Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the 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, and thank you for joining Applied’s first quarter of fiscal 2020 earnings call, which is being recorded. Joining me are Gary Dickerson, our President and CEO; and Dan Durn, our Chief Financial Officer. Before we begin, I’d like to remind you that today’s call contains forward-looking statements, which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning the risks and uncertainties is contained in Applied’s most recent Form 10-K 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 reconciliation slides, which are available on the IR page of our website at appliedmaterials.com. And now, I’d like to turn the call over to Gary Dickerson.

Thanks, Mike. I’m pleased to report that earnings for our first fiscal quarter exceeded the top-end of our guidance, reflecting outstanding execution across the Company in a market environment that is strengthening. Based on our calendar year revenues, we believe we outperformed both the markets and our direct peers in 2019. We entered 2020 with momentum, and the signals we see give us increased confidence that the years ahead will be very good for the industry, and especially for Applied Materials. In today’s call, I’ll give you my perspective on how our markets are evolving and provide our near-term outlook. Then, I’ll highlight the key components of our strategy to address the changing needs of our customers and drive sustainable profitable growth for Applied Materials. Before I get started, I’ll take a minute to address the implications of the coronavirus outbreak. To direct a comprehensive response across all the regions where we operate, we quickly activated our business continuity teams. Our top priority is the health and safety of our employees and their families. We’re also doing everything we can to provide our customers the support they need to minimize disruption to their business. In addition, the Applied Materials Foundation is sending medical equipment into Wuhan, and we’ve created humanitarian response fund for our employees in China, and the communities where they live and work. In terms of the business our current assessment is that the overall impact for fiscal 2020 will be minimal. However, with travel and logistics restrictions, we do expect changes in the timing of revenues during the year. We are actively managing the situation in collaboration with our customers and suppliers. While we’re making the necessary adjustments to our near-term plans, we are not taking our eye off the powerful trends that are driving the semiconductor industry forward and creating a structurally larger and less volatile market. At the low point of this recent downcycle in customer spending, which occurred in the second calendar quarter of 2019, the combined quarterly revenues of the top five semi-equipment companies were only 17% lower than at the cycle’s peak. In contrast, during the industry cycles that took place between 2000 and 2013, peak-to-trough revenues for the same five companies combined, dropped on average 44%. Another important metric we look at is equipment intensity or annual equipment spending as a percentage of annual semiconductor industry revenues. Between 1990 and 2014, this equipment intensity metric fluctuated between 17% and 6%. However, when we look at the most recent five-year period, equipment intensity has been in a tight band of 10.5% to 12% with a mean of 11.5%. We believe this is a good estimate going forward and reflects the ever more complex technology challenges we’re addressing and the increasing value we’re delivering to the ecosystem. In addition to the higher growth and lower cyclicality we see in the market as a whole, Applied is demonstrating even lower volatility than our peers. The reasons for this include the breadth of our product portfolio and the balance we have across different device segments. Dan will provide more color on this topic in his section. Moving to our near-term outlook. We see robust foundry/logic investment continuing. There is a strong commitment on the part of these customers to advance the leading-edge as they get ready for demand related to the rollout of 5G. At the same time, we’re also seeing healthy spending for specialty nodes to support growing demand from the IoT, communications, automotive, power and image sensor markets. Progression in the memory market is consistent with the view we’ve shared over the past several quarters. NAND appears to be in the early stages of recovery with prices rising and inventory levels down to 4 to 5 weeks that’s compared to 8 to 10 weeks this time last year. We also see a good setup for DRAM to recover. Encouraging signs include supplier and end-market inventories that are starting to get back to normal levels and prices that appear to have bottomed. These leading indicators bode well for a pickup in investment by memory customers later in the year. Overall, we like the way the market is shaping up for 2020 and beyond. We believe that our semiconductor business can deliver strong double-digit growth this year and feel very good about our longer term opportunities. In display, there are no major changes to the outlook we provided last quarter. We expect FY20 revenues to be similar to FY19 as the industry navigates the bottom of this spending cycle. We still believe that display is an attractive adjacent market for Applied that provides good long-term growth opportunities. The business remains solidly profitable, even as we make the necessary investments to ensure that we have the right portfolio of products ready for when the market picks up. Stepping back and looking at this year in its broader context it’s important to note that the overall electronics industry is in a period of expansion and diversification. Major new growth drivers, including IoT, big data and artificial intelligence are layering on top of traditional demand for smartphones and PCs. As I look ahead, I strongly believe that the future will not be like the past. The emerging workloads that will shape the next era of computing require domain-specific approaches, new system architectures, and new types of semiconductor devices. I believe that we need a new playbook for semiconductor design and manufacturing to deliver the power, performance and area cost improvements that will unlock the potential of AI and big data. At Applied, we’ve aligned our strategy and investments around this new playbook, so that we can enable new system architectures, new devices and 3D structures, the introduction of novel new materials, new advances in 2D geometric shrinks, and new ways to connect chips together through advanced packaging. Applied has a unique portfolio of materials engineering capabilities and products to enable the new playbook. Getting these new technologies to market faster has never been more valuable. And this is a major emphasis across the company. For example, we’re using advanced metrology sensors, data science and simulation to improve learning rates, speed of the transfer of new technologies from Applied’s labs to customers’ factories, and reduce the time it takes to optimize device performance, yield, output and cost. In addition, we have more engagement with the broader ecosystem than ever before, focused on accelerating innovation all the way from materials to systems. Our strategy is yielding results for our customers and Applied. Calendar 2019 was a new record for our foundry/logic revenues, and the current leading edge node transition further grows our opportunity. For an equivalent number of wafer starts, our available market increases by more than 10%. We’re also generating record revenue from specialty markets where customers build their technology upon trailing geometries. For these customers, the innovation roadmap is driven by materials innovation rather than geometric scaling. Strengthened leading edge combined with healthy investments and specialty nodes means that several of our leadership businesses, including metal deposition and Epi are delivering record revenue. At the same time, we continue building momentum in areas of the market where we still have plenty of room to grow. In the quarter, we secured major application wins for critical etch steps at both foundry/logic and memory customers. Our process diagnostics and control business delivered record quarterly revenue, driven by strong adoption of our new optical wafer inspection system and continued strength in our leading eBeam products. We’re also making great progress in packaging. As the industry introduces increasingly sophisticated packaging approaches, our strategy has been to focus on addressing the most critical process steps. As a result, we’ve been steadily gaining market share. Our packaging business delivered record revenues in 2019 while winning well over 50% of our available market. Another important growth factor for the Company is our service business. Equipment maintenance is an attractive recurring revenue stream for Applied and in calendar 2019, we added more than 2000 systems to our installed base. As I’ve talked about before, we are finding new ways to deliver value through data-enabled services that accelerate customers’ fab ramps and optimize their device performance, yield, output and cost in high-volume manufacturing. As we do this, we’re increasing number of installed base systems covered by long-term maintenance agreements. In the past 12 months alone, we have grown the number of systems covered by these agreements by nearly 15%. Before I hand the call over to Dan, I will quickly summarize. While we’re adapting our near-term plans in response to the coronavirus outbreak, our outlook for 2020 remains very positive. We believe we can drive strong double-digit growth in our semiconductor business this year and significantly outperform the market. We also like the setup for 2021 and beyond. Our markets are better than ever with powerful new growth drivers still only in their early innings. Applied’s opportunities have also never been better. We are uniquely positioned to enable the new playbook for semiconductor design and manufacturing while helping our customers accelerate innovation from materials to systems. And now, I’ll turn the call over to Dan.

