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

All right. I think we'll get started. Hi, I am Shane Brett, U.S. semiconductor equipment analyst. With us today is Dr. Prabu Raja, President of the Applied Materials Semiconductor Products Group. To get started, Dr. Raja, can you start by giving the audience just an instruction and sense of what you do in your role at Applied Materials?

Thanks, Shane. Yes, about me, Prabu Raja. I joined Applied 30 years back as an engineer. This is my first job, and I led some of the valuable businesses in Applied Materials like a PVD business and [indiscernible] and integrated products. I spent lots and lots of time with the customers. Sometimes I think I spend more time in the flights than at home. And recently I had been to multiple customers throughout Asia and also the governments -- right now, governments want to be talking about semiconductor. So the good news is I have a lot of valuable feedback from the customers on the demand, where they are, the challenges. And the bad news is I sleep about 3 hours these days. So if I mess up, just assume it's a jet lag, not me, yes.

But the air miles are pretty good.

Yes. Right. Thanks.

I guess just to get started then as President of the semi products group, just what are your key priorities, say, just where is your focus is with Applied?

See, if you really look at those right now, it's all about demand. As I said, I talked to a lot of customers that demand is very high. They all want to know are they getting the tools on time. And I can tell you, pretty much I get e-mails every single day. I want to make sure that we're delivering on time. So we have incredible visibility from the customers. I'm focusing on making sure that we can scale and if we want to deliver the tools on time. That is right now. When you really look at the long term, so what do you think about when I'm in the flight, what do you think about? I think about this semicap market, how big and how sustainable it is, number one. Number two, within semicap, which part of semicap is growing faster, where we should focus on. Number three, the customers are having the tough challenges right now with all the inflections and how can we work together with the customers in solving those challenges. These are the 3 high level is a wafer overall semicap market, as you can see that the demand is high, the fab utilization is pretty high. We are tracking around 100 fabs today. They're all in various stages, that part is really good. From what I hear from customers, they want -- need to be ready for the super cycle. That's what they call super cycle. I don't know what does that mean. Super cycle, that's why they say that, right? I want to make sure I'm not the bottleneck, okay? Number two, if you really look at those, if you segment within those semicap, now, not long ago, 1 year back, we say that a, it's a $1 trillion market by 2030. And 1/3 is leading-edge foundry logic, 1/3 is high cap, 1/3 is memory. That's all changed. Now we are -- potentially, we can do $1 billion -- $1 trillion -- semi can do $1 trillion this year. Potentially, we can do that. And also, if you really look at the mix, what I see that is the fastest-growing markets are the ones which are enabling artificial intelligence right now, the data centers. So we really look at those leading edge foundry logic, DRAM, advanced packaging. These 3 are growing faster. And the other ones are slow growth areas, we call it NAND and ICAPS, which are more in general computing. The good news is the fast-growing areas, 3 areas we talked about Applied is #1 in all those 3 areas. And we thought about the areas we invested in those areas. The last 1 is we talk about tough challenges. What are the customers concerned about. If you really look at those, a lot -- the multiple inflections are happening in this area. Each of this year, multiple inflections are happening in each of the areas. So what is customer doing? They are trying to integrate the devices to address their tough challenges. That means you put advanced logic and DRAM together through advanced packaging to solve their challenges. So what we are doing is, we are making it possible with our unique portfolio integrated solutions. Those are others.

Got it. Got it. And I guess just on this operating environment, so you've talked about just semicap model, your focuses and then the customer challenges. So we'll focus on the semicap model first. You threw out the word super cycle as it relates to sort of AI driving kind of this equipment market. How does that sort of AI drive this equipment market? How is it sort of beneficial to you guys focused on DRAM, logic and advanced packaging?

I think I talked about, I mean, $1 trillion -- 1/3, 1/3, 1/3. That's not there anymore right now. Right now -- everything has changed right now. And a lot of right now really that what is a data center? That's all you've got to think of what is enabling a data center. When you really look at those advanced logic and -- sorry, leading edge, let me put the -- leading-edge logic, advanced packaging and DRAM. These are the fastest-growing markets as compared to that and as compared to the other market, and so the multiple inflections are happening in these areas right now. If you really look at the gate-all-around, it's extremely complex, and it's going through -- everything is going to 2D to 3D, right now, you see that, that a lot of complexity is there right now. And the complexity means that a lot of more steps, a lot of new steps are coming in more steps. And Applied is in a very good place to solve the complexities right now, okay? That's where I see that where the market is going. And then I think the good part is we had a strategy, we call it inflection-focused innovations. And we kept talking about it for 4, 5 years, we talk about inflections are coming, coming, coming, it's a time. Now we see that -- those wherever we strategize, wherever we invested, that is happening right now. So we are in a very good place in all those 3 areas. So that's why if you really segment it that's the area, our biggest focus right now is paying off.

