitive and sustainable.

A I X platform brings together process tools sensors metrology with data analytics and machine learning. We currently have twenty-five AI ex R&D acceleration engagements with leading customers.

And we now expect that number to triple over the next 12 months.

Another highlight for 2021 is the progress, we're making with subscription revenues and our service business. We've already converted a significant percentage of our spares and service revenue from on demand to long term service agreements. We now have nearly 15000 installed base tools covered by these agreements up 12%.

Year on year.

The tenure of these agreements has grown from 1.9 years at the end of 'twenty 'twenty to 2.3 years today and our renewal rate is about 90% several customers have highlighted how these long term agreements have allowed them to better manage disruptions in parts supply and technical support during the pandemic.

Before I hand, the call over to Bob I will quickly summarize as the digital transformation of the economy accelerates demand for semiconductors continues to grow and is significantly outpacing supply, we expect supply shortages of certain silicon components to persist in the near term, meaning that we don't expect to fully meet demand in <unk>.

One man.

Managing these constraints in partnership with our suppliers and chipmakers is our top priority.

Looking beyond the near term disruptions I feel very positive about the future longer term secular trends are driving the semiconductor wafer fab equipment markets structurally higher.

And it applied we're making significant progress towards our strategic plans were in the best position to accelerate our customers' P pack T roadmaps and grow significantly faster than our markets over the next several years now I'll hand, the call over to Bob.

Thanks, Gary.

I want to begin by saying I'm very happy for the opportunity to work with all of you again.

I have three main messages today number.

Number one demand is very strong and growing.

I think it's likely to remain strong in 2022 and beyond.

Number two.

Supply chain constraints are impacting our ability to meet all of our demand in the near term.

Number three applied materials is making very good progress towards our financial targets and we're in a great position to return capital to shareholders.

I'll cover each of these topics in order and give you our guidance and then Gary Mike and I will help with your questions.

I'll begin by giving you more detailed insights than we typically share about the demand for our products and its sustainability into 2022.

Specifically, our semi systems revenue grew by 43% in 2021.

Our semi systems orders grew by 78% for the year.

In fact, our semi systems orders grew in every quarter.

In Q4, they were up 136% year over year.

Looking ahead, we currently expect our orders to be higher in the first half of fiscal 2022 than in the second half of 2021 across semi systems Ags and also display.

In short the demand environment is very strong.

What's happening on the demand side is that all of the trends, Gary and I talked about years ago.

Laying out an even bigger way than we imagined.

First semiconductor demand is higher because we're designing more intelligence into practically everything that gets built and sold.

Second.

Equipment capital intensity is higher.

We don't have wafer size increases anymore, and the industry has wrung out a number of efficiencies, including fab automation industry consolidation and the foundry model.

Used equipment is now scarce so even in the I kept markets customers are buying new equipment and spending more.

The industry is adding more wafer capacity to keep up with demand, particularly in foundry and logic and we believe spending will remain strong.

Specifically the industry grew foundry logic wafer starts by around 40% over the past five years alone.

At the end of our fiscal year overall fab utilization for the industry increased to the highest level of the past decade.

We see foundry logic, continuing to grow as a proportion of the industry's mix.

Five years ago foundry logic represented around 53% of Wpz's spending.

As of 2021, its grown to 60% of Wi Fi and.

And we see it being even higher into the future.

Even with higher wafer capacity and high utilization, we have a global semiconductor shortage, that's affecting a wide range of industries, including our own.

Industry wide, we are tracking 59 fab projects with available in announced expansion capacity of 3.5 million wafer starts.

These projects represent potential equipment spending of around $300 billion in future years.

All of this data leads me to believe that demand is likely to remain strong.

Now I will give you more insights into our own supply situation.

In Q4, our semi systems backlog was at record levels and growing quickly.

And our guidance for Q4, we targeted modest semi systems revenue growth.

We also widened our overall guidance range due to our concerns about the supply chain.

Towards the end of Q4, we experienced later than expected deliveries of the components, we need to complete and ship our build plan by the end of the quarter.

The reason for the delays is that our suppliers couldn't get enough parts from their own suppliers.

Which include Chipmakers and distributors.

The supply issues are directly related to the semiconductor shortage, particularly in logic power and analog Ics.

Not all of our semi businesses were affected in Q4.

Process control, CMP, and etch and packaging businesses beat our revenue targets.

Yet our overall semi systems revenue was $293 million below the midpoint of our expectation.

The full semiconductor revenue impact of the shortages during the quarter was well above $300 million.

In Q1, we are guiding for sequential growth of around 3%.

We have the internal capacity to easily shipped several hundred million dollars more semi equipment.

But we are planning for only modest supply increases looking ahead, I believe <unk> spending will be up again in calendar 2022 and.

And we'll remain strong, particularly for foundry logic, both at the leading edge and I kept notes.

I also believe applied business will be higher in the first half of calendar 2022 than in the second half of calendar 2021.

Both in semi systems and Ags.

Next since it's the end of our fiscal year is a good time to assess the progress we're making towards our 2024 financial model.

In April we outlined targets to grow our revenue profitability and earnings in a variety of W. A few scenarios.

Including a base case of $85 billion and a high case of $100 billion.

With everything we're seeing in the industry today.

Our high scenario of $100 billion is increasingly likely.

One year into the long term plan, we've made good progress increasing revenue by 34% non.

Non-GAAP gross margin by 240 basis points.

Non-GAAP operating margin by 540 basis points.

And non-GAAP EPS by 64%.

We believe our semi systems group is well on track to its growth targets based on our strong product roadmaps and the deep customer engagements Gary described.

We believe ags can exceed the growth implied in our model after growing by 21% this year alone.

In fact, a G S had record backlog of over $4.33 billion at the end of the year.

72% of the Q4 backlog was subscription business.

With terms of one to three years.

And 65% of new subscription bookings were multiyear.

While our focus is on recurring revenue a.

Ags also includes our 200 millimeter equipment business.

200 millimeter business has been growing along with the rest of the <unk> market approaching $650 million in Wi Fi revenue in calendar 2021.

Turning to our profitability metrics.

We expect to achieve our non-GAAP gross margin target of 48, 5%.

Once the near term material and logistics cost headwinds subside.

We also feel confident in our non-GAAP operating margin targets.

The semi systems group increased its operating margin by 590 basis points this year.

While Ags delivered record operating margin of 31% in Q4.

A major focus for us is increasing the display group's margin to between 25 and 30%.

And we plan to be in that range by the second half of 2022.

Another of our targets is to return, 80% to 100% of free cash flow to shareholders.

In fiscal 2021.

We generated a record $4 seven $7 billion and free cash flow.

And we returned 96% mainly through stock buybacks.

We ended the year with over $5 billion remaining buyback authorization.

And given the strong demand outlook.

And our view of the intrinsic value of the company we.

We expect to continue to be aggressive with the program.

Now I'll share our Q1 business outlook.

Given the supply chain challenges, we expect to modestly increase revenue two $6.16 billion.

Plus or minus $250 million or up around 19% year on year.

We expect non-GAAP EPS to be around $1.85, plus or minus seven cents or up around 33% year on year.

Within this outlook, we expect semi systems revenue of around $4.46 billion up 25% year over year.

We project a G S revenue of around $1.33 billion up 15% year over year.

We expect display revenue to be around $350 million in Q1, and higher as we progress through the year.

Applied non-GAAP gross margin should decline to around 47, 4%, primarily due to higher near term cost headwinds, we plan to increase non-GAAP opex to $970 million, which is around 15, 8% of revenue.

Below our long term model target of 16%.

Our guidance also assumes a 12% non-GAAP tax rate.

Finally, along with Gary I'd like to thank all of our teams and partners for their hard work in a challenging environment now Mike let's begin the Q&A.

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

Thank you as a reminder, a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from C. J Muse with Evercore you May proceed with your question.

Yeah. Good afternoon, Thanks for taking the question and welcome back Bob.

I'm sure you're happy to be back from the golf course.

