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

Good morning, everybody. Welcome to the Goldman Sachs Communacopia Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome Applied Materials and CEO, Gary Dickerson on to the stage today. Welcome, Gary.

Thank you, Jim. Happy to be here.

Thanks for being here. Maybe just kind of given your long-standing experience in this industry, you've seen many industry cycles. You've been Chair -- at the helm of Applied since 2013. It seems to me over the last 5 years, there's been some really confluence of secular and cyclical dynamics in the industry for semi-cap, a series of onshoring initiatives globally, U.S., Europe, Japan, China. At the same time, we've seen a number of technology changes from gate-all-around logic to 3D memory structures and the like. During the earnings call last month, you guided your October core revenue below the street. I've gotten an increasing number of investor questions asking whether this could be or signal the top of a down cycle. I'd love to get your perspective on whether you believe that's the case or not.

Yes. So I would say that for Applied, we've grown revenue. This will be the sixth year in a row. We're on track for the sixth consecutive year of revenue growth. And in terms of the industry, AI is the biggest inflection of our lifetimes. AI and robotics, I think, are the biggest productivity accelerators of our lifetimes. And that is driving increase in demand for compute and also for compute innovation. So if you think about AI as the key driver for the industry, the segments that will grow the fastest are also the segments where Applied has clear leadership, leading-edge foundry/logic, compute memory with DRAM and high-bandwidth memory and also advanced packaging. And if you think about -- and I'll get back to your other aspect of your question. But if you think about kind of what we see going forward, I think the industry going to $1 trillion by 2030, being driven by the biggest inflections of our lifetimes that touch every single industry. I think that's really what our customers are focused on. And really, if you look at that 2/3 of the market, there are just a handful of customers that are racing for leadership. You have 3 companies in leading edge foundry/logic, 3 companies in DRAM and compute memory. And for those companies, what is absolutely crucial is being first to market for the architecture inflections. Again, and that's really everything. Design wins for those companies are based on performance yield and reliability around those inflections and Applied Materials is in by far the best position to enable -- strategically enable design wins for our customers. Our portfolio is unique. We have a very broad portfolio of materials innovation technologies. We have about 30% of our revenue coming from integrated platforms that are absolutely crucial for those inflections. We have integration innovators uniquely in the industry. So we're driving high velocity co-innovation with all of those different companies, many technology nodes out in the future, 4 technology nodes a decade out in the future. So again, for our customers, we've never had deeper or broader relationships. And then from an Applied perspective, our focus is really to be the most enabling company for those inflections because, again, that's really life and death for our customers. And we're much larger than our next closest competitors relative to our market share in those big markets, the amount of enabling technologies we have. And then for every one of these architecture inflections, there are a few tipping points that determine who wins and loses. So when the -- when the customers are racing for gate-all-around or backside power or new DRAM architectures or new packaging architectures, again, we have incredibly unique capabilities, unique innovators, very deep connectivity with all of those different companies. And again, there are a few -- just a few of those companies where Applied is by far the leader and very high confidence that we're going to continue to lead and gain share through these architecture inflections. Then your question about downturn, I just don't see that. I mean, certainly, another part of the market is ICAPS, IoT, communication, auto, power sensors. And there is a period of digestion now. If you look at '23, '24, the 2 previous years, there was tremendous investment in ICAPS. So ICAPS is down this year. And we formed our ICAPS group actually April 12, 2019. I still remember when we pulled that group together, Applied has a very unique capability in this segment of the market. And I feel really good. We can talk about that later about our ability to perform really well going forward in the ICAPS market. But the near term is really -- part of it is being driven by this digestion in ICAPS where you had just tremendous spending in the previous 2 years.

Yes. Yes, it makes sense, and we can get to...

And I think a year from now, this whole thing on downturn, we won't be talking about that. It will be very clear.

Excellent. Excellent. Very good. So maybe if we can kind of unpack some of the different moving pieces there. Let's talk about leading-edge foundry logic. Clearly, you've had a lot of market share strength with gate-all-around backside power. Those seem very relevant. Maybe talk about your position at the top customers in the industry, as you mentioned, very concentrated, especially in the leading-edge foundry logic space. I'll get a lot of investor questions wondering why you see a bit of an air pocket in that segment when others are guiding for relative strength. So maybe you could help investors contextual...