Got it. So there's inflection-focused innovations have sort of led you to DRAM leading logic and advanced packaging and sort of the stars have aligned with AI?

Yes. You are right.

Got it. Got it. I want to talk about 2026 because you sort of talked about more than 20% shipment growth for the calendar year. I think if the year plays out as you've sort of called it out to be, that will be the highest growth for Applied since 2021, which was back then the semiconductor industry, just equipment was a big bottleneck at that time with chip shortages just affecting a lot of other industries. Just how are -- how is the industry and Applied prepared relative to 2021 to sort of meet this kind of massive surge of demand?

Okay. The short answer is we are in a much, much better place. I can tell you that. And it's a great opportunity. We are not going to let it go, okay? This is the number one. So you really look at those and like I said, I talk to customers a lot. They are giving us great visibility. They are forecasting the demand much, much earlier than ever before. The reason is they want to make sure they're getting the tools. I can see that demand is side, they want to make sure they're getting their tools. More important, when the tools are coming in, these tool needs to be installed. It has to be serviced and for that, you need manpower much, much earlier, Applied does that. So you can't just hire a college graduate and ask them to go and do that. These are complex areas you need to learn. So these guys need to be trained for 1 year or so. So for that reason, the customers are giving visibility much, much earlier right now. That's a great visibility we get. And so that really helps us right now to plan and what do we do with that? I -- you're right, COVID was a stress test for us. We learned our lessons. And we fundamentally change how we do that in terms of how we plan, how we forecast and how we scale, how we execute, we fundamentally changed that. We are in a much better place if you really look at those manufacturing. We can -- the capacity is doubled compared to what we had before COVID. And since we got a very good visibility from the customers, sometimes 2 years early, even beyond that, and what we do with the visibility is we are going and talking to our suppliers, partnering with the suppliers to early enough. We see where the bottlenecks potentially could be. We are well prepared for it. The suppliers are more ready right now. And the third part is that we talk about service and support. And we are expanding our service team. We are training them. I think we are in a much better place. Like I said, we are not letting it go this time. For sure, we are more ready right now, yes.

But rallying 2,000 suppliers cannot be easy. So just how have you gone ready for this inflection? I know we kind of spoke about earlier, you guys kind of talk about a 5-year strategy. What were kind of the steps you put in place during the kind of 5 years leading up to this that allowed you to kind of meet this demand?

I think if you really look at those, Applied, if we look on Applied revenue, even after Applied revenue never went down. We didn't come down. We kept in the same every year, we kept increasing that -- increased the revenue in the last 20 years. That kind of helped us to -- customers to have more of a confidence on us. Other one is we changed the model is right now. If you really look at those with the customers, we truly work with our customers as partners rather than just a supplier-customer relationship. We work with partners. I think we do the same thing for our suppliers. We work with them much more closely. So they're a lot more open, not only their capacity, they are also more open with their sub-supplier capacities. So it's all about partnership, how closely we work with them, how much visibility you give them, this all together, yes.

Got it. It's a tighter partnerships with your suppliers, but also with your customers, I mean you're talking about 2 years plus of visibility, just -- we're seeing 2 years plus of visibility, but there's so many tech inflections right now, just this change in kind of rapid pace of complexity. How is that changing the way the equipment industry works with kind of your customers?

