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

Good afternoon, everyone. I'm Stacy Rasgon, I'm Bernstein's senior research analyst covering our U.S. semiconductors and now our U.S. semiconductor capital equipment. And I can't express what an honor it is to have our guest here today, Gary Dickerson, the President and CEO of Applied Materials. Before we get started, I do want to mention a few -- we have about 50 minutes of for our session today. If you have questions that you'd like to ask, you should have a link to our Pigeonhole forum on your screen. You can submit them there. We'll have time for that Q&A at the end. Now if I'm just to start out today about Applied Materials, if I put the stocks aside for a minute, I want to say I love semi cap. This is an industry -- as an industry at least, that's near and dear to my heart. Many of you know that my background long-ago comes out of equipment. In some alternate time line, I've probably got a doppelganger working in the industry someplace. And I remain continually humbled by the capabilities that these companies and all of them bring there creating the complex technology that's needed to create the most complex technology that humanity has ever developed. And to that end, the semiconductor equipment industry today really seems to be coming into its own, both underlying industry growth, and it seems industry capital intensity seems set inflect higher. With the contributions from companies like AMAT more important than ever as materials-driven innovation moves to the forefront of the process technology development that's needed to keep it going. And to talk to us all about all of that, we have us with here, someone whose passion for the industry probably dwarfs mine. It gives me great pleasure to welcome Gary Dickerson. Gary, thank you so much for being with us today.

Oh, yes. Absolutely. Thank you for inviting me, Stacy. And by the way, if you want to come back in the industry, you can join us anytime.

Let's have that conversations some other time. Gary, this is not a format that I'd like to use for short-term questions. Just given what's going on in the entire industry now, I can't avoid them. I do want to try to get through them quickly. We can move on to some of the more fun stuff. But obviously, we are in a supply-demand situation, and we've seen shortages and things like that in the past, but I've never seen anything quite like this. It seems to be somewhat unprecedented. And I was wondering if you could discuss, just given your position where you guys sit in the industry, both the supply and demand disruptions that you're seeing as the world emerges from COVID. And what your perspective is in terms of kind of where we are in that and what it's going to take to resolve those and how long it might be.

Yes. Stacy, relative to demand, we certainly have been big believers that technology is going to transform every industry. And certainly, as we're working from home, learning from home, the whole disruption around retail, transportation, the chips are -- demand is much more pervasive than we've ever seen before. And a lot of this inflection has been accelerated in the last year. So demand, we can talk about that. Just we're really in the early innings of this huge demand acceleration that we're seeing this year. On the supply side, what I think is interesting, you see our customers now talking about multiyear investments, which we haven't heard in the past, big multiyear investments. And in the supply chain itself, what's interesting, some of the industries operated with a kind of a just-in-time mindset. And of course, that's -- and actually, some of my customers have talked about, a little over a year ago, even maybe cancellation of some orders. And of course, that -- now you see tremendous demand, and really, the semiconductor content increasing. So automotive is certainly an example of that. But I really see a rethinking, Stacy, of the whole supply chain. And people are understanding that you can't respond in a matter of weeks or months relative to building capacity. As you know, it takes time to build the facilities, to bring in the equipment, to bring that process up. And so that's really where we're at right now. One thing I am seeing That is different is this longer-term horizon for our customers relative to their investments. And for their customers, I'm hearing more longer-term supply assurance and contracts than I've ever heard before. So I think people are understanding this just-in-time type of a mindset is not going to work. The other thing that I would say, Stacy, I personally think we're in the early innings. You certainly see transportation inflecting, the foundation of competition is changing, but that's in every single industry on the planet. So the strategic aspect of semiconductors, you can see countries recognizing that. And this longer-term horizon, the thinking has to change. And certainly, I see that more so than I've ever seen from our customers.

Got it. Got it. It doesn't sound like -- again, we're hearing these like multiyear forecast from TSMC and Intel. It sounds like you think that's not just bravado. You think that, that is real. Like there's a demand profile and a trajectory that they warranted at this point?