Sure. So I guess a couple of part question on supply constraints, you talked about not being fully resolved in January do you expect it to be resolved in April.

How are customers reacting to the shortages are are they waiting on a full suite of tools or are they taking whatever tools. They can get and then I guess lastly, considering the backlog that you highlighted and also that longest lead time ASML is essentially sold out for all of 2022. It certainly it looks like your visibility extends now into 2020.

Can you speak to that.

Sure you got a vote a sexual.

Sexual over and back a few things one supply chain to overall demand environment and three visibility I guess.

The first one our supply chain, we actually did pretty well managing this through about 11 months of the year in a week and then it got a little worse at the end of the quarter and that that was our issue. So that we're all over this thing in the short term manage in the next quarters about prioritization of project management and execute.

So where we have set up a cadence that every week.

I'm going through all the detail performance by week of how we're doing on receipts shipments shortages individual supplier names and gary's going through it it almost every day. Okay. So we are escalating this thing. So when you say why do we think will go to do better in Q1. So if you look at some of the public companies you know they're up you know three to five per.

On average some of our suppliers.

We believe that our allocation will be somewhat better than that we also believe that we have internally allocate that effectively and we're working with our suppliers suppliers, who are our customers to free up more demand. Secondly, if you look at the early data in the first two weeks of the quarter.

Receipts are up about 15% from the previous quarter. So I think we're gonna be okay. If you look at the stuff that caused us problems, there's miscellaneous problems all over the place.

But most of those are manageable what hit US hard was there's no thousands theoretically of electronic components that are suppliers using our products to us. They were about 100 that we're closely monitoring last quarter and 10 that gave us problems at the end of the quarter. These are particularly around Plc's weird.

On a train the top 10 suppliers of our <unk>.

Products and we are monitoring those hundred plus 200 other.

Components. So we wanted to make sure nothing goes bad so I.

I feel pretty good that number one the demand is really good.

Backlogs are the orders were up every quarter. It looks strong next year that'll be a felix drug that ship I think supply chain is going to get better incrementally every quarter through the year in terms of visibility is great and <unk>.

Terms of.

A full suite of tools.

We our customers are taking all the tools, we can ship and where we're largely keeping them happy, but we want to not get the backlog too big but I think we're going to make progress throughout the year.

Hi C. J. This is Gary I'll add a little bit more you know I've met with all the Ceos of our top customers, leading technologies and I caps here in the last quarter.

You know what I would say certainly the supply situation is challenging.

But no really no change in terms of the customer demand for the products and some of the tools that again as Bob said its not a broad based issue. Some of these tools are the ones that are most enabling from applied and you know again, those nothing has changed relative to that demand.

Hey, Thanks C J. Thank you.

Thank you. Our next question comes from John Pitzer with Credit Suisse. You May proceed with your question.

Yeah. Thanks, So let me ask the question in basketball.

We'll come back as well, it's great working with you again.

My guess is youre going to get multiples of CJS questions on the supply side, but I'm just kind of curious Bob to follow up.

As the supply chain gets better do you think by the April quarter, Theres, a big step function pick up to the 500 million plus or minus that you can't ship in sort of October and January or will it be a little bit more linear than that as supply comes on line and then to your point earlier Bob.

The backlog just how do you safeguard against sort of a frothy backlog in this kind of environment. They are impressive numbers, but typically when customers can't get what they want they tend to order more than they need. So how are you safe guarding against that.

So in terms of rate of recovery and confidence in the backlog and kind of a double booking question. I think is the question. So in terms of.

Right of recovery.

We're modeling from discussions with suppliers at our suppliers suppliers that are earned total analysis, which we're doing the best we cannot model. This and we believe it's accurate we take Q1 the rate of recovery. If you look at our semi business is up little over 3% equipment and.

That's about what the industry is quarter on quarter, our Ags business is a little bit lower because its 14 weeks last year in Q1 is a Chinese holiday falls into Q1. This year, but if you look at rate of recovery, we think it goes up.

A little over 3% in Q1, we took the equipment business picks up a couple of points more every quarter and builds momentum later in the year now as we get more visibility next quarter I'll be more confident of those numbers, but that's the kind of.

Acceleration would pick it up in shipments, we hope to do better.

Do better, but that's what we're modeling.

Oh.

Well double or I don't think that's a problem right now double book and John If you look at breakout between memory and foundry logic foundry and logic was six 2%. This year. The business. We actually think it's up next year. If you look at public statements from TSMC Intel another big foundry and logic manufacturers their talk.

And about multiyear commitments to W. A feast spanning and very strong businesses on their side.

We look within the mix that foundry and logic increase as a percentage of the mix next year, we look at memory as being slightly up a little bit more on that a little bit down on DRAM. So we think that's muted and reasonable.

And we don't see double booking then we see China down a little bit next year. So I don't see the double booking thing right now.

Alright, Thanks al Thanks, John.

We will see at the conference.

Thank you. Our next question comes from Stacy <unk> with Bernstein Research you May proceed with your question.

Hey, guys. Thanks for taking my question I was wondering if you could talk a little bit about the impact of the constraints on the services business because it's not just you know.

Services, there is hardware and everything else is services actually being impacted by constraints with services to be strong without them and how do you think how do you see services the evolution of services going forward.

In the next year as you work to resolve that constraint issues.

Our services business is doing great.

We were up 21% were ahead of plan to hit the 2024 model I think we might have said on the call even that we need a compound rate of growth of 7% a year to hit that model. We think we'll exceed that probably do double digits. This year growth in service. If you look at our service business.

What multiple components as a 200 millimeter tool business. There is a contract services, where you sign up for services, one to three years, including different types of service arrangements and then it's kind of time and materials stuff. If you look at the service business. We think it's gonna grow strongly this year and double strong double digits and in fact are cut.

They're thanking our service guys forgetting them onto parts service contracts in the past year or two because our customers are good shape in terms of support and parts. So I think that the parts issues supply chain issues are not really impacting our service business.

Other thing, which we will point out Gary might give you more detail. If you look at the parts of the constrain things like P. L sees himself, which are components in components. Those are not the parts that are high replacement service parts in the service supply chain. So I think we're pretty good shape for the service business. It's a great business for us and Bob How would you guide services in fiscal 'twenty two.

As a percent low double digits.

I think it's low double digits growth.

Got it that's helpful. Thank you so much.

Thank you. Our next question comes from Vivek Arya with Bank of America. You May proceed with your question.

Alright, Thanks for taking my question just a clarification what do you expect display to do overall in this fiscal 'twenty two.

And then my question is you know this year, we have seen your foundry customers raise their prices fabulous customers IBM debt raising their prices.

What about the equipment side, how much pricing power do you guys have.

Right that can hit.

Mitigate some of these supply chain issues, because you did mention a kind of a.

Hit on your gross margin. So as you start to see some of the supply situation recover should we expect this combination of pricing and the supply side have you recovered gross margins quickly, although the gross margin your company take time.

Uh huh.

Sure Ivy.

Vivek. This is Gary thanks for the question. There's two parts of this I'll take the first part and then Bob can take the second part.

Relative to display we've talked about that many times really good adjacent market, where we can take our semi deposition in E beam technologies into a market with larger substrates for 'twenty one as expected we're on track for a little over $1 $6 billion in revenue and maintaining strong share of our served market. We think 'twenty two is.

A little higher than 21, more second half versus first half and as Bob also discussed in the prepared remarks, we're on track to achieve our target for higher profit and free cash flow in the 25% to 30% range exiting.

2022.

And Bob do you have the second part sort of in terms of your second question, it's kind of a broader gross margin question. So if you look at gross margins. This past year were up 2.4 points, which was great performance.

We're on track to hit the model, which is I think about 48 five in the out years were a little soft right now in Q1, and that's all supply chain stuff as you go out through the year, we expect gross margins to rise up again as we get to the supply chain issues behind us in terms of the things that impact gross large we did a lot of good things in 2000.