Yes. Equipment industry, I'll also talk about particularly Applied Materials. Not long ago, I've been in industry for a long time. And they're scaling, if you really look at technologies, not that complex looking back and more predictable or litho-enabled scaling very predictable. We had a handful of materials. And so customers had their own process design team. They pretty much used to tell us, hey, what is my hardware spec, what is my process step. All I have to do is I got to meet the spec. Customers have their own -- the team, which can integrate everything together all steps together. Right now, the complexity has changed. It is really complex right now. It's more of a customer-supplier relationship with all the complexity we are talking about multiple inflections are happening, these inflections are incredibly complex, I can tell you that, like gate-all-around, you think about that. More than 2,000 steps. A lot of new materials are coming in. And more importantly, every angstrom matters. I can tell you the good example is in the transistor gate, the small 10-nanometer space. You've got to put 5 to 6 different materials. Everything is 1-nanometer thickness. So that 1 angstrom really matters, those kind of complexity. On the top of it, there is the step-to-step when it's out 2,000 steps, some of the steps, they are interdependent. Okay. So it's more like the Rubik's cube that if you touch 1 step, 1 material, it impacts everything. It falls apart. So that complexity is increasing, right? That is more that part of it. On the top of it, the speed, speed is the game. And the customer want -- time to market becomes important. The customer -- they don't have a time to put together every pieces together. So fundamentally, customers are working very closely with somebody at Applied Materials. The reason is really look at Applied Materials. We understand the steps better than anyone because we have broad portfolios and with a broad portfolio, we understand the steps and how they're interdependent on each other and also we can come with optimized solutions better than anyone. And the customers are coming to us, they're working with us, partnering with us, 3 nodes ahead, in some cases, 3 to 4 nodes ahead. So when you have 3 to 4 nodes ahead and partnering with our customers working together to solve the problem rather than just meeting those hardware spec or process spec, now I become the part of solving the device challenges as a solution partner. So that gives me incredible visibility on customer challenges, customer road map. I can use that to fund my R&D and more importantly, when you work that early, you are designed in into this. I'm telling you these complexities like a open-heart surgery. Once you're designed in, you don't want to touch it, they fall apart. Okay. I think the biggest change is that the relationship what used to be like a supplier customers versus partners.

I think this is a really good segue because you spent kind of billions of dollars to invest into EPIC. And kind of my question here is just how should we see kind of the ROI on that billions of dollars that was spent into EPIC. You've had some nice customer announcements there. I'd love to hear about that. And just -- should we expect to hear about more customers when are you opening just kind of the road map around when EPIC is going to come up and up running?

Yes. No, I talked about complexities, right? And also I talked about speed. Okay? Right now, really look at those -- today, if you really look at those, how the innovation works, innovation, the commercialization, let's call it, how it works. Now, from university academic research, if you come with the new materials. Academic research to the equipments, to semi manufacturers, to the commercial chip takes 10 to 15 years. Go back and look at those FinFET and High-k metal gate, this all inventory somewhere around 10 years, 15 years, but that's the time it 10 to 15 years, it takes. Right now, nobody has the time to wait for 10 to 15 years with the complexity. Now speed is the game. Everyone wants to be the first. So what do they do? Rather than sequential way of innovating and commercialize, at Applied what we are doing is, can we do it in parallel? Can we co-innovate together? That means universities, equipment and customers can we work together in parallel in one place under one roof. Imagine you come with the new materials you can validate on the equipment, validate on the customer wafers. And your success rate goes up and the time of -- time to innovation has come down dramatically. That's the whole idea of success rate because I can tell you that otherwise success rate is too low because you can come with a new material, it doesn't work in the equipment. Right now we all work together, success rate goes up and also time to market goes down. I think that is the biggest benefit the customers see. That's the reason that customers want to partner with us, not just customers but all universities and also the peers. They all want to be a part of it. Like you said, we announced with the Samsung. We are talking to and working with other customers, universities, major U.S. universities, also with the peers. And you'll see more announcements in coming months.

Okay. Well, I'm looking forward to that then. I guess let's talk about -- dive into the road map here. So leading-edge foundry logic. You sort of highlighted that from finFET to GAA with backside power that sort of increases your revenue opportunity by about 30% for equivalent fab capacity. Just where specifically -- could you kind of give clarity on where specifically Applied is winning for those kind of inflections?

So let me see, when you say leading edge, foundry logic, we are #1 that process equipment provider in the space right now. If you really look at those, there are 2 big pieces if you really look at those. The 1 big piece is that transistor, other big piece is wiring. Let me start with the transistors. Okay? Transistors are the ones I'm talking about the complexity. FinFET, we are #1, if you really look at non-litho, we're very close to 50%, maybe a little less than 50% share right now. That gate-all-around makes it even more complex. Like I said, a number of steps are increasing significantly. A lot of new materials are coming in, and these materials are interdependent. They really interact with each other. So the complexity is happening where Applied has a leadership positions, like for example, EPIC is very critical. And PVD is critical, metal yield is very critical. CVD is critical, implant, treatments, you can see that where conductor etch -- those are the -- these inflections are happening, complexity is happening, there Applied material has a leadership position. On the top of it, I talked about interdependencies between the steps. That means if you touch 1 step, it will impact the other step. So that means these all steps need to work together to get the solutions. That means Applied knows how to optimize better than anyone because we know all those pieces, and we know how to connect those pieces to make it work.