Well, I think it is. Again, this is the foundation of more and more products and the foundation of competition for industries. And again, their customers, they may not -- I don't know how much is communicated publicly, but they're seeing more pull and longer-term agreements with their customers as part of building that capacity. I mean one thing, Stacy, that's very interesting also, if you look at data explosion, you have data up about 150x in the last 6 years. And where the data is coming from? 2018 was the first year machines generated more data than people. By 2025, it's 99% to 1%. So that just talks about everything getting smarter. And every industry, whether it's at the edge, the cloud, PC, mobile, the content is increasing in all of these different industries around the globe.

And I guess to follow up on that, I know you gave like a forecast for underlying semi growth at the Analyst Day, and I think you callid for $1 trillion by 2030, which would be, what, 8% or 9% a year? Which I'll be honest, over the cycles, a little more than it has been, but maybe it doesn't sound insane. Is that the driver? Is it primarily that growth in data? Are there other drivers that you see kind of like taking the industry to something where -- and I guess, even if it was 5%, I guess, that put us in a $1 trillion in 2025. So I mean, plus or minus, right? Maybe it's not crazy.

Well, again, it really is. Transportation, health care, education, retail, agriculture; every industry is inflecting, and this explosion of data is really driving the overall industry higher. I think the other aspect is the capital intensity, Stacy. So if you think about -- again, people still remember the mainframe PC, no growth cyclical semiconductor capital equipment industry. But then you went to mobile, social media, where you had a different rhythm around the war for mobility leadership every holiday season. And now you see in the future, this 99% of the data being generated by everything around us driving this industry larger. And you had, in 2000 to 2010 also the 200- to 300-millimeter transition. So you were able to drive tremendous efficiencies, about 2.3x the number of chips per wafer. So not only do we see the demand drivers stronger than ever and more pervasive than ever, but you also see capital intensity rising. I think just last year, about -- it was about 13.6% wafer fab equipment as a percentage of revenue. But if you look at wafer fab equipment as a percentage of customer profits, that's actually improving. So our customers are capturing more value. And that makes the whole industry healthy. So again, you look at this $1 trillion opportunity, and then combined with capital intensity, again, we're very optimistic about the overall opportunity.

Got it. And I guess, to that end, I think when you were here last year, we were talking about like a $50 billion kind of normalized WP level. Now it's looking -- I mean we did 63 to 64, whatever the number was in 2020. Obviously, we're -- you're thinking kind of like high 70s now. And so call it like a normalized level, close to $80 billion just a year later, right?

Yes.

What do you think has changed? And I get the drivers you're talking about. I understand stronger demand, and I understand like the drivers in memory and increasing complexity. But that's a big shift in perspective over 12 months, especially with the pandemic in the middle of it. What do you think has changed in terms of your fundamental view of the industry in terms of where things can go versus maybe when you were sitting here a year ago?

Stacy, I would say that we had conviction around secular growth in the industry even when we talked a year ago. We do forecast, we do base case, high and low forecast. So we're actually tracking to the high end of that range. But it really, I do believe is the acceleration of data and the transformation as we're working at home. I mean, I have 11-year-old twins that were in fifth grade. So they're doing their learning at home every day. And working from home. I can connect with any customer around the world, the CEOs, the R&D leaders instantaneously. Certainly, the retail has already been transforming, but those things are accelerating. So I think really, it wasn't so much from my standpoint. By the way, 18 months ago, inside Applied, I told everyone '21 is going to be a big year. The question is, are we ready, or not? Now I did certainly didn't know anything about the pandemic. But Stacy, I wouldn't say there's any fundamental change in terms of our view. We look at all of the end markets and we look at all the drivers and content, and it certainly has accelerated above. But the other thing I would say, we had conviction. So we did -- we have been making investments in our operations and supply chain, significant investments, to be ready. So I would think relatively, we're performing better than some of our peers in responding to the situation that we're in today.