I think leading-edge foundry logic, we're still performing incredibly well. As I said, we have deep visibility. I mean we really are co-innovating with all of those different companies. So we have a really good understanding of performance yield across that whole landscape. I think it's also though lumpy so that really, the revenue is dependent on the timing of fab ramps. And so you don't have many customers there. There's been even more market concentration. So really, the revenue timing is more dependent on the ramp timing. But again, from a standpoint of Applied's position, as you go through these architecture inflections, every single inflection, our customers are focused on energy-efficient computing. So 10% to 15% improvement in power, 20% to 30% improvement in performance. And they also are focused on 10%, 20% improvement in area scaling. Now more of the area scaling and really all of the power and performance is enabled by materials innovation. The areas where Applied has tremendous strength, far stronger than any of our competitors.

Yes. Maybe you talked about ICAPS a moment ago. You talked about some potential digestion given all the capacity that's been built. Can you maybe specifically address China? And what do you see as the forward demand outlook from your Chinese customer set, Chinese WFE spending sort of writ large? And do you think there's sort of a digestion in China as well as broader ICAPS?

Yes. So I would say, again, ICAPS, we are in this period of digestion, as I talked about earlier. The previous 2 years, you had very strong spending in ICAPS, including in China. And so in '25, the spending is less. And there's going to be a period of time where we go through this digestion. And longer term, I would say that ICAPS, we see as kind of mid- to high single-digit growth rate. If you think about robotics, edge AI feeding into all of the large language models in so many different kinds of applications, power electronics for the grid, for the automotive industry, image sensors, again, in so many different kinds of applications. We think that's going to grow kind of a mid- to high single-digit growth rate, but you do have a period of digestion that we're working through that will take some more time. But then once you get through that, we do think that, again, that market is going to grow kind of mid- to high single digits. And then from an Applied standpoint, I mentioned we formed that group in 2019. We've performed really well in ICAPS, bringing many new products to market. And I think our strategy is different than some of our peers. We're not focused on just incremental modifications to existing architectures. We are definitely focused on -- we have integration innovators in ICAPS, just like we do on the leading edge, so on power, image sensors, any of those different device verticals. We're co-innovating with customers in ICAPS also. We have a very robust pipeline of new products, products that will expand our total available market in ICAPS that are significant innovations that are important for design wins for our customers in those verticals. And another thing we're focused on through a large part of our portfolio is cost innovation. So again, for Applied, our main focus is to be the most enabling company for our customers in every one of those segments because that's strategically critical to their competitiveness and their design wins. And then that enables us also to win ties in the areas that are cost competitive, but we can't win the ties if we're not -- if we don't have those cost competitive products. So I would say more so than ever, that pipeline of innovations that we're driving in ICAPS, both in areas that expand our total available market and improve our cost competitiveness, those are key strategies that we're driving in Applied. And I feel very positive that we will do well where we can compete. There are export controls that have limited our ability to compete in certain customers. So that is something that certainly has impacted our near term. But I feel really good about competing where we can compete. But there is going to be, again, this digestion period in ICAPS -- as also the customers -- new customers are ramping yields, that's also going to create some type of digestion period. But over time, again, all of this edge AI, robotics, these are areas that we feel the market opportunities are good over the longer term, kind of mid- to high single-digit growth rate.

Fair enough. Another one relative to China. Recently, a couple of weeks ago, we got an announcement out of the U.S. government that the license exemption for multinationals in China, Samsung, Hynix, Intel and TSMC have been rescinded starting early 2026. I'm just wondering if that is the same or a different issue than you noted on your last conference call relative to license and maybe sort of in the medium term, what impact do you expect from that change?

Yes. I'm not going to speculate on trade policies or the geopolitical policies, those types of things. Obviously, there's a lot of dynamics that are happening there. And what we talked about on the licenses were products where we're not restricted, where we're just not seeing anything flow. And I think that's been something over the past several months that many people have seen that same type of situation. I know some of the other tech companies have commented on that. So I think that -- and then on the multinationals that are in China, that's really a different issue. But again, I can't really speculate on how that will play out over time.

Okay. Very good. And maybe you don't want to talk about this, but I'm just kind of curious, given the preliminary tariff regime on semiconductors that's out there from the administration, curious as to whether you think structurally, that's going to drive sort of an increase in U.S. fab spending domestically.

