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

Okay. Great. Well, thanks, everybody, for joining us for the next session at our Deutsche Bank Technology Conference. I am Melissa Weathers. I lead up U.S. semi-cap equipment and memory research here at Deutsche Bank. And this morning, still, we are pleased to have Brice Hill, CFO of Applied Materials joining us. So thanks for joining.

Thanks for hosting us. Beautiful conference. Appreciate you having us here.

Okay. Before we begin, if anybody has any questions from the audience, feel free to raise your hand, and we can get a microphone over to you to get that answered. So I guess, I think to kick off, the smartest place to start would be you reported earnings 2 weeks ago. You talked about some -- maybe some incremental headwinds going into the second half of the year, maybe a little bit different than what you had been thinking 90 days ago. So I think just to level set everyone, can you remind us what was your messaging on that call? What are the key takeaways that you want investors to have taken from that call? And what are you seeing into your October quarter?

Yes, great. So when we think about this year, if we back up 90 days and even further than that, for Applied Materials and for the industry, we've been thinking how strong will DRAM and leading logic be this year? And will it be strong enough to offset any headwinds in ICAPS, the mature logic space? Because in the ICAPS space in China, there was a huge build-out in 2023 and 2024. So we've kind of expected 2025 to be slower, but on the positive side, with all the strength of AI, we've expected DRAM to be really strong, and we've expected leading logic to be really strong. Q3 was record revenues for us, record earnings per share, and it was sort of exhibiting that sort of behavior. And we had expected leading logic to be sort of linearly accelerating through the course of the year. When we gave our guide for Q4, it was different than what we expected. The expected part and the headwind part is China. China is lower, lower than '24. We've been expecting that. Still a good market, but not going as fast as 2024. What was unexpected was that leading-edge wasn't linear. Now we model, of course, all the customers' factories and the capacities and the timing of the equipment, but the pickup rate wasn't exactly what we expected. And I would dig into that a little bit because people ask us, well, what does that mean? Is there a slower demand? Is there a change in expectations? No change in expectations on leading logic. If we dig into it, if you look at the foundry ecosystem, the utilization on the leading edge processes is 100%. From a design perspective, reported designs, reported designs are higher on these nodes, in this node than prior nodes. If you look at the performance of the process itself, a gate-all-around process is 20% to 30% more power efficient compute than the prior. So it's a good node to put a design on, especially in the AI space where you need more power efficiency going forward. When we listen to the cloud service providers and their CapEx forecasts, I think investors know that their CapEx forecasts have only been going up. And when you look at those -- the CapEx on AI compute and high-performance compute systems, what do those systems consist of? They consist of accelerators, GPUs, processors, then with stacks of DRAM, the high-bandwidth memory around those systems and that has a lot of pull for DRAM, a lot of pull for leading logic. So that's what we expected just to continue. However, the pickup rate from an equipment perspective is not linear. We're a little bit more tilted towards 1 large customer. It's going to be a little bit more tilted towards their factories and their timing. And so it will be more uneven than it was in the past from a build-out perspective. But I would just leave it as that was the piece that's unexpected. I would put it, Melissa, in the construct of, we expect leading logic and DRAM to grow over time and in fact, be the 2 largest and fastest equipment markets.

So I want to dig in more on to that leading-edge piece. So really quick, as we think about what your peers have said versus last quarters, the messaging across all the semi-caps has actually been pretty different, which is strange given that you all have the same customers. So how do you account for the difference in your outlook versus what your peers have talked about?

Yes, I do think we did see some companies say they saw signs of a slower business and we saw other companies. Every company is at a different timing window with respect to China shipments, with respect to whether they can serve China customers or not, if they have more exposure to NAND, which grew a lot this year or less exposure to NAND. So there is a lot to sort out, which is your job and makes it tough for you. For us, if you back up for Applied Materials, if I can just reiterate the strategy that Gary has put in place, we think DRAM and leading logic will be the 2 fastest equipment markets for the next 5-plus years. The strategy of the company is to focus on developing new applications when the architectures change in those technologies. And what that really says is, that's the time when our customers reevaluate their equipment sets. They're making a change to the architecture like the gate-all-around processor. They've got new structures to build and they reevaluate the equipments that are going in. And so we're focusing our development efforts on when you see those architecture changes in leading logic, which should be gated-all-around, backside power and eventually CFET, if you look at DRAM, which should be 6F-Square then 4F-squared then 3D DRAM, when you see those architecture changes, Applied already has good share, and we expect to gain share once those transitions get implemented. So that's really the focus for the company in terms of the fastest-growing markets. And when we think about AI, those strategies -- that strategy has been in place for a while. We didn't know about AI when we started working on those architectures. But AI is a perfect example of the market pull for compute memory, DRAM and of course, for compute logic.