Got it. I guess to those investments, if I look out to the Analyst Day model they gave us, the '23, '24 kind of model, I think it was set it was around $85 billion. I think you had a WP, I think you had a high end like $100 billion, right? Like do you have the capacity in place today? Or I guess would it be in place -- do you have to do incremental investments like by '23 or '24 to actually hit behind of that target? Are you prepared to be able to hit it now? Like what would you get there in terms of the infrastructure?

Yes. We definitely are always looking to invest at the high end of that forecast. But I would say for us, it's pretty efficient. We have a very strong manufacturing footprint in Austin, Texas; Singapore; other locations; Israel, Gloucester, Massachusetts. So for us, it's more incremental. But we had already been planning for higher levels of demand. And so I wouldn't say -- and by the way, as we're making those investments, we're also driving efficiencies in how we work. So our goal is to not only to be more agile relative to being able to respond because we have such a broad portfolio, much broader than anyone in the industry. So that complexity is an advantage, but also a challenge. So we've been putting all of those capabilities in place to be able to respond today. And there will be some incremental investment, but I wouldn't say significant incremental investments from an operations and supply chain standpoint. I think from an innovation capacity standpoint, those are things that we are going to continue to invest in. We've transitioned our OpEx from around 50%, 55% R&D to 70%, and really, really driving that.

Got it. That makes sense. I guess, you've talked a little bit about some of the technology inflections that you see driving both growth in the underlying market as well as capital intensity. Whether this is -- but I wonder if you could go a little deeper in terms of what you view are the most critical ones, especially where AMAT can deliver value, whether it's new architectures or structures or materials or packaging? I mean, is it all important? Is it all stuff that AMAT is focusing on?

Well, if you break the market apart, Stacy, certainly, in the foundry/logic market, it's about 2/3 leading edge; 1/3 what we call the ICAPs, IoT, communication, auto power sensors and trailing nodes. And we have the new group we formed in the trailing edge a little over 2 years ago. That is a really great opportunity for Applied. Again, we have -- that is certainly not shrink-driven market. It's more about power and performance. And our capture of that market is increasing. And our scale and our breadth there and the technology focus, as we pulled this together, really puts us in a great position As that -- this 0.5 trillion, 1 trillion connected devices in the future, that is growing, and that's a really great opportunity for us. In the leading foundry/logic, I -- again, we have pretty good visibility as what's going to drive that market forward. And I think from a big picture standpoint, classic Moore's Law 2D scaling slowed down years ago. I think that's very clear. And you can see how that also has played out in -- from our customer standpoint and their competitive positions. So it really is about these new materials, these new structures. Packaging is another one, connecting chips or chiplets, IP blocks together, those are the things that are driving that part of the industry forward. And it really gets back to the transistor on the high-performance computing, especially drive current. That's where Applied has tremendous capability, many unique leading technologies. We talked about in this year, our epi business, CMP, thermal, implant, all of those businesses will grow more than 50% this year. In the wiring, Applied really is the wiring company. So Stacy, you know that you need to get all of that data off the chip and communication inside the chip with low power, that's really important as you have 0.5 trillion or 1 trillion connected devices or these high-performance data centers at high speeds. So the wiring we showed in our Investor Day meeting one innovation where we improved resistance in wiring 50% by combining PVD, ALD, CVD, surface prep, metrology into a single platform. That is an enormous opportunity that is repeated through multiple levels. But it really is, Stacy, these new structures around the transistor, around the wiring. And in memory, you look at what's happening there. High-speed memory. They're adding high-K metal gate and interconnect technologies that were in logic into memory to go to high-speed memory. That is a big inflection. And you look at things like the capacitor shrinking. Those are also areas where Applied has tremendous leadership in those technologies. So it really is about those new structures and new materials; power, performance and cost. The same thing, by the way, is true in packaging. Applied has leadership there. PVD, CVD, CMP, plating, the new sentry via etch. We announced a hybrid bonding technology to bond chips together to shorten the wiring link and increase the wiring density to improve power and performance. The industry, Stacy, if we're sitting here 2 to 3 years from now, I'm very confident that we'll be talking about these technologies on the structures, materials, connecting chips together as the primary driver of power, performance and cost. It's going to increase in relative importance.