An integrated material solutions.

That's what we call it integrated material solutions right now, how we integrate. In some cases, you can't take it out of the tools, machines. It's all under vacuum. And imagine I talked about 1 nanometer, the 10 angstrom, once -- imagine you are exposed to air, it's gone. It's not the same material anymore, is it right? They all need to be integrated in one system. That's where Applied comes in and really helps. And the customer -- what they do is that these are the places we work together 3 to 4 NAND technologies ahead right now because this is not the 1 that you can just come and change something. So we work 3 to 4 technologies ahead, I think it benefits both of us win. For customers, they can do early validation on the wafer what we do and also time to market. For us, we get this visibility into the road map, visibility into the technologies, road map, challenges, also our R&D funding. I don't have to put R&D in 10 different ways right now. I know I can validate. I can fund it in an R&D funding guide of my R&D funding. And even more important, I'm designed in. I know 3 nodes earlier, I'm designed in most cases. So win-win for both of us.

Got it. I want to talk about 2 more things within leading edge logic, wiring and just copper. I think the first question is just wiring module and leading-edge chips. How is it changing and where is the opportunity for Applied? And I guess the second part of that question is there's been concerns about PVD copper being at risk from ALD moly, Just what is your sort of answer to that concern?

Okay. Maybe particularly this topic is more personal to me because I joined the company in the PVD wiring. That was my first job, okay. And I've been hearing this. When I joined the company, people say that, hey, copper is going to end, PVDs going to end, don't join that group. That was 25, 30 years back. And yet copper continues to extend and PVD continues to extend. I think -- if you really look at the wiring, it is a very valuable and large business for the company right now. And I really look at those in the -- today's GPU, there are 800 plus miles of wiring. This is complex, if you look at those. And people -- the complexity in wiring is equally there as transistor. People don't give importance to the wiring. Wiring is extremely complex. If you talk to the customers, any customer, they'll tell you, litho is not my bottleneck, wiring is my bottleneck. That's the first thing they say that, wiring, focus on wiring. That is the most important message. So what we see that is now 20-plus layers right now -- in the GPU right now. So we see that copper -- number of copper layers are increasing. What has changed is to put 1 layer. We used to have 3 different technologies integrated together 10 years back. Today, can you imagine, the 7 different technologies are integrated into the 1 system, machine under vacuum to get 1 layer of wiring. Number of layers are increasing, number of technology steps inside each layer is increasing on the wiring. Wiring is big. And I can tell you that with the breakthrough innovations, at least our 3-plus nodes of copper would extend. I can confidently say copper is going to extend for 3 more nodes or even more, okay? We have a path. And that brings to the moly question. There is always a misconception that moly is going to replace copper. Clearly, answer is no. Moly is not going to replace copper. Okay. Copper is going to stay here. Copper will continue to be here, continue to grow on more and more layers. Where moly comes in, really look at those wiring, then you hear transistor. Something in between which connects them is contact. There are 3 layers of contacts today -- not 3 -- yes, 3 layers roughly contact. Tungsten is the materials -- contact material today, tungsten. That moly has benefits over tungsten. That's where I see that people are talking about. They -- sometimes we call the contact also as wiring. That also moly could be replacing tungsten. I think we recently announced a product, the spectral ALD moly. And with the foundry logic, we already have a PTR position right now because the ALD moly is replacing tungsten and it's a very critical layer. And really look at those moly is not as big as what you think, really look at the market overall. Copper is at least a magnitude or more than the moly itself. Okay. And copper will stay, continue to stay and moly has its own place, it could inflect, but copper will be much, much bigger. And copper will continue to grow. Quite honestly, copper is growing in layers faster than anything. Yes.

The people that doubted you 25, 30 years ago, will be reminded in 5 years, that copper is still around?

The copper will be still around. I can tell you that. I told you I worked with the customer 3 to 4 nodes ahead. I know exactly what's going on. It will expand.

There you go. Next question I want to move on to is DRAM because I think there's a perception that Applied is a bit more of a leading edge, like a foundry logic company, but you guys have gained a lot of share in DRAM over the last decade. Just can you kind of remind the audience where those DRAM share gains have come? Just how you sort of position yourself with this sort of inflection in DRAM spending?