While we're talking about AI, a lot of the high-end GPUs and even some of the ASICs still aren't at the very, very bleeding edge. So can you just talk about what are your expectations in terms of bleeding -- actual bleeding edge adoption for those processors? And could we ever get like 2-nanometer GPUs, and what's a view on that?

Firstly, so I'm not a chip architect, but we talked a little bit about this before. I would expect all of that to migrate to thought leading edge. And if it's not, the node that's currently ramping, then maybe the node after. And the reason is -- there's 2 reasons, but the main reason is power performance. The transistor, the gate-all-around transistor was designed to be better, power-efficient compute and more reliable than the FinFET transistor. It's in the architecture. It's more efficient, more reliable and consumes less power than the prior generation of technology. So I expect all those designs -- once they're comfortable with the tools and implementing and getting the design there and the process itself, I expect all those designs to go into that space. It would be -- I think it would be a huge change for the whole industry if somehow that didn't evolve, and it's not the world -- I think everybody knows, the world is worried about power. The way to solve the power need is to make the compute more power efficient and there's multiple different ways, including in packaging to do that. And so I think you'll see all those designs move forward.

Maybe on the -- sticking with the near-term side, and then we can get into some of those long-term growth opportunities. WFE, I'm going to try and get an outlook from you for 2026. But as semi-cap investors, it's very difficult for us to get a clear picture of what could happen in 2026. You have all these different moving pieces between China, between the leading-edge and DRAM. So you don't have to give me a hard number. But as we think about the moving pieces into 2026, what -- how would you guide us? And like where should we start?

I think the dynamic will be similar from a growth perspective for 2026. We'll have strength driven by AI in DRAM and leading logic. We'll have continued growth of new packaging elements for that space in particular. And if there's a headwind, the headwind will still be in the China mature nodes, which we call ICAPS. The devices, ICAPS for investors, we talk about IoT devices, communications, the auto market, power, sensors, all those things that are built on essentially 14-nanometer and larger geometries, analog chips and the like. Because China invested so much in 2023 and 2024, even though the end markets for those mature logic devices are growing, growing at mid- to high single digits, there's a lot of capacity in place. We're still adding customers. We're still adding capacity. So it's going to be slower developing for the next few quarters still than we're going to see in the end markets. So going back up to the top, we would expect growth generally over a 5-year period, especially in DRAM and leading logic. No reason to expect '26 to be different than that. That will depend on the macros. And then the headwind will be ICAPS. And the question is, is leading logic and DRAM going to grow strongly enough to offset that? So that's -- I think the dynamic is similar to what we've seen in the past few quarters.

Okay.

I would add 1 thing, sorry, Melissa. This year's growth, our semi equipment business is growing with our guide about 4%. So that gives you a -- assuming a constant share, that gives you some perspective on what the equipment business is doing this year. So you should see WFE growing this year. And we're just -- I'm just saying the trends -- there's not a reason to expect the trends to be different.

So on the leading-edge piece, that was definitely the biggest surprise to me in this most recent quarter. One of the things that you've talked about, which I found interesting is the difference in customer order patterns and order behavior pre-COVID, during COVID and then in this post-COVID world. So can you add a little bit more color, like how have your engagements with customers? Have they changed? What is your visibility going forward as to what those leading-edge customers are spending?

Yes. I think, if we start in China, we have more customers and a lot of them are newer customers. And if you compare them to long-standing customers that are larger, the long-standing customers have a mature process for forecasting their demand, forecasting their facilities and sharing that with vendors. So first of all, a lot more of the market has been in China or in Rest of World with less mature processes and with the policy uncertainties and trade uncertainties and tariff uncertainties, what we've seen is customers kind of wait till the last minute before they commit to the order that they're looking for, right? And then looking at the mature, larger customers, we've actually seen the same behavior, sort of late commits to the orders that they're taking. And what we're doing is we're reminding everybody -- during COVID, we all struggled with supply chain because there was significant volatility in demand for the supply chains. Applied Materials can take more orders or take fewer orders in any particular quarter. But what's really hard is if you have 8,000 to 10,000 components in a system, and you're trying to move a large number of suppliers at the same time, they really can't move up and down that much. So what we're doing is reminding our customers we know there's more volatility in the environment, which hopefully will settle out, but we really need to have a perspective, what's the 2-year road map? What's a good 1-year build plan? And then for 6 months, we really have to have a clear perspective on what the builds and deliveries are. I think we've split away from that a little bit, but I think everybody is on the same page that in order to manage the large ecosystem, we have to follow that behavior.