'twenty one we had very good cost reduction, we had high value products and services, we sold to the customers and we recognize that value back from our customers and they were pretty good volume and mix, which helped too. If you look at prospectively the cost reductions a little slower we will continue to realize high value with the customers.

Sure that value them, and we think that's going to help our margins and if the costs continue we may even have that discussion at some point.

Yes, so margins kind of flattish in the first half and then maybe a little better in the second half a week.

Yeah, I think so and I think the years, you know a little better than this your overall by the time, we're done okay and any comments on pricing because that was kind of thing yeah, we look to share value with customers.

That's worked for both of US great. Thanks for that thank.

Thank you.

Thank you. Our next question comes from Sheila <unk> with <unk>.

Eldon sacks, you May proceed with your question.

Hi, guys. Thanks, so much for taking my question and welcome back.

Gary in your prepared remarks, you talked about a localization of of semiconductor capacity going forward. Obviously, there is a lot of talks in the United States and Europe.

In Asia as well.

More recently, Japan.

How are you thinking about the potential impact from all of these projects.

I think from a timing perspective, most of US are thinking 2023, or even later, but based on what you know all the discussions you are having how are you thinking about that and sort of related to that.

How should we think about the competitive threat from the local Chinese.

Semi cap companies I know they've been around for a very long time and up until this point, they're there remains a very significant gap between incumbents like yourselves in them, but.

How concerned should we be as we think about your business over the next three to five years. Thank you.

Yeah. Thanks for the questions Tokyo relative to localization of supply chain and you know things like the chips Act.

Obviously, good for our business. We're in discussions as I mentioned earlier I've met with all of the top Ceos here in the last quarter and you know that's that's as they move to these other new locations that creates an opportunity for us to support them.

Actually with our services business. So we're in very close cooperation with those with.

With those customers as they move forward with those plans in and Theres opportunities I think for them. They are also concerned about.

<unk> cost and <unk>.

Cultural differences and all of those things and so that creates a tremendous opportunity not just for our traditional services, but opportunities like a I ask the applied.

<unk> insight acceleration.

There I think they're also extremely focused on how do they accelerate R&D ramp and optimize high volume manufacturing in new locations. So I think that.

It really creates a tremendous opportunity for us the other part of the chips Act is really how the every government runs faster and innovation and commercialization and we're also in deep discussions with a number of leading technology companies and that will also create an opportunity I believe for applied relative to the.

China equipment suppliers and it really if you look at what every single customer is focused on is providing power performance and cost have had ahead of others. We talk about P pack T. In the tea is incredibly important and whether it's you know we talk about low resistance wiring.

Which is probably one of the biggest issues in the industry, where we have tremendous strength or gate, all around transistors or the scaling and memory or packaging that is incredibly complex and difficult and the companies that are ahead on power performance and cost capture.

Capture really the majority of the market. So you know I really believe that applied is even in a stronger position going forward.

We've been in the past relative to local competition.

Great. Thank you.

Thanks, just yet.

Thank you. Our next question comes from Krish Shankar with Cowen and company. You May proceed with your question.

Yeah, Hi, Thanks for taking my question and Bob they'll come back I just wanted to check on.

The fact that some of these constraints are pushing out revenues into next year and it looks like maybe in the first half of next year. The WPZ Andre could hit 100 billion. So just wanted to figure out from your vantage point, how do you think about that and you also mentioned that you are trending towards the target model, but obviously the margins are impacted because of constraints in the target model.

10 Bucks in EPS and 100 billion in W.

W. P.

Discounts, we give to that 10 bucks in this constrained environment. Thank you.

Well, we think W fees up next year, it's actually probably said in the script you know it could be up.

I think at this time, we are the two specific were taught to cut of 10% up next year.

And I'm pretty confident that frankly.

If you look at the run rate in the first half the visibility a little better in the first half and we have very strong orders and book and potential in the first half.

We actually think the second half is going to get a little stronger even on bookings to what we have today frankly.

Everything we've talked to customers as bullish, particularly on the foundry logic area. If you go look at the model it is.

$100 billion I think that's a real number nowadays I don't know that it's a real number next year at this point I think we achieved that $100 billion will hit the model and that was the model to 10 Bucks you know I think I think we'll do it.

Thanks, Bob.

Thank you Chris.

Yeah, maybe I can add Chris one more thing relative to our 2022 and then going forward.

Backlog for US is very strong again I've met with all of these leading customers foundry logic memory I caps and as Bob mentioned earlier, if you look at what they're publicly talking about in terms of their investments over multiple years, it's very very strong and some of this obviously I cant.

Sure.

<unk> publicly but I have very high confidence that our you.

The business is going to remain strong through 'twenty, two and right. Now 23 also looks good for us and certainly again, if you just look at all the public statements.

From those customers.

Again, they're not planning on a short cycle they are planning to be ready.

With capacity to capture the opportunities.

Thanks, Gary.

Thank you. Our next question comes from Timothy Arcuri with UBS you May proceed with your question.

Hi, Thanks, and Bob welcome.

Welcome back.

I guess I guess I have a question on <unk>.

Wi Fi share Gary you talk about that a lot and optically you share. This year is flat in the 'twenty two to 'twenty three range, but obviously, that's not representative because you would have done $300 million more in October. So I'm kind of wondering if you can adjust January for us So what we.

January has been in terms of SSG. If you had the supply would you have.

With that $4 45 billion guidance would have been say $300 million higher I'm just trying to.

Sure sure higher because obviously this year you gained a lot of share and on an adjusted basis. Thanks.

Yeah, Tim Thanks for thanks for the question.

Certainly Q1 would have been significantly higher I think Bob gave some color on that.

But certainly demand is far higher than supply you know when you take us and we outperformed in 19, we outperformed in 'twenty. We're definitely we're on track to outperform in 'twenty one.

We've also feel very good about 'twenty, two and going forward, but you know I don't know if I want to be more specific.

Other than what the color that we've already given on the call, but definitely would have been significantly higher.

In Q1, and then going into 2022 in terms of the different parts of our business, we've talked about wiring resistance and foundry logic. It really is the biggest challenge for our customers as they shrink. These features resistance goes up and we gave some color on.

Copper barrier seed tool with seven different technologies that is worth billions of dollars in what I said in the prepared remarks is that we have five of these innovations that we're delivering to customers and we haven't quantified all of them, but it's very sizable and areas where applied is really unique and enabling.

Solutions to to wiring resistance and in one case, we've talked about 50% improvement in.

In resistance and then you look at gate all around you know again, we feel very good about our position in the transistor to gain share that's a billion dollar opportunity and relative to our Finfet position. We believe we are positioned to gain share as that goes forward certainly in foundry logic are at shares increasing our <unk>.

<unk> shares increasing.

P D C share, we've talked about our business being up more than 60% overall.

And just again really a very very strong position with integrated solutions I gave some color on co optimization and gave an example in the memory market, where again, we have a big opportunity. So Tim I feel really good about our position going forward.

And Tim I'll add one more thing for you so.

I know in the past instead.

Instead of waiting for Gartner group to come out with market share. What you always did is you took our fiscal Q2 through fiscal Q1 as a proxy for our revenue and what's interesting is what we did back in February.

Kind of disclosed in our conference call and then in April I wrote to everybody that we've made a similar adjustment ourselves. So what we're now doing is our calendar year revenue for VLSI share purposes. It's now based on our financial reporting in fiscal Q2 through fiscal Q1, and one benefit of that change is that as soon as we guide Q1, which we just did today now.

You can forecast our Wi Fi revenue for share purposes, and you can make an apples to apples with the peer group and then I just wanted to call your attention to one other number in the script today, Bob sized our Ags 200 millimeter revenue at around $650 million for the calendar year. So now you have all of the numbers that you need to make sure assumption. So I just wanted to give you that.

Ground, and we look forward, Bob and I to seeing investors at your conference.

Thank you. Thank you everyone appreciate it.

Thank you. Our next question comes from Harlan sur with Jpmorgan. You May proceed with your question.

Good afternoon. Thanks for taking my question and Bob will come back to the team.