Well, I think for sure, if the Trump administration is very focused on bringing more semiconductor manufacturing into the United States. There's no question about that. You see what's happening with TSMC in Arizona and many different companies, both in the leading edge, also in the ICAP space. And that's good for us for sure. We're making investments in the U.S. We're making investments in manufacturing. We talked about a few hundred million dollars investment that we made in Arizona. We have our EPIC center, equipment process and innovation commercialization center that will come online next year in Silicon Valley. And that's going to be a real accelerator for Applied Materials and the entire industry. I talk about everybody racing, racing for leadership in those architecture inflections. And so being able to have our customer innovators co-located with our innovators, where Applied is, again, the clear leader in materials innovation is a really important strategy so that we can drive those innovations in parallel versus a slower serial type of an approach. So we're making big investments in the U.S. and also the -- bringing those fabs to the U.S. where they don't have an existing infrastructure in place also helps our service business. Our service business is over a $6 billion run rate, growing at a double-digit compound annual growth rate in the past and also going forward. So as those companies are moving to new locations with very complex architecture innovations. Again, we're seeing more traction for our services. About 2/3 of our services today are long-term subscription agreements. So it's very sticky. We've grown our service business 24 quarters in a row. So that gives us a tailwind to continue that double-digit growth rate in that large service business for Applied Materials.

Very good. I want to turn to the end markets for a moment. I know you don't like to give a quantitative market estimate or outlook for WFE spending, but I'd love to get your perspective on directionally whether you think 2026 will be a growth year for the industry in light of the fact that you don't think we're entering a downturn? And then maybe within that envelope, do you think -- which of the end markets that you serve, you think is going to perform best versus lag a little bit?

Yes. So as you said, I'm not going to guide on 2026. But what I would say, I'm highly confident, again, connecting with CEOs constantly all the top companies that AI is going to drive -- our customers are telling us that data center wafer starts will pass PCs and smartphones. So again, the growth in leading-edge foundry logic, we feel very confident and very positive that, that compound annual growth rate over time is going to be very strong. In compute memory for DRAM and high-bandwidth memory for AI, those are critical technologies. And we talked about in our leading DRAM customers, that spending is up around 50% this year. So again, we are restricted in China, so we can't serve the China memory companies. So that is something that's offsetting this tremendous growth in DRAM. We've gained 10 points of share in a little over a decade in DRAM. We can talk about the architecture inflections there later. But we're very positive on the growth rate in compute memory going forward. And then I would say packaging is another one where Applied, that's really our strongest overall share position. There's going to be tremendous innovation in how you connect all the computing components together. If you look at AI server architectures, the way they look 3, 4 years from now will be very different than what they look like today. So there are critical architecture inflections there. Everybody wants to go to larger body sizes where you can connect more computing components together. And obviously, power and performance is absolutely crucial. How you move data between all of those computing components will be completely different in a few years versus what it looks like today. And Applied really has deep connectivity into those markets. ICAPS already talked about kind of a mid- to high single-digit growth rate once we get past this period of digestion. And then NAND is up a fair amount this year off of a very low base. And I would say we're -- if we look at the overall WFE mix going forward, we would say that the foundry/logic is about -- leading-edge foundry/logic is 1/3, ICAPS is 1/3, memory is 1/3, more weighted towards DRAM compute memory than storage memory NAND. That's kind of the way we see it going forward. And I'm actually extremely positive. Again, we have high visibility relative to all of the fab investments. There's over 100 fabs that are being built by customers today. Again, the business is not linear because it depends on the timing of when those fabs are being built. You have a period of time now where you have digestion in ICAPS, but we're very positive relative to $1 trillion semiconductor industry, kind of mid-teens capital intensity and applied more of the spending going to materials innovation to enable power and performance architecture inflections over the next several years.

Great. It sounds like you got high conviction in the advanced leading-edge foundry and logic business. Maybe talk -- unpack the packaging business, the advanced packaging segment for a second. Maybe just give us a sense or can you contextualize roughly what scale business is that for you today and sort of going forward, what growth rate you expect that to go at? And how has that changed from maybe your expectations a year ago?