Thanks, Gary. Applied Materials returned to year-over-year growth in Q1 with revenue up 11% and non-GAAP EPS up 21%, versus the same period last year. Revenue and gross margin exceeded the midpoint of our guidance and earnings were above the high-end of our range. Our revenue performance was driven by semiconductor systems, which was up 24% year-over-year. We generated nearly $1 billion in operating cash flow during the quarter and returned close to $400 million to shareholders. Our business outlook calls for continued strength in Q2 and our second half. Our relative performance is especially strong. We outgrew the overall semi equipment market in calendar 2019 and we significantly outperformed our closest peers. Applied has made strong investments across our portfolio in recent years. And today, we are larger and more resilient company that performs well in a variety of market conditions. One of Applied’s unique attributes is our broad portfolio, which is more diversified across end markets and more balanced among semiconductor device types, including memory, leading edge and specialty nodes in logic, and packaging. Our portfolio makes us more stable relative to our past and relative to our peers, the closest of which were 50% to 100% more volatile in the recent cycle. Today, our traditional strength in foundry/logic is apparent as we set new quarterly records for overall foundry/logic revenue as well as in metal deposition and process control system sales. Our investments in memory have given us a balanced share profile and this will enable us to continue to generate strong returns when spending recovers later this year. A key pillar of our stability is our aftermarket business, which includes Applied Global Services and our 300-millimeter upgrades and refurbs. Our aftermarket revenue is a product of three drivers, installed base growth, the higher service intensity of new nodes, and our data-enabled service agreements. Our service agreements provide a higher return on investment for our customers and subscription-like recurring revenue for Applied. In Q1, AGS generated record revenue of nearly $1 billion. Our overall aftermarket business also set a new record in Q1 and has grown every year since 2013. Against this backdrop, we’re pleased to be making further progress towards the acquisition of Kokusai Electric, which has an outstanding equipment business, a very large installed base and a highly talented management team. During the quarter, we received regulatory approvals from Japan and Korea. And we grew our cash position by over $350 million as we prepare for the transaction. As a reminder, upon close, we plan to prioritize our free cash flow towards repaying the term loan we’re using to help finance the transaction. We expect to limit buybacks until we’ve repaid the loan. Next, I’ll comment on the near-term environment and provide our Q2 guidance. Since the middle of January, our business continuity team has been working around the clock assessing the needs and capabilities of our employees, customers and suppliers. I’m impressed by the decisive action and compassion being demonstrated by our people across the globe. Our Q2 guidance ranges are wider than usual. And our revenue forecast reflects all of the risk factors we can see today. In Q2, we expect our overall revenue to be $4.34 billion, plus or minus $200 million, which would be up by about 23% year-over-year. We expect non-GAAP earnings to be $1.04 per share, plus or minus $0.06. The midpoint would be up nearly 50% year-over-year. Within the outlook, we expect semiconductor systems revenue to be around $3.05 billion, up by around 40% year-over-year. Our services revenue should be about $955 million and display revenue should be around $310 million. We expect non-GAAP gross margin of around 45.4%, which would be up nearly 2 points year-over-year, and non-GAAP OpEx should be around $820 million. Finally, I will give you some additional color on how our risk-adjusted Q2 guidance compares to the strong underlying demand for our products and services. Absent the near-term risks, our revenue guidance would have been about $300 million higher at the midpoint or up about 30% year-over-year, and AGS revenue would have exceeded $1 billion. While the situation remains fluid, we believe we can address the vast majority of our unmet Q2 demand in Q3 and Q4 and deliver strong growth for the year. In summary, we are seeing very strong demand for our products, solutions and services. We have a broad, diverse and balanced portfolio that is delivering strong relative performance and stability in a variety of market conditions. As Gary outlined, the semiconductor industry is enjoying a new wave of growth, and the equipment industry is growing along with our customers. For Applied’s part, we’re investing in new products and solutions that will accelerate the new playbook and position Applied Materials to deliver superior performance, stable growth and shareholder returns. Now, Mike, let’s begin the Q&A.