The chip shortages, you talked about some of the areas, which is not seen as much cost controls CMP and etch packaging systems.

But that leaves things like deposition implant thermal processes in many other areas and I am sure.

Even within that it's different for different systems architectures, like leading edge versus the high caps.

I'm trying to figure out whats the implication.

No.

Which of your end markets are getting more impacted given that there are different etch deposition.

Pattern intensities patterning intensities and system configurations, as foundry and logic anymore impacted is it memory, that's getting more impacted high caps or is.

Is it across all of your customer segments and also as your display business being impacted as well.

So arlinda this is Gary.

First off I'd say that display is not being impacted.

Relative to the different device types. So I don't know that I would separate one versus the other.

Relative to impact just as an example, and.

The foundry logic business, I caps, and Varian, our business and I kept our shares up significantly in our implant market and our revenue is up four acts over the last two years.

So you know again I think that when you look across the different products. There are specific components, it's not broad based but you know again I wouldn't necessarily say that.

You know, it's it's one market or another when you look at that.

The impact.

Okay. Thank you.

Thanks Harlan.

Thank you. Our next question comes from Joe <unk> with <unk>.

Wells Fargo you May proceed with your question.

Yes, thanks for taking the question I wanted to double click on your expectations for first half calendar 2022 being above second half 'twenty, one does that apply to memory as well or should we think about that growth being mostly foundry logic, driven and maybe memory is more second half weighted.

Yeah. So if you look at our 2021 data in terms of memory versus logic, we were a little stronger than the first half on memory and then if you look at our look at the actual data. So our foundry was a little stronger in the second half and our memory NAND was a little stronger than the first half.

DRAM, a little stronger in second half actually.

If you look at next year, we think the year's kind of flattish.

We think it's.

It's probably.

A little more second half weighted and memory next year I think foundry is pretty strong throughout the year, but I don't think there's a big delta.

Yeah. So overall W. P. I think overall Wang W fees up I'd say, Florida is a bigger percentage I think memories kind of flattish ends up a little bit DRAM is down a little bit I think the split within next year.

My memory is there was a little better in the second half, but I'm not sure.

Got it that's helpful. Thank you thank.

Thanks, Joe.

Thank you. Our next question comes from Patrick Ho with Stifel. You May proceed with your question.

Thank you very much and likewise, Bob I guess, one rodeo wasn't enough for you so welcome back.

Maybe just following up on the Ats side of things.

Utilization rates are high to me, which ships to date have you seen any well equal metal type of pickups in your services.

Just because your customers are trying to keep it.

It was running as best as possible.

Any incremental pick up in store.

Just because of the current environment.

Yeah, I think the answer is yes, I'm not sure if I covered completely I would call I'll give you some data that you guys like data.

If you look I wanted to look at sustainability of all this so we looked at bookings or backlog orders rates stuff like that but the other thing I looked at was growth in wafer starts and tool utilization right. So I'm not sure. If we said on the call but tool utilization at the end of the calendar fiscal year was at an all time high in the last 11 years I look back at.

Across all device types. So that gave me confidence. This thing is sustainable it looks pretty good and it's good for our service business and then I also looked at growth and wafer starts and growth in wafer starts I think that's it.

It's about 40% in foundry logic, and kind of about 20% and memories since 2016, particularly strong in 300 millimeter wafer starts for foundry and logic. So that if you go with the question you asked Patrick we grew our service business, 12%, 21% last year, we're looking about 12% this year.

And if you look at high utilization foundry logic tools growing, particularly well for us where we are.

It did pretty well in etch in previous years also our Ics service and we increased our contract in the life of our contracts from one to three years.

The subscription revenue business sustainability of the service business looks really good Hey, Patrick This is Gary Yeah, just one other comment.

In the discussions I've had with US all of these C E OS.

One thing that was pointed out was that having these subscription agreements than forecasted parts management. They said, we're profiling better than others because they have those parts there are.

So from a supply standpoint, they said that was a big differentiator and gives them more conviction to continue and expand that type of approach.

Great. Thank you.

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

Okay.

Thank you. Our next question comes from Quinn Bolton with Needham and company. You May proceed with your question Hi, Thanks for taking my question I just wanted to ask about your outlook for China next year in 2022, so it would be down slightly wondering if you could give us a little bit more color, what's driving that decline is it just digestion of capacity put in place. This year do you see any political.

<unk>, our export control impact or perhaps.

<unk> towards supplier localization in China next year, let.

Let me give it to you guys a good data guys I give you some data so three things in China, It's down some next year, but pretty strong. The second thing is if you look at travel local versus spending by local companies versus international companies. It's trending up it was high seventy's kind of 77%. This year about 82% next year the third is mix.

<unk> business, so they've trended like the rest of the world to go a little bit more foundry logic. So they were like 52%.

48% memory, they should go to like 52% next year, so the trending that.

In terms of where it's down I think DRAM is down a little bit in China next year and foundry, but the mix to foundry is trending up.

Got it thank you.

Thank you.

Thank you our last question comes from Sidney Ho with Deutsche Bank. You May proceed with your question.

Thanks for squeezing me in I had a question on the process control side you guys talk about process control is not an area that was impacted by supply constraints and now growing about 60% for this year.

Ill talk about a number of AIA engagement potentially tripling next year instead of doubling.

Can you help us understand how these engagements and paas revenue growth potential do they generally translate into revenue in the same year a number of years.

<unk> silver.

Overall size of the market or just an opportunity for apply to gain shares and generally just how you measure success with those engagements.

Yeah. This is Gary thanks for the question so.

The.

Fastest growing largest part of our PDC business is our E beam product family.

And we have tremendous leadership there we're growing share a significant amount the strength is really on our resolution and speed of imaging and we're expanding that gap with caufield emission.

We have about 50% resolution advantage versus others and so when you think about the certainly the growth there and we have line of sight site to really good growth also in 2022. This co optimization with E. Beam is very very important we talked about that an example for.

Capacitor scaling where we're combining our new material, we call Draco with innovative etch technology and basically.

Optimizing these processes.

Credibly complex, you're trying to optimize many many different parameters at the same time and the goal is to.

Optimize those recipes as fast as possible with big process windows, because that directly impacts yield. So this combination with E. Beam is incredibly important when you think about again capacitor scaling our gate all around or any of these big inflections.

The ability to map that out and look at those fingerprints across a chip you look at pattern loading for isolated dense structures fingerprints across the wafer being able to map out this multi dimension space and with a unique imaging of those features which we have with our E beam system and then we talked about the apply.

Process recipe optimization applied problem within a I ask is really an enormous focus for all of our different customers. So it certainly is growing our PDC business, but even more impactful the opportunity for us to capture value with our I M. S.

S platforms are co optimized platforms is worth billions of dollars. So that is an accelerator for us that were you know that gives us a tailwind whether it's low or gate all around memory scaling all of those different capabilities and that that's a great leading indicator going from <unk>.

Twenty-five engagements to 75 next year it does translate into wins in terms of these big inflections accelerating inflections, but T of the Pea pack T is worth an enormous amount for our customers. So it's really it's tremendously synergistic with our overall strategy and.

<unk>.

Yeah.

Thank you.

Thank you Sydney.

Bob would you like to help us close the call with some summary thoughts and alright, I have some summary thoughts, but first I'm going to go off script, and just say, it's great to be back work with the team, including Gary and when I visualized coming back I thought to myself, a little bit like Arnold Schwarzenegger, either terminated or I'll be back and then unfortunately, here's some remorse.

Gabe Kaplan and welcome back Kotter, but I'm back anyway, so, let's let's do the three legged stool.

Our markets are strong in great shape with a W. A phase up next year in practically all right.

Positively biased towards twenty-three second applied position is strong.

Spending demand is great. Our orders are great. Our backlogs great that the mix of the demand is really favorable for us including foundry logic. These advanced devices I caps, it's really great number three is our financial performance and capital returns I have to admit I was impressed that the gross margins went up 240 points of share and we were about 540.