Yes. So it's over $1.5 billion. And we've said that in the next few years, we can double that business again to around $3 billion. We're in a very strong position with a broad portfolio of technologies. We're working with customers innovating many nodes out in the future to new packaging architectures. And I would say here, you're going to see tremendous architecture inflections over the next 2 or 3 years. Again, people want to connect more of these computing components together, especially for AI servers. So a lot of the innovation around those packaging architectures are really being driven by that inflection. Applied not only has the broadest and most unique portfolio of technologies. We have new products that are in the pipeline that are really critical. Hybrid bonding is one that is going to be important for high-bandwidth memory, future architectures and important for chiplets for logic. And Applied also has a unique packaging R&D facility where we have full flow packaging. We're the only company that has that in the industry. And our customers, just like we're talking about EPIC co-innovating for those advanced chip technologies as a game changer for Applied and for our customers. We're doing the same thing in packaging. So we're working with all of these companies innovating on these new architectures. We're even working with companies across the ecosystem on new packaging architectures. So again, very strong position, over $1.5 billion, growing to $3 billion, and it's going to keep going from there. Again, this is how you connect all these computing components together is really important to drive energy-efficient computing in the industry.

That's great. DRAM, you touched on it before. I'd like to just explore a little bit more. Can you maybe talk about -- you previously talked about, I believe, 75% of incremental HBM steps for HBM memory you're capturing. As this technology evolves, what's the right way to think about kind of how you benefit as we move from HBM3E 12-hi to 4 and 4E? And then separately, if you want to maybe touch on 4F-Squared cells, what that means for you?

Sure. So yes, high-bandwidth memory, we have a very high share. As you said, there's like 19 new steps, 14 new steps. We have a very strong position. And there is an architecture inflection where people will go to hybrid bonding for HBM. Again, we have the leading technology to enable that inflection. We have a strong partnership with Besi, and that's one of our integrated platforms. We have 6 technologies integrated into a single platform because as you're driving these bonding technologies, all of that interface engineering and surface preparation is incredibly important for yield for those particular inflections. So very strong position in HBM, very high market share and a very strong position enabling the key technologies for those future architectures. In DRAM, overall, as I said, we've gained 10 points of overall DRAM share over -- a little over a decade. And in the future architecture inflections, you have FinFET for high-speed memory, that's going to be a big inflection where Applied has clear leadership and is enabling the inflection for our customers. And then in 4F-squared and 3D DRAM, those are very big inflections that are really enabled through materials and architecture innovations. So Applied, when we're working with any of these companies, when I'm meeting the CEOs of our customers, there are a handful of innovations that are the tipping points for any one of these different architectures. So one of the CEOs and CTOs I talked to recently, the top 3 innovations for one of these future DRAM architectures were all from Applied Materials. So basically, the innovation won't happen unless we can co-innovate around those enabling technologies. So we have very deep connectivity. We're enabling this FinFET inflection. We're enabling these architecture inflections where you're going more vertical and they are really enabled by materials innovations versus lithography. So over time, more of that, not only is the wafer fab equipment spending increasing, but your -- more of that is moving to Applied Materials. Last thing on HBM, I don't know if I mentioned this or not, but you have to start at least 3x more wafer starts for HBM because the die sizes are bigger and the yields are lower. So that's another factor that's driving growth in compute memory. But again, this is an area where Applied has outperformed with 10 points of share gain and very well positioned to outperform going forward.

Great. One last one on process, which is a deposition etch, you're clearly the market leader in deposition. Can you maybe talk about the runway you believe you have an etch? And where do you have an edge versus your competitors?

Yes. So we've been gaining share. We had our first $1 billion quarter in etch. We've been consistently gaining share in conductor etch, especially in DRAM, but also in foundry logic. We've gained share, especially with leading customers in foundry logic, significant market share with technology innovations we have within the etch business unit. The other thing I would say that not only do we have great technology and great innovations that we're enabling that have enabled us to gain several points of etch market share, but also there's this concept of co-innovation. So when you're creating these new architectures, you're creating new materials in those structures, you're shaping those structures, modifying those structures. That's a multibillion-dollar business for Applied Materials, and you're analyzing those structures. So we have great innovations within our etch business unit that are enabling us to gain share. But even more important than that is our ability when we bring a new deposition material to the market, we're able to co-optimize that for customers so that they can accelerate time to market for those innovations. So that's another aspect that's enabling us to grow, but there's significant opportunities for us to continue to grow etch share in memory as these new architectures are adopted and also in foundry/logic.