Thanks, Dan. Now, I know there are a lot of people on the call today. To help us reach as many of you as we can, please ask just one question and not more than one brief follow-up. Operator, let’s please begin. C.J. Muse: Yes. Good afternoon. And apologies for the noise in the background. I guess, first question, can you speak to gross margin leverage, as you look forward, particularly around an accelerating service business combined with -- on the tool side where you are mix-wise leadership versus growth, and some of the new products as they layer in? I would love to hear your thoughts around that.

Thanks, C.J. As we look at gross margins, I think, it’s important to look at the evolution of the business over time. We’re different business today. We’re driving a significant amount of growth in foundry/logic, but we’re also more diversified business than we’ve been in the past. If you were to go back a handful of years, you would have seen us spike highly in the foundry business from a share perspective, and the other three device types were mid-teens. And today, we’re a very-balanced portfolio, and I think that’s served us really well in 2019, both from a revenue volatility standpoint, significantly less than the peers in the industry, but also from a gross margin standpoint, the Company has performed pretty well in the most recent downturn. As we go forward, foundry/logic is going to continue to be a strong market for the industry. The trend line on foundry/logic is up into the right. Every quarter won’t be a record, but we will see an upward trending market, less volatility and higher highs and higher lows. Embedded within that strength in foundry/logic is growth in specialty nodes and technologies as edge devices proliferate. This is a great business for a strong driver of cash flow, strong driver of operating margins. You’re also seeing us in the broad set of markets drive businesses like etch over time. We are making significant share gains into the NAND market followed by DRAM and then foundry/logic, and the Company is performing really, really well, growing that market share. And we’re going to continue to do that going forward. And so, you see an evolution and profile change of the business. You also see our services business going structurally larger. It’s a great source of stable revenues, cash flows and operating margin for the business. And so, we’re a broader, bigger, more resilient business, and it’s going to change the profile of the business over time. As you look at gross margin for the rest of this year, our semi systems business on a half over half progression looks fairly linear, and then you see a growing services business into the back half of the year, and a growing display business into the back half of the year, and all three of those business look positioned to grow well into 2021. And so, where we’re guiding Q2, we expect to be around those levels for the rest of 2020 against this mix profile as we see into the back half of the year. Are we ever satisfied with gross margins as they exist today? No. Are we looking to continually optimize the performance of this Company and drive as much of value for our shareholders? Absolutely. And we’re going to continue to drive as hard as possible at delivering that value. But, I think that gives you a good sense of where gross margin is going to go for the rest of this year and some of the drivers of our business that deliver that result. C.J. Muse: Very helpful. I guess, as a quick follow-up. Can you speak to I guess the improved visibility that you have to memory, and kind of one of the guideposts that gives you the confidence on the second half from foundry over to memory to sustain the growth through the year and into next year? Thank you.

Yes. Thanks C.J. I think, the best way I’d describe the profile and shape of the business in 2020. We’re going to continue to see strength in foundry/logic throughout the year. And we’re seeing early signs of memory recovery today. I think, ultimately what happens in 2020 is really going to depend on the magnitude of the memory recovery later in the year. We posted a really strong fiscal Q1, our guide into fiscal Q2 we see is very strong, and we see that strength continuing into the back part of the year. Again, we’re going to be relatively balanced half-over-half in our systems business. And the ultimate shape of that systems business and strength in the back part of the calendar year is going to be a function of what we’ve been saying for a couple quarters now, which is, it’s going to depend on the magnitude of the memory recovery later in the year. But right now, we feel really good given what we see, fairly balanced half-over-half from a semi systems standpoint. And I think there’s an opportunity to do better in our fiscal Q4 and our fiscal Q1 as the memory recovery begins to accelerate.

Yes. C.J., this is Gary. I’ll add a little bit more color. Certainly, what we see for the year is foundry/logic, NAND, DRAM pretty balanced. And relative to the memory recovery and timing, we talked about the supply and demand, the inventory levels on the prepared remarks. And then, obviously, we also have demand signals coming from our customers. So, that’s really what is driving our comments relative to the way the year is going to shape out, and also the balance in all of those different segments.

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

Hi. Thanks for taking my questions, and good job on results and guidance. I have a question on the display business. Flattish outlook, not super exciting this year. Gary, does this make you look at some of the disruptive products in the R&D pipeline, like the evaporation or the inkjet tools differently? And if you can share the long-term view on display market?

