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

Yes. I would say that the higher majority of our revenue is coming from people that are more experienced, but there are a number of those smaller companies not as big a percentage of the total revenue, but there are companies that have emerged, that have less experience. Obviously, the yields are much lower for those customers. We track wafer starts for every fab around the world every month. We pretty much know where the yields are at for those -- all of those different companies. And then when we look at the market, we basically try to start from the end-use demand, what do we look at for end-use demand and then back that into what the CAGR will be. And so we think ICAPS over time will grow pretty much in line with the overall market.

Okay. Have you guys have ever given a view of the overall market growth I mean...

Well, I think we think that trillion dollars by 2030. We think that's definitely a reasonable estimate. And I think if you look at the big drivers like AI and some of these inflections that consume an enormous amount of chip capacity, we think that's going to be a great growth driver for a number of years. And then you look at capital intensity.

So that was my question, what do you think as we go to $1 trillion, what do you think capital.

Yes. So capital intensity is interesting. If you look at 2000, capital intensity was about 70%, then you had a shift from 200 to 300-millimeter.

[indiscernible].

[indiscernible] per wafer, you had the emergence of foundries where you had a lot of used equipment. And you pretty much had no growth for that entire period of time. But -- and then the capital intensity with the used equipment, the wafer prices went down about 9%, now it's back to 17%. So I think that capital intensity is going to remain very healthy. I mentioned like the 3 to 2-nanometer, it's over 30% step growth. So it's very hard and this race for power consumption and performance is trumps everything. Because again, when you're growing so fast, with those data centers that are consuming a larger and larger and larger percentage of the world's power or edge devices that are consuming a lot of power that's a huge driver for complexity and for the industry.

It doesn't really feel like there's any real structural reason that one should. I know in any year, anything can happen. But over the cycle, any reason that capital intensity should go down at [indiscernible].

I think it's going to -- I think, again, it's really like magic, what we're able to accomplish. And so no, I think it's -- and we can see this out many technology nodes in the future. I think it's going to become -- it's more, more, and more complex, but I'm also very optimistic that we're going to be able to deliver those innovations.

None of these nodes are getting cheaper anymore.

No.

Okay. Going back to China for a second. So lots of the industry is running at a very high mix of China's revenues right now. You guys are actually, people -- you guys are on the lower end of the big 5. I think you were like low 40s, I think like mostly China as like 41% or something last quarter. I think [indiscernible] with 49. Now you have suggested that China mix is coming down. Is that primarily the DRAM piece that's driving that?

I think the DRAM is coming down. Again, what we had in '23 was 27%, '22 was 28%. I think it will come back down into the 30% zip code. And as you mentioned, you have display, you have AGS and then DRAM for sure, is coming down a significant amount. So that's going to bring it back down into the kind of that normalized range.

And that was just sort of related to the export control, right? I mean, you were not able to ship to the Chinese, because you realized you could ship more than you thought and they ordered and now they've got enough. Is there anything more complicated than that?

I think it's just based on those customers demand for that point in time. We're not giving an estimate of what does that look like going forward, but I think overall, when we put it all together, we think it's around 30% something like that, maybe high 20s or 30%.

What are the [indiscernible].

And 20% for equipment, something like that.

I'm sorry, say it again?

Well, the equipment we said was again, 27%, 28% in '23 and '22, so semi-equipment is 20%, then you have AGS and Display on top of that. So maybe [indiscernible] equipment and then the rest AGS into play, something like that.

So AGS is they over indexed to China like display certainly is. I mean.

Display is over-indexed for sure. But AGS is -- our penetration there is similar to other regions.

I want to get to AGS in [indiscernible].

Okay.

I wanted to ask -- so clearly, if Chinese customers are willing to -- the margins have been better with the Chinese customers.

Well, I would say that margins on -- if I look at ICAP, they're in the same zip code. Those are smaller volume customers. So whether they're China or a different region of the world, there in roughly they're same ZIP Code for those ICAP customers. .

DRAM customers? I mean -- I mean, I guess what I'm asking is as it comes down, how should we be thinking about even other margin drivers as well that have been.

