Applied Materials, Inc. (AMAT) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Krish Sankar, the semi cap equipment analyst at Cowen. Thank you all for joining. The company presenting next is Applied Materials, and we are very fortunate enough to have Dan Durn, the CFO, of Applied here. Thank you very much, Dan, for joining. And as always for the audience, members, there is a dashboard, you can always send in any questions you want, then I can ask them to Dan.

Okay so, let me start it out by having some questions for you, Dan. And clearly, you had a very strong earnings conference call recently a couple of weeks ago. You sounded very bullish on the second half demand and also into next year. And so -- and within that, it seems like into the second half of this year, you were more lukewarm on NAND while being more bullish on DRAM, foundry and logic. Is that still the case? And do you actually think NAND declines in the second half or it just more moderates?

Yes. So thanks, Krish, and appreciate the invitation to participate in your conference, so thank you for that. Our view of the market continues to be quite strong. Last year was a very good year in our market. Off of that, we see strong growth this year. Our view was to high 70s overall market size. And within that, foundry/logic is going to be your strongest growing market off of where we were last year followed by DRAM. DRAM will be -- foundry/logic will grow above the overall industry average. DRAM will grow about in line, plus or minus, with the industry average. NAND will grow below the industry average, and that rank order from a growth standpoint is the opposite of what we saw last year. Last year, the NAND market was over 30% grower. This year, it's going to have a bit more of a digestion period, but it will grow year-over-year. Now the question is, what does the shape and profile look like within 2021? And we have a strong point of view that foundry/logic and DRAM are both going to be to be second half-weighted markets. I think our view 3 months ago was NAND was a first half-weighted market. Today, as we sit, I think it's too early to call first half versus second half. So I think there's a question mark on does it grow half over half? And so while growing year-over-year, I think it's too early to tell. We want to see some more data to figure out whether it's first or second half-weighted. The other 2 markets, DRAM and foundry/logic, are very clear to us. Against that opportunity, we'd expect to outperform again this year. And as we look into 2022, we're planning for our business to be up year-over-year. So market continues to be strong, and we think we're really well positioned against that opportunity.

Got it. Very helpful, Dan. And is there a way to quantify the industry WFE growth for next year?

Yes. I think it's a little premature to do that. We want to see more of the data points. Here's what I will say about 2022, the combination of 2021 plus 2022, we see as over $160 billion. So if you think this year is high 70s. Now you've got an upward shape trend line between the 2 years. Ultimately, growth rate, though, is going to be what gets done in calendar Q4 versus calendar Q1. And so sometimes things push across the boundaries one way or the other, and it influences growth rates. The important thing is, as we see an upward trend line, we see over $160 billion overall combined market size for the 2 years. And against that opportunity again, we are expecting to significantly outperform this year. We expect to significantly outperform again next year, given how we're positioned against the opportunity. So we're planning for all of the businesses to be up in the back half of this year. And as we look into 2022, we expect our businesses to be up again next year. So we feel really good about how we're positioned against this opportunity.

Got it. Got it. And I think Dan, you were talking about this a while ago. It's on many investors' mind. You're seeing strong growth this year and next year. Obviously, you have the government initiatives, you have component tightness. So is there a way you can like help us understand how much is secular versus cyclical in this strong environment?