Points of five 4% operating margins.

Last year, we returned 96% of free cash flow to investors and we look at a really strong cash flow. This year. So I think the company has just been fundamentally great shape, we have supply chain headwinds, we take full accountability for making it work and deliver to customers. We are all over this issue in the next quarter or so we're going to make a lot of progress, but fundamentally this company is great.

I'm looking forward to work with all of you again.

Alright, Thanks, Bob I'd like to thank everybody for joining us today, a replay of the call. He is going to be available on our website by five PM Pacific time today, and Gary and I look forward to seeing many of you at the credit Suisse Conference in Scottsdale in just a little while and so happy Thanksgiving and thank you for your continued interest in applied materials.

Thank you.

Today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Yes.

[music].

Yeah.

[music].

Welcome to be applied materials earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, you'll 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 fourth quarter of fiscal 2021 earnings call. Joining me are Gary Dickerson, our president and CEO and Bob Halliday, 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 apply its most recent Form 10-Q, and 8-K filings with the SEC. Today's call also includes non-GAAP financial measures reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at applied materials Dot com and now I'd.

Like to turn the call over to Gary Dickerson. Thank you, Mike I'd like to start by thanking our employees for delivering the best year in applied Materials' history, while navigating a dynamic and challenging environment.

Demand for semiconductors in wafer fab equipment remains very strong and in fiscal 2021, we generated $23 billion of revenue, which represents 34% annual growth in fiscal Q4, we hit the midpoint of our earnings guidance, despite larger than expected supply chain constraints. These constraints were.

And in the last few weeks of the quarter as we experienced delayed shipments from several suppliers without the supply shortages, we estimate that our Q4 revenues would have been at least $300 million higher.

We expect supply chain headwinds to persist into fiscal 2022, and mitigating them remains our top priority.

[noise] tend to outperform the market over the coming years.

So let me start with the supply side of the equation applied has made and continues to make strategic investments in our own global manufacturing infrastructure. So our factory capacity is not a limiting factor for us.

Like many in the industry. The primary challenge we face today is availability of certain silicon components.

Looking further ahead I believe we will see permanent changes in the way supply chains are designed and operated in the semiconductor industry and beyond there's a shift from just in time to adjust in case, the approach, which will require higher levels of inventory more built in redundancy and more burst capacity.

Europe and Asia, we expect to see a trend towards regionalize supply chains that are more resilient, but also increased capital intensity.

And 40% year on year in other words in the mid 80 billion dollar range and constrained by supply not demand.

There are still a long way to go before supply and demand is balanced, especially as demand drivers continue to grow. We therefore expect wafer fab equipment spending to be up again in 2022.

RF content increased at twice that rate and then data center applications. The average DRAM and NAND content per server is also growing at a 20% compound annual growth rate as more and more smart devices are connected at the edge. They are driving exponential growth and machine generated data.

To be in the best position to capture value as these long term secular trends accelerate in our core market foundry logic is about 60% of wafer fab equipment spending in 2021, and we expect it to remain at this level or higher over the next several years within foundry logic.

The spending mix is relatively balanced between the most advanced nodes, where we see a fierce battle for leadership, playing out and I kept I kept snowed serve the fast growing Iot communications automotive power electronics and sensor markets.

<unk> is increasing simply put more innovation is needed to get from one node to the next and this higher complexity translates to higher capital intensity.

Against this backdrop I'll now describe applies performance and progress towards our strategic goals.

In fiscal 2021, we grew semiconductor equipment revenues, almost $5 billion or 43% year on year outpacing the market growth rate during that period. However, as I described earlier, we were unable to fully meet demand in our fourth quarter due to component shortages and we expect.

To remain supply constrained going into fiscal 2022.

As a result, we've grown our backlog at a company level to 11 $8 billion, which is up 77% compared to the same period last year.

Our near term results do not fully reflect the underlying strength in our business or the progress, we're making against our long term strategy.

As a reminder, our strategy has three pillars first to be the Pea pack T enablement company and provide the foundation for our customers' power performance area cost and time to market Roadmaps second to shift more of our business to subscriptions and third to generate incremental free cash flows and profitability from our <unk>.

8% in calendar 2021.

One example is dielectric materials, where we're driving parallel innovations in materials deposition modification and removal.

Our positioning equipment and.

Another example is advanced patterning, where we're co optimizing CBD a L D and C. M P with our sensory edge, enabling us to gain more than five points of share in patterning. This year.

Integrated material solutions are I M. S. Go one step beyond co optimization by combining multiple processes with customized metrology and sensors in a single system typically undervalue them with I M. S weakened targets, the most complex and valuable challenges and the new Pea pack T playbook.

Allergies, and one system under vacuum a L. D. P. B D CVD copper ray flow surface treatment interface engineering and metrology. This enables at 50% reduction in interconnect resistance at the most advanced foundry logic nodes and creates a multibillion dollar opportunity for applied.

<unk> over the next five years.

The final component of our P pack T. Enablement strategy is time to market acceleration, new digital tools that accelerate R&D technology transfer and high volume manufacturing are a major focus area for our customers in the coming years. These technologies will have a huge impact on productivity and <unk>.

Aviation to commercialization speed. They will also play a key role in making regional supply chains economically competitive and sustainable.

Our AI X platform brings together process tools sensors metrology with data analytics and machine learning. We currently have twenty-five AI ex R&D acceleration engagements with leading customers and we now expect that number to triple over the next 12 months.

At year on year. The tenure of these agreements has grown from one nine years at the end of 2022 to three years today and our renewal rate is about 90% several customers have highlighted how these long term agreements have allowed them to better manage disruptions in parts supply and technical support during the pandemic.

Nick.

Q1.

Managing these constraints in partnership with our suppliers and chipmakers is our top priority.

Looking beyond the near term disruptions I feel very positive about the future longer term secular trends are driving the semiconductor wafer fab equipment markets structurally higher.

Thanks, Gary I want to begin by saying I'm very happy for the opportunity to work with all of you again.

I have three main messages today number.

Number one demand is very strong and growing.

I think it's likely to remain strong in 2022 and beyond.

Number two supply.

Supply chain constraints are impacting our ability to meet all of our demand in the near term.

Number three applied materials is making very good progress toward our financial targets and we're in a great position to return capital to shareholders.

I'll cover each of these topics in order and give you our guidance and then Gary Mike and I will help with your questions.

I'll begin by giving you a more detailed insights than we typically share about the demand for our products and its sustainability into 2022.

Specifically, our semi systems revenue grew by 43% in 2021.

Semi systems orders grew by 78% for the year.

In fact, our semi systems orders grew in every quarter.

In Q4, they were up 136% year over year.

Looking ahead, we currently expect our orders to be higher in the first half of fiscal 2022 than in the second half of 2021 across semi systems Ags and also display.

In short the demand environment is very strong.

What's happening on the demand side is that all of the trends, Gary and I talked about years ago are playing out an even bigger way than we imagined.

First semiconductor demand is higher because we're designing more intelligence into practically everything that gets built and sold.

Second.

Equipment capital intensity is higher.

We don't have wafer size increases anymore, and the industry has wrung out a number of efficiencies, including fab automation industry consolidation and the foundry model.

Used equipment is now scarce so even in the I kept markets customers are buying new equipment and spending more.

The industry is adding more wafer capacity to keep up with demand, particularly in foundry and logic and we believe spending will remain strong.

Specifically the industry grew foundry logic wafer starts by around 40% over the past five years alone.

At the end of our fiscal year overall fab utilization for the industry increased to the highest levels of the past decade.

We see foundry logic, continuing to grow as a proportion of the industry's mix.

Five years ago foundry logic represented around 53% of Wpz's spending.

As of 2021, its grown to 60% of Wi Fi and.

And we see it being even higher into the future.

Even with higher wafer capacity and high utilization, we have a global semiconductor shortage, that's affecting a wide range of industries, including our own.

Industry wide, we are tracking 59 fab projects with available and announced expansion capacity of $3 5 million wafer starts.