Are you seeing any signs of share shift?

If I look at leading-edge and DRAM where we're focused, we don't think there's any change in share. The share shift, of course, the biggest component is in China. This year, we announced early in the year that there was $400 million of business in our backlog that we would not be able to serve because of the entity listed customers in China. So we do have share loss there that's based on the rules that were put in place. But I would step back and just think about that for a second. If we think about the China business that we can't serve, the memory business, whatever is, leading-logic there and any restricted accounts, the question is going to be how long will this regime of rules be in place? I think there's 2 big questions. The first 1 is a technology question. Will there be new technologies invented in China that use different tools that are competitive? If that happens, then we don't have access to that share like we do today. If you can't really keep up without access to the equipment, at least over the next 10 years, then more of that demand should shift back to the multinational vendors where Applied does provide that equipment. So I think that's the big -- that's a large unknown in the ecosystem right now. That's 1 thing that could happen that could benefit Applied. We recently saw that NVIDIA can sell components to China. That's going to put more demand on Applied tools. And so that's an example of how that could happen. The second scenario would be if the government changes its stance from restricting equipment to actually it's okay if we provide equipment and China can build on top of that equipment. If that happens, that's another way where Applied could sell more equipment to that customer base or that use base. So I think that's a big unknown. But going back to your question, yes, where we see share shift is in China, and we expected that. It's rules-based, and the question for us when we talk about will we see overall share gain or not, we think we're going to gain share on leading-edge. We expect to gain share also on DRAM. And will that be large enough to offset any share loss in China? That's what we're looking at.

So there's been a lot of news in the semi sector over the last week or 2, particularly in the second-tier foundry players. I don't know if you heard, the U.S. government is now a shareholder of one of your large customers, Intel. And then also, we've had some news on the Samsung Foundry side as well. So a lot of activity on those second-tier foundry logic players. So as we think about those incremental developments, how is that factoring into your outlook for leading-edge logic spending?

Yes, I'll start with, it's not much of a factor. And the reason I say that is people used to ask us, investors used to ask us, "Hey, if the governments are incentivizing your customers to build in the U.S. or build somewhere else, isn't your demand forecast going up?" And we would say no. At the highest level, demand is driven by PCs, data centers, smartphones, and all that those incentives do is have a customer instead of building in Taiwan, they're going to build in the U.S. So the view was it mattered a little bit at the margin, but it didn't matter in total. Similarly, our expectation is that if the second-tier foundries are more successful, it's not going to be a major change in the way we look at the market. We -- at a high level, we would model the market for leading-edge and DRAM as an example, to be roughly the same. It does matter at the margin. And the way I think about it is, if you move the needle all the way to 1 side of the equation, you say there's only 1 foundry, then 1 foundry will operate at a very high utilization. If you move it to the other side and you say there's 4 competing foundries, then they'll altogether operate at a little bit lower utilization because they're competing against each other. And so we think it matters at the margin, but hopefully for investors, it's sort of comforting. We don't think anybody is going to build extra fabs that don't have designs. When you're building a factory, you know whether you have a design or not, at least when you're ready to order the equipment. You know do I have a customer, are they taping out, are they ready to commit to volumes? And then you're ordering the equipment because there's enough time between your tape out and design win and actual start of production that you can install the equipment. So we -- anyway, hopefully, that answers the question. It's a positive. Competition is a positive. It will help drive performance. It matters at the margin, but we're not changing our forecast -- our 5-year forecast because of this dynamic.

I think that's a prudent way to handle it. Maybe last question on the leading-edge piece and then maybe we can get into some China. On your call, you talked about 30,000 wafer starts per month of 2-nanometer. I don't recall if those're 2-nanometer gate-all-around. So one, can you clarify what -- which nodes that is? And then also, as we think about like the timing of the build-out, clearly, maybe there's some seasonality or some -- a little low-end spending in the second half. But as we think about the scale of the 2-nanometer node, can you talk about what that could mean for the pace of growth that you're expecting for leading-edge nodes?