Yes. So I would say there's probably a little bit of both at play if I were to say what's really driving our market. If you look at the 2-year combined WFE, 2012 plus 2013, '13-'14, '14 and plus '15, all the way to '21 plus '22, you get about a 12% compound growth rate. This has been playing out for the better part of a decade. The vast majority of what we see right now is a secular tailwind around our industry. We talk about the next wave of compute. We talk about Internet of Things, artificial intelligence. We talk about it as being the basis of competition for companies around the globe, and it's nonconsumer discretionary. I actually call it existential. Companies will make these investments, survive and thrive or they won't and they'll cease to exist. And so we see something very structural happening here. That is a nice secular tailwind, and we're in the very early innings of this playing out as the semi industry grows to about $1 trillion. That's the general consensus by the end of the decade. Our industry being 14% of the overall semi industry as a ratio between the 2 industries. That's going to drive our industry up over $100 billion to $140 billion and $150 billion in overall size. And so we feel good about these secular tailwinds. Customers that are putting equipment in place today, that's really to satisfy demand for a couple of years out. And as we look at the number of 300-millimeter factories we're tracking around the globe, you're now over 50 projects around the globe that can take almost $300 billion of WFE. So our customers are putting infrastructure in place that's tracking a very strong secular growth trends shaping our industry. In the near term, you'll get a little bit of the cyclical effect as our customers try to catch up in the near term environment with some of the output to address shortages that they see in the market. The vast majority that's shaping our industry right now, in our view, is a secular trend that's been playing out for quite some time now.

Got it. Got it. That's very helpful, Dan. And then when I look at AMAT, specifically, like, let's say, over the next 5 years, it feels like the incremental opportunities are in like, what I'd probably call it as 4 buckets. One is gate-all-around. Another one is advanced packaging. Another one is process control and then the fourth one being 3D DRAM. Would you agree with that analogy? And how would you rank order them in terms of either the dollar opportunity or timing? And how you see that impacting AMAT?

Sure. So I would say you've hit on 4 very big drivers. But if I were to set the context just a little bit differently, taking a step back and then I'll come and address the specific question. I think the opportunity for us going forward is really characterized by the new PPACt playbook. So new architectures, new structures, going vertical on a chip, new types of materials, new ways to shrink and also advanced packaging. And so the combination of those different elements of the new PPACt playbook is about a $7 billion cumulative opportunity between now and 2024. So over the next 4 years, that's going to be a large driver of the company's growth. You picked 4 really important elements. You've got gate-all-around and 3D DRAM, both of those opportunities are about $1 billion opportunity for us, for every 100,000 wafer starts. And so really sizable, substantive opportunities. You talk about process control. Over the next 4 years, we're going to look to double that business versus where we sit today. And then in packaging, we've characterized that at our most recent investor meeting as a high-growth market. We did about $500 million of revenue in 2020. We did -- we're going to do over $800 million of revenue this year. So clearly, a fast-growing market for us. And we think we're really well positioned against that opportunity. And then when you layer in things like integrated material solutions, this is just a continued opportunity for us to solve our customers' highest value problems and then allow them to bring those solutions to market even faster than they do today. So really getting at the t part of the PPACt equation. And when you take those capabilities, the absolute best point technology solutions and combine them together under vacuum and then complement it with our e-beam technology, sensor, metrology, machine learning algorithms, you're bringing together a set of capabilities that really focus on that most critical element called time, but also a set of capabilities that potentially allow us to monetize our innovation in a different way through a subscription-like model over time. And so what we're trying to do is create the building blocks of a vector of growth that's independent from just pure equipment sale. That will always be a part of the company's model, but there's also a set of capabilities that we're bringing together that are very valuable for the customer that we hope to monetize through more subscription-like revenues and build out that side of our business as well. So we really like how well we're positioned against the opportunity. You hit on 4 big elements of our growth strategy. But I think there's a bit more around the edges of those 4 opportunities that really round out the substantial opportunity in front of us.

Got it. Got it. That's very interesting. And thanks for that characterization. And the other thing that has been very interesting with AMAT is the last year or so, you kind of gotten quite a bit of traction, market share gains. And one of them was in conductor etch, and I feel like that is because of your Sym3 product. How transferable is that opportunity to parlay that into share gains in foundry and the logic side?