So display, we still see as a very attractive adjacent market for the Company. If you look at the growth that we’ve seen over the last few years, it’s up significantly. I think, we’re around a $0.5 billion. The business was up over $2 billion, down a little bit this year, but still a very, very attractive market. And certainly, our near-term guidance is impacted also because of the coronavirus. Some of our customers are in areas that are impacted. And so, that reduced our guidance in terms of Q2. But as Dan said, we see the second half of the year being very positive. And we also, if you think about visual experiences and the way they differentiate, different mobile devices, or all of the trillion connected devices that will be happening, will be growing over the next several years, we see that that market’s going to continue to grow. So, 2021, we certainly see the business being up a fair amount over what we see in 2020. The capital intensity is rising as new technologies are adopted. So, we see a good opportunity in our core business. And certainly just like we do in semi, we’re very-focused on enabling customer roadmaps and enabling new structures, new materials for our customers. So, we have those investments that we’re also making in terms of display. We’re making good progress on the pipeline of those new opportunities. Not going to announce anything here on the call today, but we’re still very optimistic overall about the business and also those new opportunities.

Great. And then, a quick one for Dan. Dan, on OpEx, I know you don’t like to peg OpEx to a ratio. And how should we think about the spending for the rest of the year?

Yes. I think in the current environment, $820 million a quarter feels like about the right level. You’ll obviously see us continue to drive discipline into our spend. I think, you’ve seen that over time over the last handful of years, operating leverage has delivered some - pretty significant reductions of OpEx as a percent of sales. And right now, R&D as a percent of OpEx is at an all time high for the Company. So, I think the Company is being very-disciplined from a discretionary spend standpoint, and investing the right amount of money to capture the significant opportunities we see in front of us. But, we’ll continue to monitor those opportunities and guide one quarter at a time, but this level feels about right.

Yes. I guess, I would add one thing to that. I think, we’re not emotional over the investments we’re making. We make investments where we think we can drive shareholder value. So, that’s basically the way we look at that this. We do have a point of view. I think, as a leader, you need to have a point of view and courage in terms of how you drive your business. We believe that this business is going to be fundamentally bigger based on AI, big data, IoT layering on top of mobile and social media and PCs. So, we see that that business is going to be larger and the new playbook that I talked about in the prepared remarks for AI and big data is absolutely essential as classic Moore’s Law is slowing. So, we see tremendous opportunities. Applied is in the best position, if you look at the five aspects of that new playbook and we’re going to make those investments. And as I said earlier, 2021 shapes up really well for us, many different aspects come together and we definitely see great growth opportunities going forward. But, we also are not emotional about how we make those investments. So, we’re not married to anything.

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

Yes. Good afternoon, guys. Congratulations on solid results. Gary, you’ve given us a lot of qualitative guidance on semi cap equipment spending for this year. I’m wondering if you can give us a sense of what you think the overall WFE market grows in calendar year ‘20? But perhaps more importantly, how important is China in your mind to that growth? Can you help kind of profile the Chinese spend between sort of memory, foundry/logic? I got to imagine a lot of edge logic stuff you were talking about in your prepared comments is situated in China. But, how do we think about that?

Yes. Thanks, John. This is Dan. I’ll jump in and take that. So, let’s break it up into pieces. Let’s first talk about WFE in 2020 and the growth rate over ‘19 and then I’ll come back and talk a little bit about China and what we see in that market embedded in that overall growth rate. So, we think, 2020 is going to be a really strong year for the industry. We feel good about that. The ultimate question around growth rate is a function of what you use as a starting reference point for 2019. So, I’m going to break this up piece-by-piece. Hopefully, I can shed some light and be hopeful to clear up, I think some of the confusion that existed in the market. So, what’s important is, as we establish a reference point for 2019, and then we talk about growth off of that. So we know the number for 2019 WFE. It’s not mid-40s. I think one advantage we have is we’ve got a very broad portfolio and we got insight into all the different device types. And that gives us some unique insights in terms of market sizing. So, let me share with you what we’re seeing, and hopefully we can help out. 2018 was $56 billion. That’s according to Gartner. It’s a good number. It’s validated by a third-party. So, 2018 was $56 billion. Off of that number, we see 2019 down 10% to 12%. And that’s the baseline we’re using for 2020 growth. We see 2020 as a market up 10% to 15% based on everything we see and likely at the high end of that range, given the conversations we’re having with customers. So, while it’s too early to know 2020 with precision. 2019 is very clear as a baseline. So, hopefully now the baseline for 2019 is clear, off of that baseline, we’re likely up 15%. We expect to significantly outgrow the market with our semi-systems business. And it’s not one device type. Coming to China, embedded in that outlook. As we think about 2019 and where that ended? We see that market as about $6.5 billion. And we see growth off of that market of about $2 billion to $3 billion. Embedded within that, if you take a look at that $2 billion to $3 billion, I would say a third of it is 200-millimeter trailing node foundry/logic, two thirds of it is 300-millimeter business. Of the two thirds that’s 300-millimeter business, it’s roughly evenly split between trailing nodes foundry/logic and memory. And there’s balance within the memory profile. And so, I think that gives you a sense of what we’re thinking for the China market. And if I were to take a step back and distill down what we’re seeing. We see consistent, steady, ecosystem building, investments in technology roadmaps with modest capacity additions. And even if we look at the $2 billion to $3 billion of incremental spend that we’re seeing in China, and domestic China, and we take a look at what it costs to build new memory factory, $7 billion, $8 billion, or a new foundry/logic factory of $15 billion to $18 billion even, embedded within that $2 billion to $3 billion of growth, its modest capacity additions. And part of that spend is 200 millimeter, part of it is 300 millimeter with diversification across device types. Hopefully that helps shed some light on both the overall WFE market, john, as well as what we’re seeing in China.