Yes. So I think China recently being up in the 40 percentile range definitely has been an adder to market. So we think the normalized rate is around 47% right now. We were up at 48% before we had all the COVID supply chain headwinds and cost increases. We're still driving towards the 48% to 48.5% that we committed previously. It was delayed with all of the COVID cost headwinds. But I think there's tremendous opportunities for us to continue to drive margins higher. I always tell people don't -- we don't want to waste a crisis. So the COVID supply chain challenge, we've really strengthened our operations and supply chain. And then we have been implementing price increases for customers. And then the key thing overall is enabling those architecture inflections uniquely. So our ability to do that, we're creating a lot more value, we need to capture more value.

This is a question I asked Tim, but I've been as [indiscernible] just given all that value like why do the gross margins have to start with a forward like... I'm not asking for margin like guidance or anything target. Do they have to like [indiscernible].

No. Doesn't feel that way. I would say the only other thing for us, the -- the AGS margins are lower. Now AGS is growing -- we said it'll grow at double digit.

Yes. Let's talk about AGS.

Yes, double-digit compound annual growth rate, so that is somewhat dilutive, but the operating margins are in the same zip code as the rest of our portfolio within Applied and that business, we have a tremendous opportunity at $6 billion run rate right now and so you think about a double-digit compound annual growth rate, you could add $1 billion in growth [indiscernible] in our service business. And for customers with all of this complexity, we have 200,000 [indiscernible] in the field. They're constantly ramping all of these new technologies across all of those different device types. And so for them, ramping to high yield as fast as possible is really valuable for them and then high-volume manufacturing yield, output and cost with all that complexity, that's valuable to them. So that's driving this double-digit compound annual growth rate. Over the last 10 years, we've driven our percentage of subscription agreements as a percentage of our service revenue, it was about 40% agreements. Now it's 2/3 agreements, and we're also shifting customers to higher-value agreements. So that's part of that double-digit compound annual growth rate. And then there's a lot of service innovation that we're driving also that will fuel that growth.

Like what?

A lot of AI applications when you're thinking about ramping new factories, matching chambers, optimizing the yield output and cost, high-volume manufacturing, new sensor technologies that feed the data into those AI models. We have remote connectivity with thousands of tools in the field already. So -- and that percentage keeps increasing so that we can deliver service faster, better. And then with those technology innovations, we're able to help them ramp faster with bigger process windows for higher yields and then optimize [indiscernible] yield, which is really hard for those complex processes and output and cost.

And this business is [indiscernible].

Yes, we grew kind of mid-single digits this last year.

I guess the installed base still grows even in [ yield ].

Yes. And again, we are shifting. We're growing the percent of service agreements, and we're -- and there are higher content agreements. So we're shifting people to those higher content agreements.

Actually there are lot of users used to just do their own servicing. Is that just -- is this tool to get more complicated? Is that just really not viable anymore.

No, we just have unique access to that data. We also have unique sensor technologies that we're delivering for the customer. So all of that asymmetry in our understanding of those tools and technologies give us an ability to deliver that yield output and cost faster and better.

Now you had your 200-millimeter tool business in the AGS segment.

We do. Yes, the mid-teens [indiscernible].

So [indiscernible] gigabit. Okay.

No. The service business is around 85% and the above 80%, mid-teens is the 200-millimeter business.

Got it. Got it. Okay. Yes. I guess. We are going to talk about some of the other areas that prudentially maybe you weren't as strong as you've been doing and the process control is one where I think you've been talking a lot. You've done very well there when you're like things like detect inspection review and that sort of thing in eBeam. You've been moving much more lately into optical.

Yes.

Maybe you could talk a little bit more about some of the opportunities that you see there? For the mission.

Yes. So that is a really important growth driver for us. I think going forward, that will be a high compound annual growth rate. It has been a really strong growth business for us. We have about 50% share close to 50% share of eBeam. And eBeam is really important. The key thing here, and this is part of this connected portfolio, when you're enabling nano sheets or gate-all-around transistors or any of these big inflections, capacitor, scaling in DRAM or -- so eBeam is a very, very, very important technology to drive the learning rate. So there, you're trying -- again, you have 100 billion transistors on a GPU. They all have to work. So the ability to image uniquely. We have leading electron optics with coal field emission. We're about 10x faster in imaging, highest resolution. So that business is growing for us. It will grow about 4x, our revenue in coal field emissions so about 50% of our total eBeam this year is over $1 billion. So -- so that business will grow for us. And again, the demand as you go to these more and more complex structures will increase for eBeam overall. And then in optical inspection, we see opportunities to grow there, too, to expand the TAM, especially with new technologies that we're bringing to market. So that one can be a significant growth rate for us. But again, there's also the multibillion dollar synergies on time to market more of those new innovations. So that's incredibly synergistic for the future [indiscernible].