Yes. So we really like how we're positioned in this market, and the opportunity is substantial. As I take a step back and I look at that Sym3 product, probably one of the most successful products in the history of the company. The company has done a great job, got the right architecture, some innovative sort of materials that were developed alongside chamber architecture that drive really good on wafer performance with that technology. You've seen a lot of traction initially on the memory side, both NAND and DRAM, a lot of application wins, 30 points of share gain on the DRAM conductor etch side in the last handful of years. So a lot of momentum, and we are gaining traction at every single leading logic and foundry customer with this technology. So we're doing a great job penetrating the foundry/logic space. We're winning more applications on that side, and there's a lot of really good strong momentum around that product. So we feel good about how well we're positioned. It starts with great technology. And then the teams are working very, very hard to continue the penetration story around that technology. And again, it's one of the reasons why you saw the outperformance in '19, not entirely, but one of the elements of the story, outperformance in '19. Outperformance, again, in '20. We're positioned to outperform again this year. We like how we're set up against next year. So it's an important element of the story. And I think in the last handful of years, I think we've shipped like 5,000 chambers of this product. So again, one of the most successful products in the history of the company.

Very interesting. And so that kind of attacks some of the DRAM issue. So the other thing that was interesting was, last quarter, your NAND numbers are very strong, like it was higher than prior peak. Is that a function of just the NAND WFE being strong? Or have you seen any share gains on the NAND side, too? Because the reason I'm asking is that there's a view before that acquiring Kokusai would help boost your NAND footprint, but it looks like even without Kokusai, your NAND business is pretty strong.

Yes. So a couple of things. I think we are a great innovation engine and a strong organic growth driver. I guess that would be point one. And as I look at the portfolio of technologies, I think this company is really playing a winning hand and we're well poised to grow organically going forward. So it's really a great engine. Gary and the team have really built a strong technology innovation engine here. If I were to reflect on NAND and how we're positioned against that opportunity. If you were to go back when Gary came into the company, we were probably mid-teens from a market share standpoint of NAND. Today, we're around 20%. So significant progress, and that was by design. I mean, Gary and the team spent a lot of time focused on this market and really strengthened our position. If you look at the market in 2020, the NAND market was up over 30%. Our business was up 34%, 35%, strong performance against that opportunity. So we think we're well positioned, Apps and Kokusai have performed well in this market. As I look at Kokusai, I think it was nice complementary technology that we felt we could do some interesting things with over time. Doesn't lessen our ability to show signs of strength against this market opportunity, given the portfolio of products that we have and the innovation engine Gary and the team have built. So we think we're playing a winning hand going forward. Would have been a nice complement to what we already do today. But certainly, going forward, we think we're really well positioned against this opportunity as well as DRAM and foundry/logic, a very balanced company. And there's a reason we've built such a strong capable portfolio of technology, you see it playing out in the market today.

Got it. Got it. Very helpful, Dan. And the other thing I wanted to touch upon is, in China, besides the strong customer base, there's also a lot of local competition in China with the semi cap companies trying to grow there. Is there a risk of them reverse engineering your tool or catching up with you down the road? Is this something that you worry about on the Chinese domestic competition?

Yes. Here's what I would say about local competition, it's not something that's new in our market. As you know, you've been around this industry a very long time. The best analogy I can go to is Korea. I think you've got a top-down government initiative in Korea with 2 strong national champions looking to support an equipment industry. Today, there isn't a large multinational based in that geography. So then you have to ask yourself why? And it's not about intent, and it's not about support and it's not about resources. At the core of what we do, it's about technology, it's about innovation. And what we do is extremely hard when you're laying down layers of material that are highly precise 8 or 9 atom spec. If you could lay down 7 atoms or you lay down 10 atoms, the yield falls off dramatically. And so technology and innovation is at the core of everything we do. And when you talk about customers building $20 billion factories, the absolute best innovation is what they will turn to each and every time. So I like how we're positioned at the core of our industry, free fair trade, IP protection. I know the innovation engine that Gary and the team have built here and I like our chances compared to anybody when it's technology and its innovation. It's always been at the core of this industry. We expect it to be at the core of this industry for the foreseeable future. And so I like how we're positioned against that opportunity.