That’s great color. And then, quickly as my follow-up, I want to make sure I heard you correctly. I think you said in the prepared comments that for the full fiscal year 2220, you expect flat panel to be roughly flattish, year-over-year which would kind of imply a second half run rate of close to $1 billion if not slightly over. I’m just kind of curious as to why are you confident about that? Is it mainly because the $300 million Cushion you had in the April guidance with a coronavirus is mostly coming out of flat panel or headed by thinking about the math right on that?

Yes. So, let me start with the math. You are thinking about the math correctly. We’ve had a point of view for couple quarters that revenue in 2020 in the display business is going to be similar to what we saw in 2019. Everything we see in the market today, increases the confidence we have in terms of that outlook. So, no change to the full year guidance. As we look at the risk we’ve assessed as part of the coronavirus, we think we’re taking a -- first of all, we think the risk is temporary and we think there is no change to our full year outlook, fiscal year outlook as a result of that. And so, we think we’re being prudent in derisking our guide by about $300 million and we see recovery of those revenues in Q3, Q4, as we unpack $300 million across our reporting segments. We talked about services, would have been our first billion-dollar quarter, but we’ve derisked it based on the virus. In terms of rank order of the $300 million, first, most impacted is our semi systems business, followed by our display business, followed by our service business. So, if you put the pieces together without being point specific on any one of those, I think you get a sense of how much we’ve derisked our services business, display will be incrementally more than that, and semi systems will be incrementally more than that. The some of those three will equal $300 million. Our thesis around display being -- or I’m sorry, TVs being a recovery market -- or going through a digestion period in the market. You’ll see recovery of the handset market. That framing of the profile of spend in Display still holds. We see both markets looking good into 2021, and we think we return to nice growth profile in the back part of the year and into 2021.

Thank you. Our next question comes from the line Krish Sankar from Cowen & Company. Your line is now open.

Yes. Hi. Thanks for taking my question. And Dan, again, thanks for the terrific color on all the industry stuff. Two-part question. Number one is based on your guidance of roughly $3 billion for semis and around the same, maybe plus or minus $200 million for the rest of fiscal ‘20. It looks like when I look at your last cyclical peak in April 2018, you guys did about $3 billion and then the sales trailed off. I understand at the time it was SSG, now with semi systems, there is probably some shift in numbers. But overall, it looks like you can sustain a $3 billion sales number for the rest of the fiscal year. I’m kind of curious from your vantage point, how much of this growth versus the prior peak number was capital intensity going up versus AMAT’s specific share gains? And then, the second quick housekeeping question on your color on China. If I remember right, I think you said 200-millimeter is going to be a third of your number, which is about $3 billion for China WFE. I’m kind of surprised it’s that high, given the fact that last year if I remember right, China 200-millimeter is really $0.5 billion, why is it jumping up so much this year? Thank you.

Yes. Thanks, Krish. So, taking the second question first, we’ve been talking about specialty nodes, we’ve been talking about trailing node geometries, we’ve been talking about billions of edge devices and intelligence on the edge and sensor technologies that are supporting the buildout of the Internet of Things. And we see trailing node geometries is one place that China can, in the near term, play a strong role in helping to build out their ecosystem in a disciplined way. And so, it fits in with the framing that we’ve been talking about technology development, ecosystem development, and disciplined investments to support that ecosystem from a capacity standpoint. And so, it’s very consistent from a framing standpoint.

Yes. I think, on a -- maybe I can add something on this part of the question. If you look at this market, IoT, communication, auto, power devices, sensors, it has a very, very high growth rate. And innovation is driven by materials innovation. So, 2018 was the first year machines generated more data than people. In the next five years, the forecasts are that machines will generate 10 times more data than people. And when you go to CES, you see everything getting smarter. So, this market is a big market. I think, specifically to your question in China, your numbers are roughly correct. Our numbers are a little bit different, but roughly correct that there’s a lot of growth in China in these areas. And they can build those types of devices. And so, if you look at 1 trillion connected devices at the edge by 2030, the explosion of data and really the transformation of many industries, healthcare, education, you see retail, transportation, all of these areas growing very fast. And the companies that are growing quickly from a market cap standpoint are companies that are data centric companies. So again, I think that’s really what we’re seeing is this explosion of data. And this market is a very big market. Applied has a very strong position. We put together in the last year a team of great leaders across the Company for 300-millimeter and smaller wafer sizes. I personally am meeting many of the CEOs and R&D leaders in this ecosystem. And we have really, really strong momentum. One example is one particular large customer where we won two thirds of the available opportunities in a market that is very, very sticky over a long period of time. So, I think you’re correct in that. Maybe it’s surprising that the market is growing like that. But we think this is really the early innings of these particular markets, IoT, communication, auto power and sensors from a growth perspective. And Applied has a really great position inside that market.