[indiscernible] leveraging some AI methodologies between optical and eBeam to drive like [ entire ] classification, modification. Can you -- I thought it was really interesting [indiscernible]. I understand it's probably dumb about it. But I mean we -- I thought you were using eBeam to identify specific defects and then using optical optically, you can scan the whole wafer, but you don't take everything else using that through a neural network to identify areas where there are likely to be detects without actually having to go and find them first. Is that kind of how it was working.

Yes. I think there is another aspect of AI inside Applied that gives tremendous benefit. So both in the detection, the review, measurement of key structures, we're using AI very, very heavily. And so that will accelerate the value from that business for sure.

Got it. Got it. Let's about Sculpta.

Okay.

This is something -- this is a modification tool that AMAT sells to reduce the need for multiple patterning on extreme ultra [indiscernible]. But I thought the way it works is slanted etch and everything and [indiscernible].

Yes. So it's a directional pattern shaping technology. So it's a new technology for customers. And when we first introduced it, we said you could use it to reduce EUV double patterning. And it's a couple of hundred million dollar business today. We said it would go to $0.5 billion over the next 2 years. But customers are finding more applications for Sculpta. So you have certainly the EUV double patterning. As you're directionally removing material, you can approve line edge roughness, you can eliminate bridging defect. One of the key technologies even for EUV or high NA EUV and [indiscernible] facing, and Sculpta is just very, very precise in being able to move that typical spacing to smaller and smaller feature sizes. So there are multiple applications that we're seeing customers adopting with this new tech directional pattern shaping technology.

Okay. You talked a bit more about your integrated solutions. You have a new platform that actually I think, I can't remember [indiscernible] that the name of it? .

Yes.

Number one, tell us about that. And then there was something else you talked about you could incorporate third-party chambers into this platform. And I still am unclear on how that would actually work -- what is this platform bringing here.

Yes. So in terms of power consumption and then your output per square foot throughput density, there's about a 30% improvement in that platform. And then there are other 2 aspects of it besides this sustainability improvement in power consumption and throughput density intelligence built into the platform. So getting back to all sensor technologies that help you optimize the yield output and cost that's built into that Vistara platform and then flexibility. So Vistara can improve all of those metrics. But you can also -- we talked about before -- I talked about before, that 7 technology in one platform. And our percentage of integrated growing from 20% to 30%. So I think the first thing for us is integrating our own technologies into this new platform with this increased flexibility. So the Vistara is designed in a very flexible way so that we can plug in.

It was linear, right? It wasn't [indiscernible].

Yes. So you can plug in all of these different parts of the Applied portfolio. So that's our primary focus with that kind of flexibility.

Okay. I'm assuming all the integrated stuff like do you sell an integrated per chamber? Or do you sell like the solution, platform. Presumably, you can get higher value.

We do .

And that goes for Vistara as well. Have you ever just started to ship Vistara?

We have, yes.

Okay. I don't know if I can ask how many you [indiscernible].

I don't think, we've talked. It's mostly in memory right now. That's really the first place that we've had adoption with Vistara.

Okay. Got it. I was wondering about competition if there's something like everybody can they put out targets and everybody there's always think that they're going to take share. The market shares in general are fairly stable. How do -- I guess, how do customers like think of when they're evaluating, I guess, for a new bank [indiscernible] how do they, like where does AMAT differentiate in the specific like take off, I guess. And then number two, specific to China, how do we think about the rise of local Chinese semiconductors? Because I actually am of the opinion personally that they will take and are taking more in their fair share. I think given the nature of the [indiscernible]? How does AMAT think about how that situation how to deal with it?