Got it. When you talk about these things, you collect them up into that singular term. Maybe we can start there and work our way down. So the term you guys use is PPAC.

Yes.

Performance, power, area cost, time-to-market.

Power, performance, area cost and time-to-market. And that's it. I mean, again, when you think about all of the devices from the edge to the cloud, it is power, performance and cost. And who gets there first is enormously important.

Got it. And you guys have been referring to yourselves as the [ PF ] Company, I believe. So it seems like it's pervading everything you. Can you maybe talk a little bit about -- I guess conceptually, it seems obvious, right? It seems like everybody should be going these are the forces of the semiconductor industry. But like what's unique about the way Applied is actually going after those different elements? And like I said, it seems like you're making it the primary focus of the company.

Yes. Absolutely, Stacy. Because that's at the foundation of competition for our customers, and all of those system companies that are delivering the products from the edge to the cloud is really at the foundation. So when you think about what enables power performance and cost, it is -- it's new materials. It's new structures. It's new with application-specific computing. The new ways to connect the chips together and creating, shaping, modifying and analyzing and building all of those different structures. And Applied has the broadest portfolio of those enabling technologies. When you look at the transistor, we're the transistor company, we're the wiring company in terms of the speed of the data on and off the chips or into different parts of the chips. We're the company that's #1 in wafer-level packaging with this broad portfolio of technologies. So we're driving all of those foundational technologies. And by the way, this is important from a geopolitical standpoint, too. Strategically, the companies that have the most enabling foundational technology puzzle pieces will win the future. It's all about winning the future. The other aspect, Stacy, is the ability to connect these technologies together. So about -- if you go to our Investor Day, about 30% of our products are connected together So the 30% of our revenue where you combine the PVD, the ALD, the CBD, the...

[ Similar funnel ]. Yes.

And we're -- again, we're really in a unique position to enable the ability to manage all of those interfaces that you're building out through 1,000 steps. All of these wiring or transistor or memory structures, those interfaces are becoming more important because they're only a few atoms thick. And if I take the wafer out into air, those materials oxidize and damage the electrical properties. So that's why whether it's in the transistor to drive -- to move to 10% to 15% higher drive current or 50% reduction in wiring, the combination of these technology, Stacy, are more and more important for the future. And then you also have the co-optimization of technologies. We showed that in our Investor Day where we have a new hard mass material, high-temperature etch, and then our e-beam technology and co-optimizing the capacitor scaling in DRAM. And so that co-optimization, the combination of technologies, certainly, is very unique for Applied Materials and being able to enable those power and performance gains for our customers, and that will increase in importance going forward.

As you're driving more of these kind of like integrated solution sales with multiple types of tools altogether, how does that impact the broader economics? Is it just -- is it a share gain? Is it -- do you get like a pricing uplift and a margin uplift because you're providing that solution? Like how does it like actually roll through to the bottom line?

Well, certainly, for our customers, it's very valuable. So as we're delivering some of these solutions that we've highlighted, those are really good opportunities for us in terms of value capture. I mean, certainly, for our customers, they're tremendously enabling Stacy in terms of power and performance. So when we engage with customers across this broad portfolio, certainly, that puts us in a very strategic position. So when we're talking about enabling their success, enabling our success, that enters into that conversation. Another thing I would say is that the complexity also creates challenges for our customers and how fast the T part of the PPACt. So we're combining together these solutions, and that's where our e-beam leadership comes in to accelerate how to dial in these very complex either unit processes, integrated systems or the flow of many steps in a structure. So that's an opportunity to drive our service business and our recurring revenue, our subscription revenue. You see that also growing. Since I came here, we were -- about 30% of our service business was agreements and subscription-type revenue. We've grown that to over 60%. Our orders last quarter was over 70%. And I believe around 50% of that were agreements that were 3 years or longer. So there's that opportunity there, too. As you're bringing these integrated solutions to market, optimizing the time to market, Stacy, I truthfully believe through technology, there is incredible opportunities there. And it's not just time. It's also the process margins. One of the leading R&D managers for one of our biggest customers, he talked about the process window of being like angels dancing on the head of a pin. So to the extent that we can increase that process margin 30% through this co-optimization, that also is enormously important for our customers. So I would say the other way is really through these agreements, longer-term agreements with customers, so we can accelerate the time to market, optimize these process windows, and then in high-volume manufacturing, deliver yield cost and output.