And Chris, coming back to the first part of your question where you talked about growth and how much of it is share gain versus capital intensity. I think, it’s important to take a step back and set a context around how the Company has evolved over time. If we were to go back a handful of years, we were strong in foundry, over 20% and around mid-teens in all three other device types. Today, we’re balanced across all of the device types. The Company’s made steady progress on that front over the last handful of years since Gary’s took over the Company. Your specific question referenced to time period in 2018. We were high-teens, a little over 19% from an overall WFE share standpoint that year. Today, we’re -- I’m sorry, 2019, we were a little over -- probably a little over 20% in 2019. So, we feel really good about the progress we made and significantly outperforming the peers and the market in 2019. So, you definitely see some share accretion playing out in the current environment. The second thing I would say, our thesis around increasing capital intensity, you see it in the foundry/logic, you see it NAND, you see it in DRAM. That thesis of increasing capital intensity over time is firmly intact. We know our customers are investing a lot of money in WFE. And so, their profitability -- WFE as a percent of their profitability has come down since 2012. WFE as a percent of EBITDA in memory and foundry/logic is down 25% over the last half of dozen years. And so, they’re spending a lot but they’re making a lot of money. And so, the health of our customers is good as it’s ever been. And then, from a capital intensity standpoint, what we see is WFE as a percent of overall semiconductor industry revenue bottomed around 2013 at 9%. Of course we’re taking the one data point around the ‘08, ‘09 downturn of 6% off the table. 2013, it was 9%. And Gary referenced in his prepared comments, we’ve been in a tight band, centered around 11.5% for the last five years. So, it’s a clear indication, this industry is experiencing increased capital intensity. The macro demand drivers driving the overall semiconductor industry are firmly intact. Semiconductors are going to go structurally larger as the data economy kicks in. And by implication, our industry and Applied Materials are going structurally larger. So, we think the opportunities in front of us have never looked as good as they do today, and we are really excited about what we see.

Thank you. Our next question comes from the line of Harlan Sur from JP Morgan. Your line is now open.

Good afternoon. Great job on the quarterly execution. One way to combat the slowing of traditional Moore’s Law on the manufacturing front, but still drive Moore’s Law like performance improvement at the chip level is through the use of these advanced package, whether that’s chiplet strategy, multi-chip die stacking. You guys have a pretty strong position in these markets. How is this segment expected to do this year? And roughly how big is your advanced packaging segment relative to the size of your overall semi business?

Yes. Thanks for the question, Harlan. So, you’re right. We talked about this new playbook going beyond the classic 2D shrinking and Moore’s Law. And packaging is one of those five drivers for the new playbook, and it really, really, really is very important. The one example is, if you take GPU in a new package and this is a product that was released over the last couple of years, you get 50% lower power and 3x increase in speed, 3 times increase in speed just from the package. So, definitely, really important as part of the new playbook. From an Applied perspective, we had record revenues in packaging in 2019 and we have really strong momentum into 2020. We have the most comprehensive portfolio of solutions to support the packaging roadmaps for our customers, and as you talked about, heterogeneous integration approaches. In 2019, we won over 50% of the applications we competed for, and we have this broad portfolio with CVD, PVD, CMP, plating, and etch where we have highly differentiated new products. We have very deep engagement with leading customers. And there’s a lot of focus on innovating with new packaging architectures. Applied has very deep engagements with really across the whole ecosystem. Those engagements are really driven by two things. One, we have the broadest portfolio of current and new products that haven’t been announced yet that are enabling from a packaging perspective. We also have the most advanced packaging lab where we can run entire end to end process and codevelop new packaging technology with leading customers and partners. So again, overall very strong momentum with record business in ‘19. And I think this area -- we haven’t quantified it in terms of dollar amount, but it’s sizable. And I would say relative to growth opportunities and as one of the elements of the new playbook, it’s underappreciated and the opportunities are bigger than what people would think, relative to our growth potential here.

Thanks for the insights there. And then, you guys have talked about memory spending recovery, with NAND leading the way this year. But with DRAM pricing now steadily rising, especially in mobile and servers, and looking to be sustainable, and you’ve also got the new gaming console platforms launched in the second half that are driving pretty strong demand growth for graphics DRAM. Are you guys starting to get some visibility on a return to spending by some of your DRAM customers in the second half of this year?

Yes. Thanks, Harlan. I’ll take that. I think, what we see, we talked about the magnitude of the growth we see in WFE year-over-year into 2020. Our view on that is as it’s broad-based. I think that you’ll see a good profile from foundry logic. I think, you see a good profile from memory and I think you will see balance across device types within memory. The growth profile into 2020 is going to be across those different device types. And yes, we will start seeing DRAM this year.

Great. Thank you.

Thanks, Harlan. Operator, we still have a number of people in the queue. I’d like to have us please move to one question per person. Thank you very much.

Thank you. Our next question comes from the line of Pierre Ferragu from Newstreet Research. Your line is now open.

Hi. Thanks, guys for taking my question. On foundry/logic, you had like a record quarter, $1.9 billion. I was surprised -- I was curious to see how much of that comes from deep EUV nodes where a lot of capacity is being added today, [Technical Difficulty] and how much of the revenues are already coming from the new EUV nodes?

Hi, Pierre. This is Mike. Unfortunately, I couldn’t hear. I think you’re maybe on the cell phone. So, we can tell you were talking about foundry and the mix of getting to a number like 1.9. But, we unfortunately couldn’t hear the rest of the details of your question. So, we’re not sure how to respond. Could you try one more time, please?

Yes. Is it better now?

That is a little better. Let’s try again.

Okay. Sorry for that. So, I was wondering how much of the revenues from deep EUV nodes where capacity is being added at the moment 7-nanometer foundry and [indiscernible] and 10-millimeter IGM and how much is coming from the EUV nodes ramping today?

