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Applied Materials CEO Dickerson says don’t go back to normal, go far beyond normal

Shares of chip equipment giant Applied Materials are up about 14% at a recent $61.01 since the company announced on May 14th fiscal Q4 revenue that slightly missed analysts’ expectations, while delivering profit in line.

The company offered no outlook for the current quarter, but predicted both its tools for making chips and its services business, now running at a billion dollars a quarter, will see “strong” double-digit growth this year.

Chief executive officer Gary Dickerson sat down with Capital Market Labs following the report, as he has often done in past, to discuss the results and outlook. He was upbeat about how the new world of work-at-home is prompting change that will accelerate the digital products the company helps make.

“We’ve navigated through this COVID 19 situation incredibly well,” he said, “And I’ve never been more optimistic about the company.”

The main thrust of Dickerson’s remarks is that things are going to continue to move in a new direction of work-from-home, home-schooling, and other trends in the society that have been prompted by COVID-19 and measures such as quarantine and lockdown. That in turn is going to fuel what Dickerson has been promoting for years as the rise of connected “smart” devices, especially the Internet of Things.

“I think what we see now during this time period is all of these big technology inflections accelerating,” said Dickerson.

That should continue to fuel Applied’s work with chip makers such as Intel but also with the companies that are the end consumers, he said. “We’re connected across the entire ecosystem enabling that infrastructure,” said Dickerson.

“Applied really has the broadest and most enabling technology portfolio in creating, shaping, modifying, analyzing and connecting devices and structures,” he said.

He referred repeatedly to what he has for some years now designated as Applied’s “Future Playbook.”

Among the many parts of that playbook, chip-packaging technology is something that doesn’t get nearly the attention it deserves, Dickerson remarked. Packaging is an area where the company is directing increasing resources and placing increasing focus.

For Dickerson, the horizon of a trillion connected devices remains what he considers “the opportunity of a lifetime” for Applied and its customers.

“The opportunity now is even better for us to accelerate what we’ve been doing.”

As for working from home or office, Dickerson goes into the Applied HQ three or four times a week, but he doesn’t mind not getting a plane as much as he usually does.

“Less jet lag,” is one factor. On a deeper level, “with COVID-19, and the inability to fly from one location to the next, the openness to look at new ways of working and how you connect is better than ever,” he observed.

The net result of the lockdown is a “wonderful opportunity,” Dickerson insisted, to re-consider and to change old ways of doing things.

“In some ways, I think the communications are even better” between staff inside of Applied, he noted. “You know: more focused; we can think deeper, we have time to dig into different things.”

Summing up his philosophy, Dickerson declared, “My focus is not to get back to normal, my focus is let’s go beyond, far beyond normal of what we were doing before.”

To recap the quarter, Applied reported fiscal Q2 revenue for the three months ending in April of $3.96 billion, up 11.8%, year over year, and EPS of 89 cents per share. That compares to consensus for $3.98 billion and 89 cents.

Applied did not offer a forecast. On the conference call with analysts, CFO Dan Durn said the company’s main product line, tools for chips, should see quarter-to-quarter growth in each of the next two quarters, to end the year with double-digit revenue growth. Sales of display glass tools will be about flat with last fiscal year, he said.

In his conversation with CML, Dickerson also addressed the matter of buybacks. Buybacks have slowed to a couple hundred million dollars the past two quarters from a pace that had been $500 million to $600 million for several quarters.

That’s not the result of holding off on buybacks generally the way many companies are doing amidst the coronavirus pandemic. Instead, Applied is paying off the cost of its acquisition of Japan’s Kokusai Electric Corp., announced last summer. Applied is buying Kokusai from Kohlberg Kravis Roberts & Co LP for roughly $2.2 billion in cash, to enhance its wafer processing abilities.

Head of IR Michael Sullivan, who joined Dickerson in his chat with CML, said the company expects to return to its normal pace of buybacks after paying off the Kokusai acquisition’s term loan.

Speaking with the CEO of Applied Materials

Capital Market Labs: Gary, first of all, as we usually do, let me throw it out to you: What things do you think are most important for investors to take away from the results and outlook?

 

Gary Dickerson: You know I think our results are really good. We have record backlog for our semiconductor and services businesses right now.

The company is performing incredibly well in this kind of very difficult environment. And really what we focused on were really a couple of guiding principles in this time period.

