Table of Contents Gross Margin Marketing and Selling Gross margins for the periods indicated were as follows: Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has a longer development cycle. Most of Applied’s existing products resulted from internal development activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market. Management believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied has maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies. Applied continued its RD&E investments across Semiconductor Systems and Display and Adjacent Markets on the development of new unit process systems and integrated materials solutions. Areas of investment include etch, inspection, patterning and other technologies to improve chip performance, power, area and cost. In Display and Adjacent Markets, RD&E investments were focused on expanding the company’s market opportunity with new display technologies. RD&E expenses increased slightly in fiscal 2019 compared to the prior year and increased in fiscal 2018 compared to fiscal 2017, primarily due to additional headcount and increased research and development spending in Semiconductor Systems and Display and Adjacent Market segments. These increases reflect Applied’s ongoing investments in product development initiatives, consistent with the Company’s growth strategy. Applied continued to prioritize existing RD&E investments in technical capabilities and critical research and development programs in current and new markets, with a focus on semiconductor technologies. RD&E expense during fiscal 2019, 2018 and 2017 included $99 million, $96 million and $83 million, respectively, of share-based compensation expense. Marketing and selling expenses for the periods indicated were as follows: Marketing and selling expenses remained flat in fiscal 2019 compared to fiscal 2018. Marketing and selling expenses increased in fiscal 2018 compared to fiscal 2017 primarily due to additional headcount. Marketing and selling expenses for fiscal years 2019, 2018 and 2017 included $31 million, $31 million and $28 million, respectively, of share- based compensation expense. Research, Development and Engineering Gross margin in fiscal 2019 decreased compared to fiscal 2018, primarily due to the decrease in net sales and unfavorable changes in customer and product mix. Gross margin in fiscal 2018 remained flat compared to fiscal 2017. Gross margin during fiscal 2019, 2018 and 2017 included $89 million, $87 million and $69 million, respectively, of share-based compensation expense. Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows: Change 2019 2018 2017 2019 over 2018 2018 over 2017 (In millions) Research, development and engineering $ 2,054  $ 2,022  $ 1,781  $ 32  $ 241  Change 2019 2018 2017 2019 over 2018 2018 over 2017 (In millions) Marketing and selling $ 521  $ 521  $ 457  $ —  $ 64  34 Change 2019 2018 2017 2019 over 2018 2018 over 2017 Gross margin 43.7  % 45.0  % 45.0  % (1.3) points — points 