Yes. So, thanks Pierre. Let me take a stab at that and see if Gary wants to add anything. So, what I would say is, we won’t share internal forecast of how foundry/logic breaks out across nodes. But, I think, let me provide some color in context around the $1.9 billion. I think, we would say that we’re seeing strong adoption at 7-nanometers as they build out the node, strong adoption node-over-node as 5 nanometers gets deployed from a capacity standpoint and the logic equivalence of that. And while we talk about a more balanced market in foundry/logic, I think what you would see in the near-term environment that it’s going to be significantly more weighted in the near term to these leading edge technologies. And so, we really like the way the business is performing node-over-node. In fact as we look out into 3 nanometers, we really like the position and we think we can significantly enhance our relative positioning node-over-node. So, we really like the way the business is performing on the leading edge. And what you see in the near-term environment, given the strong ramp around 5 and 7 nanometers is less balance in the market in the near-term, but the long-term trend of diversification within foundry/logic is still intact.

Yes. Pierre, the only thing I would add relative to the leading foundry/logic is that all of these customers are driving performance, power, area cost PPAC improvements. And that’s really all about new materials, new structures to drive power and performance. And so, for Applied, as Dan said, really from a leading perspective -- leading node perspective, it’s really -- it is those EUV nodes like 5-nanometer where you see that adoption. But still, we’re achieving record revenue. We have so many opportunities when we’re driving these new structures, new materials, new architectures, all of those different areas. So, we see record revenue there. We’re also seeing growth, not only in transistor interconnect and patterning with some of our leading products, but we also have growth in areas where we have had lower share In etch, we have many new critical etch steps that we’ve won, new soft line multi-patterning wins and EUV patterning steps where we really didn’t participate in the past. So, we look at etch our business in foundry/logic, we are extremely optimistic about the growth that we’re seeing as new nodes are adopted even as EUV is also being adopted as one of the five drivers of power performance area and cost. The other thing I talked about is in process control, we have continued strength in e-beam. We also have strong adoption of a new inspection tool, and we had record revenues in that market this last quarter. So again, it’s really about driving that new playbook along those five vectors, power and performance are leading products. We’re seeing new steps being adopted. And in some areas, we have room to grow, the opportunities for us to have never been better and our position has never been better than today.

Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley. Your line is now open.

Great, thank you. I wonder if you could address the $300 million of kind of deferred revenue that pushes to next quarter. Can you talk about why that’s happening? Is that just sort of issues with your customers getting up and running, is it logistics issues getting tools for them, or is it supply constraints that you have getting kind of sub assemblies to build tools? Just can you kind of tell us what’s driving the deferral?

Yes. Thanks, Joe. I think, the best way to describe it is, the actions China’s taking to contain the spread of the virus has led to travel restrictions and logistics of moving things around the country. We see those impacts as being temporary, and it reprofiles revenue from Q2 to the back part of our fiscal year. And so, in the early stages of the China workforce coming back after the Lunar New Year and after the imposed restrictions by the government, we’re seeing some early signs that are encouraging of some return to normalcy. So, fluid environment. It’s too early to draw a conclusion from it, but we like some of the early indications that we see. We’re going to continue to monitor the situation closely and update as necessary. And again, as we break out that 300, you rank order it, semi systems, display services. It’s about getting our people into the factories and being able to service the equipment. That certainly puts some restrictions on it. We know Wuhan is an important geography in our display business, getting our systems into the factories in that region are impacted in the near term. And then, semi systems, it’s more of the same. And so, we think that given everything we know, it’s a prudent approach to the environment we see. We’re going to continue to monitor it. There’s an opportunity to do better in Q2. We think the customer demand is there, and we do think that we recover in Q3, Q4. And our full year, fiscal year outlook remains intact.

Thank you.

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

Thanks for taking my question and congratulations on the strong growth and for all the color you gave. A lot of questions are asked on the product side. I wanted to ask about services. Were you surprised to see the slowdown in services in the last few quarters? What drove that? And then, more importantly, let’s say, you’re targeting 15%, 20% growth for next year, how much does AGS need to grow for that or how much can AGS grow in that kind of a product growth environment? Thank you.

Yes. Thanks, Vivek. So, as we look at services, we talked about the framework of growth in that business in the prepared comments. It’s size of the installed base, it’s complexity of the leading-node technologies, and it’s the execution against the long-term service agreement opportunity we have. Those underlying growth drivers are absolutely intact. This is a business that’s grown strong double-digits over the last handful of years. Q1 was a record quarter for us and significantly above seasonal. Q2 would have been our first $1 billion quarter. And so, the team is doing a great job executing. We also know the slowdown in the near-term is a function of the memory correction that we’re seeing profile throughout 2019 as industry utilizations come down, our transactional component of the business has reflected what’s happening to industry-wide utilizations. The team is still executing against the long-term service agreement opportunity and grew that business nicely in the mind-teens in 2019. What we like about the setup through the back half of the year and as we look into 2021 with the services business in particularly, as the memory recovery begins to take hold and as we look at that building momentum throughout 2021, foundry logic demand continues to be strong. Those are going to provide a nice tailwind for that business to grow into the back half of the year and into 2021. So, underlying demand drivers intact, team is executing well, and we like the profile going forward.

Yes. Just one more data point. I talked about in the prepared remarks. We added 15% increase in the tools under service agreements. And those -- that subscription type revenue is very sticky and also gives us a higher entitlement for tool. So, that’s been a big focus. It’s been a tremendous change in last few years, the significant growth. And it’s really based on the value that we’re providing our customers.

Okay. Thank you.