Yes. So I think if you look at 2011 to today, we're up from [ 16% ] to almost [ 22 ] 21.6%. So we have gained share, certainly, DRAM 10 points of overall WFE share. But the key thing is, again, how you're positioned for those big architecture inflections? So for us, the -- I talked about gate-all-around, backside Power, [indiscernible] any of those big architecture inflections, we're working out the 4 technology nodes into the future. And for us, it's really shaping the portfolio, that connected portfolio. So we're improving our competitiveness in all aspects of the portfolio from critical applications to semicritical to noncritical. Tremendous innovation going there, but then even more important than that is how we connect that all together to enable the inflection. So when you think about any of those architecture inflections, whether it's in ICAPS or leading ads or packaging, there are tipping points for those architecture inflections. If you're enabling that architecture inflection, it puts you in a completely different position because, again, you have a portfolio of highly differentiated or competitive or less competitive parts of your portfolio. But if I'm really providing what makes you competitive and really helping you win that race to that new architecture inflection, then I am strategic and how we allocate our innovators, our innovative technologies, all of those types of things, that's a completely different discussion. And I would say that's changed a fair amount as we talked about, the way we engage with customers. The -- how many nodes we're working on with them. And our role in that co-innovation customers kind of changed a dramatic amount. So I think in any of the markets, Stacy, that is the most important thing. And then so for us, we've outperformed 5 years in a row in terms of wafer fab equipment and we're well positioned. If I look at these big inflections, we talked about 50% of the incremental spend for many of those big inflections. And again, more and more of these inflections are about these [indiscernible] materials in those architectures. So that really absolutely by far and away, the most critical thing for our customers. And then if you think about our customers in any region, we've been competing with domestic companies in Korea for 2 decades, more than 2 decades, and they've made progress in some of the noncritical types of applications. But for our customers, what they care about is their position versus their competitors. And so they never ever compromise that competitiveness. So again, building that portfolio, shaping it, connecting it and then being essential to those inflections is really how you grow share. That's by far in a way what's most important.

Got it. A few minutes left. We've got some audience questions. [indiscernible]. Is there anything that would change your view about capital intensity remaining high and making [indiscernible] again.

No.

We make [indiscernible] situation.

I don't see that. I mean there's not going to be 450-millimeter wafer inflection. You went from 200 to 300, 2.3x the number of chips per wafer. Dye sizes are getting bigger. [indiscernible] requires 3x the number of wafer starts, GPUs. They [indiscernible] many transistors they can in [indiscernible] field, I don't see that.

Okay. What are investors not talking about today on AMAT, that we'll be talking a lot about in 2030?

I think it's really, again, our role in enabling these inflections. I think people -- again, we see it because we can see that for technology node out in -- for technology nodes out in the future. I think people really, the amount of those inflections that will be enabled the contribution from materials innovations is something that is growing. And again, I talked about TSMC, roadmap for energy efficient computing and more and more of the innovation coming from the these magic materials. And that's true in ICAPS too. That's something people talk about trailing edge technologies. There's innovation happening there that people really don't -- hard, right? They tell us really hard and how they compete, people really don't understand that. That's something we need to do a better job of helping people understand.

Speaking on the opportunities that excite you the most in advanced packaging? And how much you think the front end versus back end spend might be long term?

So again, that's a $1.7 billion business for us today. And if you look at what people are talking about this these road maps for dramatic improvements in power consumption, energy-efficient computing, there's going to be incredible innovation in packaging technology. So we already have the broadest, most connected portfolio. We have a unique packaging lab or co-innovating with customers on those new technologies. We have some new opportunities to expand our TAM, some that we've talked a little bit about, some we haven't talked about. But I think those architecture inflections are absolutely crucial to the whole industry hitting their goals for energy-efficient computing. So again, this is one I'm spending -- when I go back Saturday, meeting on this time. We're spending an enormous amount of time here and partnering with customers and also ecosystem partners.

Got it. Helpful. So Gary, we've got about 1 minute left. And you've been doing it all along, but I will give you your 1 minute [indiscernible] like why should investors buy AMAT stock today?

Yes. I think that our markets have never been in a better position than today. You're looking at the drivers in this AI era. They're bigger and then that compound annual growth rate is going to be more significant, more pervasive computing than we've ever seen. Energy-efficient computing is a big drive in all aspects of the market and Applied is just incredibly well positioned for those future architecture inflections with a very unique portfolio. So I think that's the main thing. But on top of that, you've got a $6 billion service business that has a great opportunity to grow at a double-digit compound annual growth rate going forward.

Got it. I think that's the best place to leave it at. Thank you so much. .

Okay. Great. Thank you.