One is maintaining the trust of employees, customers, suppliers and partners.

And the second one really is coming out of this stronger. Ever since you and I have talked, I’m a big believer that technology will transform every industry.

And I think what we see now during this time period is all of these big technology inflections accelerating. Work from home, of course, we’re all experiencing that.

Learn from home: I have 10-year-old-twins and every morning they were getting up and doing their remote learning.

E-commerce — All of these things are accelerating and you can see it in the performance of companies. Again, as I said, we have record backlog for semiconductor systems and services.

And so, I think these technology trends are going to accelerate. And really, I talked before about a trillion connected devices by the end of the decade. I think that could even accelerate as everything is getting smarter.

You see every industry transforming. At the foundation of that data economy infrastructure are semiconductor systems.

And as I’ve talked about before, Moore’s Law is slowing down or has stopped. The classic Moore’s Law of 2-D shrinks, scaling what exists today, will not enable this future, if you look at the explosion of data going forward — you know, power, performance, area, cost, and time to market.

So, we think about PPACT [Applied’s standard designation of the foregoing factors in chips, Power Performance Area Cost and Time-To-Market], really, it is the fundamental driver for the infrastructure enabling the trillion connected devices with low power and high performance, high speed, high bandwidth. That’s really crucial.

So, we’re connected across the entire ecosystem enabling that infrastructure.

Applied really has the broadest and most enabling technology portfolio in creating, shaping, modifying, analyzing and connecting devices and structures.

So that that’s the future playbook, enabling new architectures, new structures, new materials new ways to connect things together.

So, I would say for me, you know, again, we’ve navigated through this COVID-19 situation incredibly well. And I’ve never been more optimistic about the company.

 

CML: That’s a good segue to my first formal question for you, which is, with the economy, and with I.T., specifically, turning more to digitization, digital transformation, maybe more so, maybe accelerating, is there anything particularly about digital transformation, digitization to add to what you’ve just said?

 

GD: No, I think you’re, you’re right. I think really that’s the future, all of these industries…

You know, again, this whole — the work from home, it’s an interesting thing.

I’ve been really focused on how we drive R&D acceleration with technology inside Applied. My call was for 10x acceleration [in R&D], not 10%.

I came up with this term, innovate anywhere. Actually, I was talking to the Prime Minister of another country with another big cloud service provider a few weeks ago, and this concept, I think is going to accelerate.

I think the way we live, the way we work, the e-commerce, learning, healthcare — all these things are going to transform.

That is really generating data from the trillion devices, storing the data, processing the data, connecting the data. All of that is really part of this infrastructure I talked about.

 

CML: And so in line with that theme, Gary, of accelerating R&D, for you guys internally, does this change what you put on the front burner for planning, for R&D, versus what you might have put on the front burner before, what you moved to the back burner? Is there any switch or change in which things take precedence now?

 

GD: I think you know, as you and I’ve been talking, everything that we’re doing is perfectly aligned with what I’ve been communicating.

Again, we had talked about this, I think it was two years ago at Semicon West [one of the biggest annual trade shows and conferences for the semiconductor industry], we talked about this huge inflection with A.I., big data.

We talked about how much power is consumed with existing architectures.

We talked about the end of classic Moore’s Law, and the need to innovate in new ways.

You look at all of the companies now that are, they have their own device designers, they’re designing all of these application-specific chips and systems for application-specific workloads.

So, really, we started this transformation within Applied a few years ago, and really, it’s about connecting from materials to systems. From materials to chips and structures, new device architectures.

How you design all of these new systems, and all the way to the end customers, the cloud service providers on the edge, in the cloud.

We started this journey a few years ago, really bringing in new capabilities inside the company, restructuring the company around this strategy.

So, for me, you know, it’s not really, I wouldn’t say there’s anything other than conviction, even more conviction around the strategy that we’ve been driving, that, you know, this is going to be the opportunity of a lifetime.

Applied is in the best position we’ve ever been in enabling all of this, and certainly we continue on that journey that we started in terms of how we connect through the ecosystem, bringing in new capabilities to accelerate this infrastructure, the materials to systems, and systems to materials.

And there’s so much opportunity for co-optimization through the ecosystem.

And as we talk to these big companies that are building out the edge, the near edge, the cloud, in terms of all of these transformations, the time to market value is huge.