Thanks, Vivek. And operator, can we have just two more quick questions, please?

Thank you. Our next question comes from the line of Timothy Arcuri from UBS. Your line is now open.

Thanks a lot. I guess, I wanted to go through some numbers with you guys. So, you, I think you said a 19.2% of WFE last year. So, if I assume that the second half is flat versus the first flat, that would put SSG sort of in the $11.5 billion to $12 billion range. So, I don’t think you would argue with either of those numbers since that’ what you guided. So, if I use that and then I assume that you don’t gain or lose any share this year, that would imply like a $61 billion WFE number, you’re sort of saying we’ll, it’s probably going to be more like 57. So, if I just average those two and take 59 and if I try to figure how much revenue is required to support that much WFE, and I listen to what Gary said, which I totally agree with about WFE intensity that it usually peaks out at about 12%. So, if you take 12%, that would imply that you need over $500 million worth of semiconductor revenue this year, which would be up like 25% year-over-year. So, I definitely get that line YMTC is some of the incremental WFE, and they don’t have much revenue. But how can you build a path to have enough revenue to support this? I guess, that’s the question. It’s just hard to see WFE growing off of this. It’s going to take a long time for revenue to kind of grow into these WFE levels. Thanks.

Yes. Thanks, Tim. I appreciate the question. So, a couple of things. We have insight in what we think our Sunday systems business can do against the backdrop of the environment we see. And we’re very confident in our ability to significantly outgrow the market. And then, from a modeling standpoint, here’s I guess how I would get at some of the assumptions. We think 2020 is going to be a really good year. We expect to outperform the market. One of the key variables in the model that you’re putting together is what you assume for market share. And small changes in market share can make big differences in the model. So, we see continued strength from foundry and logic in our business throughout the year. We’ve got signs of memory recovery. And as we’ve been saying for a couple quarters, ultimately, it depends on the magnitude and shape of the memory recovery later in the year. And if we see more momentum in that than we’re currently planning for, then I do think that we have an opportunity to outperform in Q4 and into our fiscal Q1. And so net-net, we don’t see this as being, an isolated pocket of performance. We’re relatively balanced half over half. And we feel really good about our positions and how we’re performing this year.

Thank you. Our next question comes from the line of Patrick Ho from Stifel. Your line is now open.

Thank you very much for squeezing me in. Gary, maybe just a follow-up on the share position for Applied, both in terms of the customer spending mix, which is influential for you, as well as some of the competitive and design wins you talked about, process control being a record revenue year. How do you look at the next couple of years as I guess new products continue to be introduced, and additional competitive wins you believe can drive the Company on this outperformance?

Yes. Thanks, Patrick. So, I would say, I’ve never been more optimistic relative to the market. Again, you have new demand drivers that are layered on top of mobile, social media and PC. So, the market is going to be bigger than we’ve seen in the past. And you can also see indications over the last few years the market is structurally larger and less volatile. We have very good share spread across all of the different segments, leading foundry/logic, we have momentum as customers are driving improvements in power, performance, area and cost. In specialty nodes, we have very, very strong positions, whether it’s in image sensors or any of the other markets, like IoT, communication, auto and power, devices. So, we have strength there. We’ve grown a significant amount in DRAM and in NAND relative to market share. Dan talked about this earlier. We’ve grown several points over the last few years. So, we have very strong balance. And what I would say is, again, the path forward for the industry is really this new playbook around new architectures, new structures, new materials, new packages, also where we had record last year and we have strength and new ways to strength. So, we have the product pipeline and we have some very significant products in the pipeline that are targeted at multi-billion dollar types of opportunities. But, the other thing I would say that’s really important is the combination of these different technologies with integrated materials solutions, driving significant improvements in throughput and drive currents or power, the things really that are crucial for the edge and the cloud. We have unique capabilities to combine these technologies, some of them under vacuum. So, you’re not damaging interfaces electrically. So, that’s another area. We have engagements across every single customer with integrated material solutions. We have very good momentum there besides the current products we have and the products that we have in the pipeline. So, again from my perspective, I’ve never been more optimistic. I spend a huge amount of my personal time with the R&D leaders for the customers through this entire ecosystem. They’re struggling to drive the performance, power improvements that are needed. And I think Applied is in the best position that we’ve ever been relative to our ability to drive our opportunities and growth going forward.

Thank you.

Yes. Thanks, Patrick. Thanks for your question. Dan, would you like to help us close the call?

Sure, Mike. First, our sympathy is to everybody who has been affected by the coronavirus situation. I want to personally thank all of our employees who are helping their families and their communities while also taking really good care of our customers. Applied’s outlook for 2020 remains really positive. We expect to deliver strong double-digit growth in our semi systems business this year, significantly outperforming our end markets. Looking out into the future, I really like the setup. I really like what I see. Continued strong pull of foundry/logic, improvement in memory, both of those elements are going to drive and fuel growth in our services business over time. I like what I see in display, increasing into the second half of 2020 and into 2021, and we expect to close the Kokusai transaction in the middle of this year. So, I really like the setup in 2020 and 2021. Gary and I hope to see many of you tomorrow at Goldman. And next week, I’ll be on the East Coast and look forward to seeing many of you as well. Let’s close the call, Mike.

Okay, thanks. And we’d like to thank everybody for joining us today. A replay of our call is going to be available on our website by 5 o’clock Pacific Time. And we would like to thank you for your continued interest in Applied Materials.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.