These projects represent potential equipment spending of around $300 billion in future years.

All of this data leads me to believe that demand is likely to remain strong.

Now I will give you more insights into our own supply situation.

In Q4, our semi systems backlog was at record levels and growing quickly.

And our guidance for Q4, we targeted modest semi systems revenue growth.

We also widened our overall guidance range due to our concerns about the supply chain.

Towards the end of Q4.

We experienced later than expected deliveries of the components, we need to complete and ship our build plan by the end of the quarter.

The reason for the delays is that our suppliers couldn't get enough parts from their own suppliers.

Which include Chipmakers and distributors.

The supply issues are directly related to the semiconductor shortage.

Particularly in logic power and analog Ics.

Not all of our semi businesses were affected in Q4.

Our process control Sampey etch and packaging businesses beat our revenue targets.

Yet our overall semi systems revenue was $293 million below the midpoint of our expectation.

The full semiconductor revenue impact of the shortages during the quarter was well above $300 million.

In Q1, we are guiding for sequential growth of around 3%.

We have the internal capacity to easily shipped several hundred million dollars more semi equipment.

But we are planning for only modest supply increases looking ahead, I believe <unk> spending will be up again in calendar 2022 anymore.

It will remain strong, particularly for foundry logic, both at the leading edge and I kept nodes.

I also believe applied business will be higher in the first half of calendar 2022 than in the second half of calendar 2021.

Both in semi systems and Ags.

Next since it's the end of our fiscal year. It's a good time to assess the progress we're making towards our 2024 financial model.

In April we outlined targets to grow our revenue profitability and earnings in a variety of W. A few scenarios.

Including a base case of $85 billion and a high case of $100 billion.

With everything we're seeing in the industry today.

Our high scenario of $100 billion is increasingly likely.

One year into the long term plan, we've made good progress increasing revenue by 34% non.

Non-GAAP gross margin by 240 basis points.

Non-GAAP operating margin by 540 basis points.

And non-GAAP EPS by 64%.

We believe our semi systems group is well on track to its growth targets based on our strong product roadmaps and the deep customer engagements Gary described.

We believe a jazz can exceed the growth implied in our model after growing by 21% this year alone.

In fact, a G S had record backlog of over $4.33 billion at the end of the year.

72% of the Q4 backlog was subscription business with terms of one to three years.

And 65% of new subscription bookings were multiyear.

While our focus is on recurring revenue.

Ags also includes our 200 millimeter equipment business.

Our 200 millimeter business has been growing along with the rest of the eye caps market approaching $650 million in Wi Fi revenue in calendar 2021.

Turning to our profitability metrics.

We expect to achieve our non-GAAP gross margin target of 48, 5%.

Once the near term material and logistics cost headwinds subside.

We also feel confident in our non-GAAP operating margin targets.

The semi systems group increased its operating margin by 590 basis points this year.

While Ags delivered record operating margin of 31% in Q4.

A major focus for us is increasing the display group's margin to between 25 and 30%.

And we plan to be in that range by the second half of 2022.

Another of our targets is to return, 80% to 100% of free cash flow to shareholders.

Fiscal 2021.

We generated a record $4 $77 billion and free cash flow.

And we returned 96% mainly through stock buybacks.

We ended the year with over $5 billion remaining in buyback authorization.

And given the strong demand outlook.

And our view of the intrinsic value of the company we.

We expect to continue to be aggressive with the program.

Now I'll share our Q1 business outlook.

Given the supply chain challenges, we expect to modestly increase revenue two $6.16 billion.

Plus or minus $250 million or up around 19% year on year.

We expect non-GAAP EPS to be around $1.85, plus or minus seven or up around 33% year on year.

Within this outlook, we expect semi systems revenue of around $4.46 billion up 25% year over year.

We project a G S revenue of around $1.33 billion up 15% year over year.

We expect display revenue to be around $350 million in Q1, and higher as we progress through the year.

Applied non-GAAP gross margin should decline to around 47, 4%, primarily due to higher near term cost headwinds, we plan to increase non-GAAP opex to $970 million, which is around 15.8% of revenue.

Below our long term model target of 16%.

Our guidance also assumes a 12% non-GAAP tax rate.

Finally, along with Gary I'd like to thank all of our teams and partners for their hard work in a challenging environment now Mike let's begin the Q&A.

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

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from C. J Muse with Evercore you May proceed with your question.

Yeah. Good afternoon, Thanks for taking the question and welcome back Bob.

I'm sure you're happy to be back from the golf course.

Sure. So I guess a couple of part question on supply constraints, you talked about not being fully resolved in January do you expect it to be resolved in April.

And how are customers reacting to the shortages are are they waiting on a false.

Suite of tools or are they taking whatever tools. They can get and then I guess lastly.

Considering the backlog that you highlighted and also that longest lead time. They smell is essentially sold out for all of 2022. It certainly it looks like your visibility extends now into 2023 can you speak to that.

Sure you got a vote a sexual over and back few things one supply chain to overall demand environment and three visibility I guess.

The first one our supply chain, we actually did pretty well managing this through about 11 months of the year in a week and then it got a little worse at the end of the quarter and that that was our issue. So now we're all over this thing in the short term manage in the next quarters about prioritization of project management and execution.

So where we have set up a cadence that every week.

Going through all the detail performance by week of how we're doing on receipts shipments shortages individual supplier names.

And Gary is going through it it almost every day. Okay. So we are escalating. This thing. So then you say why do we think we're going to do better in Q1. So if you look at some of the public companies you know, they're up you know 3% to 5% on average some of our suppliers.

Receipts are up about 15% from the previous quarter. So I'm I think we're gonna be okay. If you look at the stuff that caused us problems, there's miscellaneous problems all over the place.

On a train the top 10 suppliers of our products and we are monitoring those hundred plus 200 other.

Poland. So we wanted to make sure nothing goes bad so I.

I feel pretty good that number one the demand is really good. The backlogs are the orders were up every quarter. It looks strong next year that'll be a Felix drive that shift I think supply chain is going to get better incrementally every quarter through the year in terms of visibility is great in terms of.

Our full suite of tools.

Customers are taking all the tools, we can ship and where we're largely keeping them happy, but we want to not get the backlog too big but I think we're gonna make progress throughout the year.

Hi C. J. This is Gary I'll add a little bit more.

With all the Ceos of our top customers are leading technologies and I kept here in the last quarter and you know what I would say certainly the supply situation is challenging but.

Really no change in terms of the customer demand for the products and some of the tools that again, Bob as Bob said, it's it's not a broad based issue. Some of these tools are the ones that are most enabling from applied and you know again that was not nothing has changed relative to that demand.

Thanks C J. Thank you.

Thank you. Our next question comes from John Pitzer with Credit Suisse. You May proceed with your question.

Yeah. Thanks, So let me ask the question well.

Welcome back as well, it's great working with you again.

My guess is youre going to get multiples of CJS questions on the supply side, but I'm just kind of curious Bob to follow up.

So in terms of rate of recovery and confidence in the backlog and kind of a double booking question. I think is the question. So in terms of.

Right of recovery.

We're modeling from discussions with suppliers at our suppliers suppliers that are earned took all analysis, which we're doing the best we cannot model. This and we believe it's accurate we take Q1 the rate of recovery. If you look at our semi business is up little over 3% equipment and.

It's about what the industry is quarter on quarter, our Ags business is a little bit lower because its 14 weeks last year in Q1 is a Chinese holiday falls into Q1. This year, but if you look at rate of recovery, we think it goes up a.

A little over 3% in Q1, we think the equipment business picks up a couple of points more every quarter and builds momentum later in the year now as we get more visibility next quarter I'll be more confident of those numbers, but that's the kind of.

The acceleration will pick it up in shipments, we hope to do better we might do better, but that's what we're modeling.

Oh.

So doubling I don't think that's a problem right now double book and John If you look at breakout between memory and foundry logic foundry and logic was six 2%. This year. The business. We actually think it's up next year. If you look at public statements from TSMC, Intel another big foundry and logic manufacturers, they're talking.