Whoever gets there first in building out that infrastructure and being able to make determinations and predictions from the data, it’s incredibly valuable.

So, this acceleration that I talked about, you know, it’s incredibly, incredibly important.

One thing I would say maybe that is really good for us is with COVID-19, and the inability to fly from one location to the next, the openness to look at new ways of working and how you connect is better than ever.

So, you know we were already driving this, but I think the opportunity now is even better for us to accelerate what we’ve been doing.

 

CML: I want to drill down on one point. We’ve talked in past about leading-edge versus trailing-edge semiconductor process technology. On the call, Dan [Durn] was asked about China.

He said there’s incremental spend within the $2 to $3 billion upside in China from trailing-edge, 300-millimeter technology. But he also mentioned, later in the call, that trailing-edge technology for automobiles and for consumer devices is taking a hit in the current environment, while leading edge is strong.

So, with those puts and takes, what’s the balance of investment for leading-edge versus trailing-edge?

 

GD: Yeah, I would say from a top-level standpoint, you know, what we’ve said for Applied this year is that we would see strong double-digit growth [for silicon systems and services].

So, overall, and I think Dan gave some statistics on the first half the year, he said, Q3 and Q4 would be up, and we also said overall for Applied, we would see strong double-digit growth across our semiconductor business.

Relative to the different markets, if you break out the different markets on foundry/logic, we still see healthy demand in overall foundry/logic.

And as Dan said, obviously there are some impacts relative to certain segments.

I would say that still in the areas of IoT, where you’re looking at the sensor technology and communications and a number of those different areas, those are still very strong.

Auto, I think it’s clear that there are some these auto, industrial segments with the consumer impact right now where we see some near-term weakness.

I don’t think there’s anything really relative to our longer-term perspective.

We still think all of those opportunities are going to be there, and they’re going to be significant opportunities.

But overall, foundry logic we still see a pretty healthy demand through the year and for Applied, we see strong double-digit growth. Long term, there’s nothing that changes our perspective. Michael, do you want to add anything?

 

Michael Sullivan: What I’d say is that it’s still quite solid, this trailing-edge business. It’s just it could have been higher probably.

 

GD: It’s definitely less than what we had forecasted, and I wouldn’t say that about a lot of different parts of our business.

But that one is definitely less than what we had originally forecast. It’s still strong.

But, as Mike said it’s definitely less than what we had forecasted.

 

CML: Okay. Dan was asked about wafer fab equipment [WFE, the broadest measure commonly in use to gauge semiconductor manufacturing investment], and he said that if last year, the industry was spending roughly $51 billion to $52 billion, he said you’re not going to talk at this point about what you think 2020’s aggregate dollar total will be. Any update to that, Gary?

 

GD: No, I just would say, you know, that we talked about our business being strong double-digit growth.

I don’t think we’ve given any color beyond that. I think our performance, year on year, is going to be extremely good.

Mike, have we given any color beyond that?

 

MS: No, you’re right. We think we’re outperforming the market again this year, clearly. And then the other thing is that we think that the market is still going to be about 60% foundry/logic this year, and will be 40% memory.

 

CML: In other words, the same mix as it was last year?

 

MS: Yes.

 

CML: Gary, are there any new markets that show up amidst what you talked about a few moments ago with the acceleration in digital transformation, with the playbook that you’ve been on for a while now?

Are there new markets that open up that were just too small before that are now on the radar where they weren’t before?

 

GD: I would say that our strategy here is very consistent.

On the IoT area that you talked about earlier, last year we made a change in terms of the overall company structure to bring together all the different parts of the company, all of these different technologies, build stronger relationships with those companies because the technology drivers there are different than, you know, the 2-nanometer, 3-nanometer, or, you know, the vertical scaling in memory devices.

So, I think that’s been a really great change for us. I personally engage with a number of those CEOs of those different companies.

That’s probably the biggest change, I would say, when you think about focus on markets you know. So that one was a year ago.

But I think that just continues to get stronger relative to our overall market focus.

And then yeah, I think, really just driving that playbook that I talked about earlier relative to creating, shaping, modifying, analyzing, and connecting devices and structures.

Big focus on all of that, and connecting across the ecosystem all the way to the end customers with new relationships. That’s been an increasing focus for us.

So I think the great thing about that also is it gives us good visibility into what’s coming in the future, and what, when you think about the edge or the cloud, what are the big drivers, what are the devices that are going to be built all the way from the edge to the cloud and everything in between.