Got it. Thank you. I do want to dig into services in a moment, not quite yet for you, but I [indiscernible]. But for the folks on the line who don't know, a process window is sort of think about it is like how much your process can vary and you still get good chips out at the end of the day.

It's all directly related to yield.

Yes. So think about it that way. Gary, I was wondering if you could talk a little bit -- Applied has a fairly well balanced -- as you guys have pointed out before, a fairly well-balanced equipment. 60-40, give or take, 55-45 foundry/logic and memory. Memory is still pretty evenly split DRAM and NAND. Maybe could you talk about like some of, I guess, both the opportunities as well as some of the challenges between, say, like foundry and logic and memory. And where, I guess, you saw some of the biggest like opportunities as well as some of the biggest challenges and risks to the process and how they differ between like those 2 broad spaces?

So Stacy, your question is relative to Applied's opportunity in those different opportunity segments?

Opportunities as well as like where you find like, I guess, challenges as well as opportunities within logic and memory. Because again, you do have a more -- you're less focused on one space or the other versus some of your competitors.

So you're absolutely right, Stacy. If you wind the clock back around 2013, we were very heavily focused -- or weighted to foundry/logic. Our memory business was in the low teens. Now they're all in the same ZIP code relative to our share of that spend. You referred to the 55-45 split between foundry/logic and memory. That's actually the industry split. And we see that, by the way, staying in that same ZIP code of the 55-45, that's historically what it's been if you look back over a number of years. And that's kind of the way we see the industry split going forward. And our position is, like you said, very balanced across all of those different segments. And the way I think about it is really about enabling our customers to win and those system companies to win in power performance and cost. So I focus -- I spend a lot of my time with R&D leaders, whether it's on the chip or the packaging side of things. And it's about these inflections that enable the power performance and cost, the transistor, the wiring, the new memory structures. I referred to some of those earlier. That's where I spend an enormous amount of my time, and that's where we're focused. And the same thing is true in packaging. That's really where we spend an incredible amount of time. And we have deeper relationships, Stacy, than ever. Our connection into integration is deeper than it's ever been for Applied Materials.

Got it. I guess regarding that, kind of those deep relationships and that visibility, and you're mix being kind of like equivalent to the industry. I guess, what are you seeing in the near term across these 3 markets, foundry and DRAM and NAND. And I will note I've gotten a question -- even a question here on the Pigeonhole around the back half, especially NAND, which I think is one of the near-term controversies right now.

Yes.

You seem to be a little different than one of your competitors. I don't know if you have a point of view on that or not that you'd like to share with us.

Yes. I would say that, again, just relative to this mix question, we outperformed the market in 2019. Last year was a big NAND year. NAND was the fastest-growing segment we outperformed last year. By the way, this is the same time EV adoption is really at the highest rate of adoption. So we've been outperforming in '19, '20. We're outperforming this year. So if we look at this year, what we've communicated is that we see the largest -- the fastest-growing being foundry/logic, #2 DRAM, and NAND under-growing the market this year. And what we've said is our -- we don't normally give first half, second half projections. But we did say that we see strength across all parts of our business in the second half of this year. And certainly, again, we have tremendous conviction around foundry/logic and DRAM strength in the year. Those, for sure, will be the fastest-growing segments. And we see those markets up in the second half of the year. NAND, I think what we've communicated there, Stacy, is it's still a little bit too early to call. Certainly, that's going to be #3 in terms of growth this year. It was #1 last year, but the slowest growing market. And question, whether it's going to be higher in the second half or not. But again, you do have...

But it grew an awful lot in Q1, right? I mean it was up...

Pardon me.