[noise] about multiyear commitments to Wi Fi spanning and very strong businesses on their side.

I don't see the double book anything right now.

Alright, Thanks al Thanks, John.

We will see at the conference.

Thank you. Our next question comes from Stacy <unk> with Bernstein Research you May proceed with your question.

Hi, guys. Thanks for taking my question I was wondering if you could talk a little bit about the impact of the constraints on the services business because it's not just <unk>.

Services, there is hardware and everything else is service is actually being impacted by constraints with services. These strong without them and how do you think how do you see service as the evolution of services going forward.

In the next year as the you worked to resolve that constraint issues.

Yeah. Our services business is doing great. This year were up 21% were ahead of plan to hit the 2024 model I think we might have said on the call even that we need a compound rate of growth of 7% a year to hit that model. We think we'll exceed that probably do double digits. This year growth in service.

Look at our service business.

It's multiple components as a 200 millimeter tool business. There is a contract services, where you sign up for services, one to three years, including different types of service arrangements and then there's kind of a time and materials stuff.

You look at the service business, we think it's gonna grow strongly there shouldn't double strong double digits and in fact, our customers are thanking our service guys forgetting them onto parts service contracts in the past year or two because our customers are in good shape in terms of support and parts. So I think that the parts issues supply chain issues.

And not really impact on our service business. The other thing, which we will point out Gary might give you more detail. If you look at the parts of the constrain things like P. L sees himself which are components in components.

Those are not the parts that are high replacement service parts in the service supply chain. So I'd say, we're pretty good shape for the service business. It's a great business for us and Bob How would you guide services in fiscal 'twenty, two as a percent low double digits, yeah, I think it's low double digits growth.

Got it that's helpful. Thank you so much.

Thank you. Our next question comes from Vivek Arya with Bank of America. You May proceed with your question.

Thanks for taking my question just a clarification what do you expect display to do overall in this fiscal 'twenty two.

And then my question is you know this year, we have seen your foundry customers raise their prices fabulous customers IBM that raising their prices.

What about the equipment side, how much pricing power do you guys have right that can help.

To mitigate some of these supply chain issues, because you did mention a kind of a hit on your gross margin. So as you start to see some of the supply situation recover should we expect this combination of pricing and the supply side have you recovered gross margins quickly on the gross margin in the company.

Uh huh.

Vivek. This is Gary thanks for the question. There's two parts of this I'll take the first part and then Bob can take the second part.

Relative to display we've talked about that many times really good adjacent market, where we can take our semi deposition in E beam technologies into a market with larger substrates for 'twenty one as expected we're on track for a little over $1.6 billion in revenue and maintaining strong share of our served market.

Think 'twenty two is a little higher than 21, more second half versus first half and as Bob also discussed in the prepared remarks, we're on track to achieve our target for higher profit and free cash flow in the 25% to 30% range exiting.

2022.

And then Bob do you have the second part sort of in terms of your second question, it's kind of a broader gross margin question. So if you look at gross margins. This past year were up 2.4 points, which was great performance.

'twenty one we had very good cost reduction, we had high value products and services, we sold to the customers, where we recognize that value back from our customers and they were pretty good volume and mix, which helped too.

You look at prospectively, the cost reductions a little slower we will continue to realize high value with the customers we share that value them and we think that's going to help our margins and if the costs continue we may even have that discussion at some point.

So margins kind of flattish in the first half and then maybe a little better in the second half to tweak.

So and I think the years, you know a little better than this your overall by the time, we're done okay and any comments on pricing that could kind of think yeah, we look to share value with customers and I think that's worked for both of US great. Thanks for that.

Thank you.

Thank you. Our next question comes from <unk> Hari with Goldman Sachs. You May proceed with your question.

Hi, guys. Thanks, so much for taking my question and Bob Welcome back.

Gary in your prepared remarks, you talked about a localization of of semiconductor capacity going forward. Obviously, there is a lot of talks in the United States and Europe.

In Asia as well.

More recently, Japan, how are you thinking about the potential impact from all of these projects.

I think from a timing perspective, most of us are thinking 2023 or even later.

Based on what you know all the discussions you are having how are you thinking about that and sort of related to that.

How should we think about the competitive threat from the local Chinese.

Semi cap companies I know they've been around for a very long time and.

Up until this point there remains a very significant gap between incumbents like yourselves and then but.

How concerned should we be as we think about your business over the next three to five years. Thank you.

Yeah. Thanks for the questions Tokyo relative to localization of supply chain and you know things like the chips Act.

That's obviously good for our business. We're in discussions I as I mentioned earlier I've met with all of the top Ceos here in the last quarter and you know that's that's as they move to these other new locations that creates an opportunity for us to support them, especially with our services business. So we're in very close call.

Operations with those with those customers as they move forward with those plans in and Theres opportunities I think for them. They are also concerned about cost and you know.

Cultural differences and all of those things and so that creates a tremendous opportunity not just for our traditional services, but opportunities like a I ask the applied actionable insight acceleration.

Where I think they're also extremely focused on how to accelerate R&D ramp and optimize high volume manufacturing in new locations. So I think that really.

China equipment suppliers.

If you look at what every single customer is focused on providing power performance and cost have had ahead of others. We talk about P pack T. In the tea is incredibly important and whether it's you know we talk about low resistance wiring, which is probably one of the biggest issues in the industry, where we have tremendous stress.

Our gate, all around transistors, or the scaling and memory or packaging that is incredibly complex and difficult and the companies that are ahead on power performance and cost capture really the majority of the market. So you know I I really believe that applied is even in a stronger position going forward.

We've been in the past relative to local competition.

Great. Thank you.

Thanks Michelle.

Thank you. Our next question comes from Krish Shankar with Cowen and company. You May proceed with your question.

Yeah, Hi, Thanks for taking my question and Bob they'll come back I just wanted to check on.

The fact that some of these countries are pushing out revenues into next year and it looks like maybe in the first half of next year. The WPZ Andre could hit 100 billion. So I just wanted to figure out from your vantage point, how do you think about that and you also mentioned that you're you know you're trending towards the target model, but obviously the margins are impacted because of constraints in the dog.

More of that 10 Bucks in EPS and 100 billion.

Do you see how much discounts, we give to that 10 bucks in this constrained environment. Thank you.

Well, we think W fees up next year, it's actually probably said in the script you know it could be up.

I think at this time, we are the two specific were taught to cut of 10% up next year and.

I think pretty confident that frankly, if you look at the run rate in the first half the visibility is a little better in the first half and we have very strong orders and book and potential in the first half we actually take the second half is going to get a little stronger even on bookings to what we have today frankly.

We've talked to customers as bullish, particularly on the foundry and logic area.

If you go look at the model it is.

Thanks, Bob.

Thank you Chris.

Yeah, maybe I can add Chris one more thing relative to our 2022 and then going forward.

You know our.

Backlog for US is very strong again I've met with all of these leading customers foundry logic memory, I cats and as Bob mentioned earlier, if you look at what they're publicly talking about in terms of their investments over multiple years, it's very very strong and some of this obviously I can't share.

<unk> publicly but I have very high confidence that.

No. The business is going to remain strong through 'twenty, two and right. Now 23 also looks good for us and certainly again, if you just look at all the public statements.

From those customers.

Again, they're not planning on a short cycle, they are planning to be ready with capacity to capture the opportunities.

Thanks, Gary.

Thank you. Our next question comes from Timothy Arcuri with UBS you May proceed with your question.

Hi, Thanks, and Bob welcome.

Welcome back.

So I guess I guess I have a question on <unk>.

Wi Fi share Gary you talk about that a lot and optically you share. This year is flat and the 22 to 23 range, but obviously that's not representative because you would have done $300 million more in October. So I'm kind of wondering if you can adjust January for us So what what would January has been.

In terms of SSG, if you had the supply would you have.

You know what that $4 45 billion guidance would have been say $300 million higher I'm just trying to adjust.