And what technologies we should invest and accelerate in, in enabling that infrastructure.

That’s also something that we’ve been driving but that has gotten tremendously stronger, the connectivity and the insights from a materials to systems perspective.

 

MS: And, Gary, I was going to also ask if you want to say anything about packaging….

 

GD: I think, for sure. You know that connecting the structures and devices is really tremendously enabling.

We’ve talked about that before. I don’t necessarily want to communicate everything we’re doing, but that one, I would say, is under-appreciated, how important it is, and that one, for sure, we have been increasing focus, and we will continue to engage with customers on that part of the playbook.

 

MS: I just want to point out, this year’s Semicon West, in July, it’s going to be during our earnings season this year.

It’s also the 50th anniversary [of the conference]. So, what they want to do this year is focus on the next 50 years, and say what are the big problems that need to be solved with technology, and let’s focus on that, and focus on each part.

Gary has a vision of what we can do. And Gary has also invited Al Gore to come and talk to the people at Semicon West. He has accepted.

So, Al Gore will be the opening keynote, and then Gary will follow up with his own keynote to talk about what Gary thinks we can do about things in the future.

We’re also going to do a technology panel last year Gary talked about not sustainable A.I. And this novel move all of this data explosion.

If we don’t do something about technology the power is going to be too high.

So, we’re doing a panel on that topic, and the people that have accepted are Google, Microsoft, VMware, ON and Applied Materials.

So, it’s going to be a real all-star panel.

 

CML: This is all virtual I take it?

 

MS: Correct.

 

CML: Cool. To turn back just for a moment to Q&A, Gary, buybacks in the last couple of quarters have been running about a couple hundred million it’s a slower rate than the previous four quarters as far as I can tell.

How should we think about rate of buybacks the rest of this year moving forward? Is there an event for that to revert to what it was at on a rate basis. Or how do we think about that?

 

GD: So maybe I’ll let Mike give the official answer.

 

MS: So, basically, we were doing like $500 million a quarter. And we stepped it down to around $200 million for a couple of quarters.

We probably will be at that run rate until we’re able to consummate the Kokusai Electric acquisition, at which time we’ll focus our free cash flow on retiring the term loan that we’ll use to finish the acquisition.

And then once we have that paid off, which we believe that we could do certainly within a quarter, then we would get back to more robust buybacks once more.

 

CML: And so, it has nothing to do at all with the environment for a lot of Wall Street stepped down buybacks amidst COVID-19? This is not related to that?

 

MS: That’s right. In fact, what we did, with the early days of COVID-19, where it was very hard to predict what would happen in the financial markets, we actually drew down our revolver a million and a half dollars.

And on the last earnings call we said, you know what, we have now, subsequent to the end of the quarter, returned those proceeds, and we’re buying back stock.

So, whereas others have not been buying back, we have decided we’re going to be in the market.

 

CML: Gary, anything to add to that?

 

GD: I think really our strategy, I think it’s consistent, Mike, with what we’ve communicated before relative to the Kokusai acquisition and the cash return policy.

I think, long term, our strategy is, I think the history has been, we’ve returned a hundred percent of cash to shareholders. But we wanted to prioritize paying back Kokusai and then continue with the same strategy, Mike.

 

CML: Regarding geopolitical tensions, the recent actions of the U.S. Commerce Department, I’ll ask you one question briefly.

You noted on the call that you have very good people, as you put it, working on Commerce’s directive, which goes into effect the end of this month. And you said you expect to be in compliance with that. Is there anything you want to add at this time that is relevant, that’s important to note?

 

GD: No, I think what we said is that we expect to be in compliance, and we didn’t see a meaningful impact to our business.

You know, I don’t think there’s anything different from what we communicated before.

 

CML: Fair enough. Let me ask you an exit question in our dwindling time together, Gary. A sort-of executive-level, high-level, big thoughts kind of question.

The late Steve Jobs, when he was interviewed by Walter Isaacson — it’s in the biography — he told Walter Isaacson that when they built the Pixar headquarters in San Francisco, Steve made sure that it was an open space because it was important in his words to have “serendipity.”

Meaning, you know, you’re walking from your cubicle to the cafeteria and you bump into someone else from another section you didn’t expect to meet.