Great. I want to ask a couple of questions on initiatives in your overall portfolio of business, if I could. How are you feeling about the overall mix of business that Applied has today? Are you sort of exclusively focused now on continuing to drive market share leadership in the semiconductor equipment space? Or can you imagine diversifying other revenue streams over time?

Yes. So I think the key thing for us, again, 2/3 of the market, there's a few customers. So being the most enabling company for those customers puts us in a very unique position. If we're enabling their design wins and their competitiveness, that creates a great opportunity across Applied's entire portfolio. So I'd say that's our #1 focus. Service, as I talked about, that's a double-digit compound annual growth rate. It's a very big business. You have these companies ramping these complex new architectures. We have a lot of service innovations. That's another one that we're driving. We have made progress in some of these adjacent markets. Display has come off a multiyear bottom with some increase in growth, operating profit kind of mid-20s, I think, this last quarter. I think that will continue to grow over time. This inflection in OLED for IT is a good opportunity for us. We have some unique enabling technologies there that can enable new display architectures. So over time, again, that's not going to happen very quickly. But over time, that will get, I think, incrementally better. And we are looking at other areas where I think what we do is amazing. All of the materials innovations that we enable within Applied Materials, again, in your cell phone, you have 60 miles of wiring in your application processor chip. Think about that, a 60-mile long wire where you're moving data, lightning fast with no resistance, it is almost like magic what we're able to do. So we are looking at some of those adjacent markets. Display will be incrementally better, I think, as we go forward. And there are a few other ones. But I would say still semi, if you look at least what we see, tremendous opportunities, the industry growing to $1 trillion, applied, the material intensity increasing, our unique position to enable those inflections that are critical for our customers is a great position to be in. So that's still the area that we're most focused on from an investment perspective.

Great. Just maybe finishing out a couple more. One is give you a chance to talk about EPIC for a second. Is that still on track to launch in spring of next year? And maybe contextualize for people, you talked about co-innovation with your customers, but what does that drive in terms of the financial results down the line?

Yes. So I talked about this concept of high velocity co-innovation. So in every one of these different segments, the companies that win the architecture inflections win big. And it's really -- it's the whole ball game from a competitiveness standpoint. So there is a race for those architecture inflections for all of our different customers. And it's very clear to us, again, we have such deep connectivity with every one of those different companies over multiple technology nodes. The companies that are moving at the highest velocity with a culture and leadership focused on co-innovation have been the leaders. What we see with EPIC, and we shaped EPIC with our leading customers to go even higher velocity. So the ability to have those innovators next year in '26 in Silicon Valley with our innovators will accelerate those technology inflections. And our customers are focused certainly on their N+1, N+2 design wins. I mean that's really incredibly critical for them. But again, the earlier you start on those innovations from materials to systems, the ability to bring those architectures to market with high yield is everything for competitiveness. So being able to work on the N+ 3 and N+ 4 technology nodes earlier, faster from an innovation standpoint is absolutely critical to our customers. So we shape the concept with them. And of course, for Applied, it enables us to be designed in with our equipment and our services as those new architectures are ramping to market. So again, I'm really excited about it. I hope everybody can come. We'll have a grand opening next year. But it's a great strategy for Applied Materials and a great strategy for the industry.

Great. Last question. I think you've met with a lot of investors since the earnings call and maybe here so far at the conference. Curious, as you reflect on investor commentary, what's the one thing that you think people are missing about the Applied story today?

I think Applied is in an incredibly unique position. Our ability to enable these inflections, our strategic enablement position at the top customers is a significant competitive advantage. And that's really where everything starts with each one of these different customers. Again, for them, it's critical for their design wins. We are incredibly well positioned going forward to gain share at these architecture inflections. Personally, I've never been more excited about the position for Applied. And then I'd say that our service business that's growing at a double-digit compound annual growth rate, I feel really positive on that, too. So I've been in the industry for a long time. I've been at 3 different companies where I've been incredibly successful. I would say I've never been more positive or excited than I am today.

Fantastic. Well, Gary, thank you for being here with us today. We appreciate it.

Great. Thank you.