A gesture show higher because obviously this year you gained a lot of share on and on an adjusted basis. Thanks.

Yeah, Tim Thanks for thanks for the question certainly Q1 would have been significantly higher I think Bob gave some color on that but.

But certainly demand is far higher than supply you know when you take us and we outperformed in 19, we outperformed in 'twenty. We're definitely we're on track to outperform in 'twenty one.

We also feel very good about 'twenty, two and going forward, but you know I don't know if I want to be more specific.

Other than what the color that we've already given on the call, but definitely it would have been significantly higher.

Solutions to to wiring resistance in the one case, we've talked about 50% improvement in.

<unk> shares increasing.

P D C share, we've talked about our business being up more than 60% overall.

And Tim I'll add one more thing for you so I.

I know in the past.

Instead of waiting for Gartner group to come out with market share. What you always did is you took our fiscal Q2 through fiscal Q1 as a <unk>.

Proxy for our revenue and what's interesting is what we did back in February.

Background, and we look forward, Bob and I to seeing investors at your conference.

Thank you. Thank you everyone appreciate it.

Thank you. Our next question comes from Harlan sur with Jpmorgan. You May proceed with your question.

Good afternoon. Thanks for taking my question and Bob will come back to the team on the chip shortages you talked about some of the areas, which have not been impacted as much cost controls CMP etch packaging systems.

But that leaves things like deposition implant thermal processes in many other areas and I am sure even within that it's different for different systems architectures like leading edge versus the <unk>.

I'm trying to figure out whats the implication.

No.

Which of your end markets are getting more impacted given that there are different etch deposition.

Intensities patterning intensities and system configurations, as foundry and logic getting more impacted as it now mean that its getting more impacted is it <unk> or is.

Is it across all of your customer segments and also as your display business being impacted as well.

So arlinda this is Gary.

First off I'd say that display is not being impacted.

Relative to the different device types I don't know that I would separate one versus the other rallied at the impact you know just as an example, and.

The foundry logic business I caps and Varian.

The business and I kept our shares up significantly in our implant market.

Our revenue is up four acts over the last two years.

So you know again I think that when you look across the different products there are specific.

Components, its not broad based but you know again I wouldn't necessarily say that.

No. It's it's one market or another when you look at.

The impact.

Okay. Thank you.

Thanks Harlan.

Thank you. Our next question comes from Joe <unk> with.

Wells Fargo proceed with your question.

DRAM, a little stronger in second half actually.

If you look at next year, we think he is kind of flattish.

We think it's.

It's probably.

A little more second half weighted and memory next year I think foundry is pretty strong throughout the year, but I don't think there's a big delta.

Yeah. So overall WSI I think overall Wang W fees up I take salaries, a bigger percentage I think memories kind of flattish ends up a little bit DRAM is down a little bit I think the split within next year.

My memory is there was a little better in the second half, but I'm not sure.

[noise].

Got it that's helpful. Thank you. Thanks.

Thanks, Joe.

Thank you. Our next question comes from Patrick Ho with Stifel. You May proceed with your question.

Thank you very much and likewise, Bob I guess, one rodeo wasn't enough for you so welcome back.

Maybe just following up on the Ats side of things given the high utilization rates the high demand for ships to date have you seen any incremental type of pickups in your services.

Because your customers are trying to keep it.

It was running as best as possible.

Any incremental pick up in <unk>.

Just because of the current environment.

Yeah, I think the answer is yes, I'm not sure if I covered completely I would call I'll give you some dead you guys like data.

If you look I wanted to look at sustainability of all this so we looked at bookings or backlog orders rates stuff like that the other thing I looked at was growth in wafer starts and tool utilization right. So I'm not sure. We said on the call but tool utilization at the end of the calendar fiscal year was at an all time high in the last 11 years I look back at.

<unk> and 300 millimeter wafer starts for foundry logic. So that if you go with the question you asked Patrick we grew our service business, 12%, 21% last year, we're looking about 12% this year and if you look at high utilization foundry logic tools growing, particularly well for us we did pretty well in etch.

She is also I see our service and we increased our contract in the life of our contracts from one to three years.

The subscription revenue business sustainability of the service business looks really good Hey, Patrick This is Gary Yeah, just one other comment.

In the discussions I've had with US all of these C E OS.

One thing that was pointed out was that having these are subscription agreements than forecasted parts management. They said, we're profiling better than others because they have those parts there are.

So from a supply standpoint, they said that was a big differentiator and gives them more conviction to continue and expand that type of approach.

Alright, thank you.

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

Okay.

Nicole are export control impact or perhaps.

Towards supplier localization in China next year, let.

Let me give us some you guys a good data guys I give you some data so three things in China, It's down some next year, but pretty strong. The second thing is if you look at travel local versus spending by local companies versus international companies. It's trending up it was high seventy's kind of 77%. This year about 82% next year the third is mix.

<unk> business, so they've trended like the rest of the world to go a little bit more foundry logic. So they were like 52%.

48% memory, they should go to like 52% next year so the.

Trending that way in terms of where it's down I think DRAM is down a little bit in China next year and foundry, but the mix to foundry is trending up.

Got it thank you.

Thank you.

Thank you our last question comes from Sidney Ho with Deutsche Bank. You May proceed with your question.

Ill talk about a number of ex engagement potentially tripling next year instead of doubling.

Can you help us understand how these engagements and tax revenue growth potential do they generally translate into revenue in the same year a number of years.

Increased silver.

Overall size of the market or just an opportunity for apply to gain share and generally just how you measure success with those engagements.

Yeah. This is Gary thanks for the question so the.

<unk>.

Fastest growing largest part of our P. D. C business is our E beam product family and we have tremendous leadership there we're growing share a significant amount the strength is really on our resolution and speed of imaging and we're expanding that gap with caufield in Michigan, where we have about it.

50% resolution advantage versus others and so when you think about the certainly the growth there and we have line of sight side to really good growth also in 2022. This co optimization with E. Beam is very very important we talked about that an example for.

We're scaling where we're combining our new material, we call Draco with innovative etch technology and basically.

Optimizing these processes.

Credibly complex, you're trying to optimize many many different parameters at the same time and the goal is to.

And look at those fingerprints across a chip you look at pattern loading for isolated dense structures fingerprints across the wafer being able to map out this multi dimension space and with a unique imaging of those features which we have with our E beam system and then we talked about the applied process recipe optimization apply.

Probably within a I ask is really an enormous focus for all of our different customers. So it certainly is growing our PDC business, but even more impactful the opportunity for us to capture value with our IMS platforms are co op.

<unk> platforms is worth billions of dollars. So that is an accelerator for us that were you know that gives us a tailwind whether it's low or gate all around memory scaling all of those different capabilities and that that's a great leading indicator going from 25 engagements to 70.

Five next year it does translate into wins in terms of these big inflections accelerating inflections. The T of the Pea pack T is worth an enormous amount for our customers. So it really is it's tremendously synergistic with our overall strategy and our opportunity.

Yeah.

Thank you.

Thank you Sydney.

Bob would you like to help us close the call with some summary thoughts.

Alright, I have some summary thoughts, but first I'm going to go off script, and just say, it's great to be back work with the team, including Gary and when I visualized coming back I thought of myself, a little bit like Arnold Schwarzenegger, either terminated or I'll be back and then unfortunately, here's some remorse Gabe Kaplan and welcome back Kotter, but I'm back anyway, So, let's let's do.

The three legged stool.

Our markets are strong in great shape with a W. A phase up next year and breakup.

Positively biased towards twenty-three second applied position is strong.

Points of five 4% operating margins.

I'm looking forward to work with all of you again.

Alright, thanks, Bob it we'd like to thank everybody for joining us today, a replay of the call. He is going to be available on our website by five P. M Pacific time today, and Gary and I look forward to seeing many of you at the credit Suisse Conference in Scottsdale in just a little while and so happy Thanksgiving and thank you for your continued interest in applied materials.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2021 Applied Materials Inc Earnings Call

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