And it prompts a discussion that is fruitful that you wouldn’t have had otherwise, some sort of fate intervening in a positive way.

And in a Zoom world, or a FaceTime world, it seems you can have spontaneous interactions but it’s not the same as serendipitous because there is a conscious intention even if you just to suddenly decide, I think I’ll call Gary and ask what’s going on this afternoon. That’s spontaneous, it’s not serendipitous.

So is there any consequence to not having serendipity in an organization. And is there any way to reconstruct what Jobs was talking about?

GD: You know, it’s an interesting thing, how we’re working today. So, you know, I spend a lot of time on airplanes going from one place to the next and —

 

CML: Not these days —

 

GD: No, not these days. But, normally, I spend a lot of time on an airplane going one place the next.

You know, it’s an interesting thing for me, and I’ve been a big advocate of reinventing how we work.

So, this is my whole big focus around 10X R&D acceleration as I talked about earlier, not 10% acceleration.

I think you know, one of the wonderful things for me in this current situation, is, it really forces you to rethink what you do and how you do it.

So, you know I’ve been driving this one initiative in the company for the last 18 months. And you know we’ve really gone back and kind of looked at what we’re doing, really from that fundamental perspective.

There’s so much opportunity for us to reengineer what we do and re-engineer how we do it, and to use technology to really accelerate how we work.

So, I think for me, that inflection, we have an opportunity now, and especially, also, because customers really are open to things that — I’m very confident that we would get to the right end state.

But I think all of this is accelerating, and all of them are open to new ways of working.

And if you can connect an expert anywhere in the world, instantaneously, rather than, you know, I gotta schedule a time where I’m going to be on a flight, and then I’ve gotta go be there with someone, I can do that instantaneously, anywhere in the world.

Now you have to have the right IT protocols in place and all those kinds of things.

But you know at least for me, when I study that, all of that, just think about that, how much productivity you can drive.

And maybe it’s because I’m so connected with all of these different customers whether it’s CEOs or R&D leaders or those kinds of things. I’ve spent all that time, invested all of that time to build those relationships.

You can connect with those people lightning fast. And I think this idea of innovate anywhere I talked about earlier, I think it’s a wonderful thing.

I really believe, my focus is not let’s get back to normal; my focus is let’s go beyond, far beyond normal of what we were doing before.

So, I think that the serendipity part, I get that. But you know the other thing I would say is that at least for me, personally, I am just unbelievably productive in the way we connect, you know, with customers, the way we connect inside the company.

It’s time for really addressing and rethinking what we do and how do we connect.

And so, I don’t know for me, personally, I think I’m better, I’m more creative.

I think we’re driving initiatives, fundamental initiatives, that really will reshape everything in what we do.

But also, we have the time to focus on this right now rather than being distracted or spending time on airplanes or jet lag coming back or all of those kinds of things. I really believe that.

And, again, I think that if you don’t take a step back and re-engineer how you work, how you collaborate, how you innovate, you know, I think you may not capture that opportunity.

I think we’re going to come out of this stronger than we’ve ever been.

We’ll be more productive than we’ve ever been.

We’ll be better connected than we’ve ever been, rethinking what we do, where we do it, how we do it. I just think this is a wonderful opportunity.

 

CML: And less jet lag.

 

GD: Less jet lag. Again, if you think about it, if you get more sleep, you know, you’re going to be more creative.

I would say I’m pretty much always driving very hard, seven days a week. That’s just my DNA.

But I would say inside the company, we’re moving faster and better and more innovative than we’ve ever been.

When I’m connected with our teams, actually in some ways I think the communications are even better.

You know: more focused. We can think deeper, we have time to dig into different things.

Now, I go in to work three or four days a week, so, you know, I’ve been in the labs. I do a lot of video conferences with different people, whether it’s government or customers or different people in the ecosystem.

I just have to say, I think we’re doing great. Our number one focus, as I mentioned, was to maintain the trust of employees and customers as we work through this, and that the second thing was to come out of this stronger.

I’ve never been more optimistic than today. I’m just really, really happy with our team, inspired by what our people are doing, and I’ve never had so much fun.

 

CML: All right, that’s good perspective, Gary, appreciate it. Thank you. I’ll look forward to checking in next month to your conference. But in the meantime, keep up the good work.

 

Conclusion

Thanks for reading, friends.

The author has no postition in AMAT as of the publication of this writing.

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