Yes. So one thing always, I thought about underappreciated Applied is that they think we are a foundry-logic company. You're right, not a memory company, really look at DRAM. I think over the last 10 years, we increased the market share in DRAM significantly. Where it came from is that patterning, conventional patterning, UV patterning in both places, we increased the market share significantly, particularly UV patterning, we increased a lot more than conventional patterning. One thing. Number 2 is that the capacitor module, that's a pretty complex structure. We had a lot of key wins because a lot of new materials as a hard mark. We talked about the integrated approach. There is another term we use co-optimized approach. When we said integrated, 1 machine, multiple technologies are all inside the 1 machine, not exposed to -- yes, right? Co-optimize is the 1 that a, they don't have to be in the same system, but they interact with each other so that we've got to optimize for each other steps. The step could be a neighboring step or even after 10 steps. Simple example is if you come with a new material, you should know how to deposit the material, you should know how to etch the materials, you should know how to remove the materials, you should know how to analyze the material. If you give to the customer on new materials, if they talk to 4 different suppliers, it will take 7, 8 years, 10 years. They want you to come out with a complete solution for that, hey, give me everything so that I can just insert in my flow. That's where there'll be a lot of key wins in capacitor. That is what happened. The moving forward, let me break down to 2 conventional DRAM and HBM DRAM. Conventional DRAM, DRAM is following logic road map, very simple. Transistor is going from planar transistor to high-k metal gate to finFET. So where you get all the learnings? Nobody wants to reinvent the whole thing. Applied has a great share in all of them, very easy plug and play there, right? Customer work with us. And DRAM also adopting copper layers, number of couple layers are increasing in DRAM. So our market share position over many years in foundry logic is really helping us right now. When you go to -- and on the top of it, you talk about conventional DRAM, you talk about 4 of score, you talk about 3D DRAM. These are less UV or more material sensitive. These are the ones, all materials engineering, everything going in the third dimension. And this inflection will further help us because it's all a lot more materials, a lot more process technologies, a lot more integrated tools. That's for conventional DRAM. HBM is very simple, right? HBM, you need 3 to 4x more number of wafers per die. That's it, very simple. So that's where HBM is growing. On the top of it, the HBM packaging part alone is more process intensive. So that's where HBM is growing. It's a combination of inflecting what is happening, combination of number of copper layers growing and the combination of where the HBM is going right now. See -- and I think we are really in a good place in all those DRAM influxes right now.

So just to summarize your take on DRAM, you kind of fam around just materials engineers and materials engineering is expanding, which is sort of leading to the bigger opportunities there for Applied?

That's correct. Yes.

Got it. I guess on the topic of HBM, at the very start, when you kind of talked about this AI inflection, we kind of called out DRAM, leading-edge logic and advanced packaging. And advanced packaging is a small portion of your business, but is also a portion of your business where you're very dominant in HBM. Can you talk about just what are Applied's strength in advanced packaging? And where do you kind of see the opportunities to grow there?

Yes. Like I said, we are #1 in advanced packaging overall. HBM, we are #1. If you really '26, what are the strong growth area. HBM packaging and 3D chiplet stacking. There are different names, different customer, different names.

Within advanced packaging?

Within the -- no, even 3D chiplet stacking. People call it 3D stacking, whatever it is. So those areas are growing very strong. And Applied has a really good push on there. Really look at this advanced packaging, right? Packaging is nothing but wiring. On-chip wiring whatever the learning what we have, we talk about copper wiring, what we had, all the wiring learning, what we had for so many years, all the machines we developed for so many years on wiring, Now all are being adopted off the chip right now. It's nothing but wiring, right? So it's a good place to start with for us because all these products are already helping us or the learnings are there. That helps us. On top of it, we already saw those inflection coming 10 to 12 years back. And personally, I was involved in this. I started this. In Singapore, we started a packaging lab. It's a complete flow lab in Singapore, we call it advanced packaging lab. Sometimes we call it EPIC packaging. It does similar to what EPIC what we have would dream right now. What we do there is we have complete flow. We have customers coming in partnering with us, and we have peers coming and partnering with us and some of the areas where we are not participating, we are working with them right now. And that gives us a great advantage if customer wants to validate a new skin, they come and work with us right there. That kind of help us. So we saw that early, we formed a packaging team and this integration flow really helps us right now. The 2 big inflection what is happening right now is bonding for sure. The other one is panel, really look at those. The bonding areas, we can see we have partnership with [indiscernible] and the panel area, we thought about it even 10 years back, 7, 8 years back, there's a Tango system panel, we acquired the company right now. On the top of it, we are developing multiple products in panel right now. Since we have a display business, for us, it's much easier. Now they have bigger tools to do the panel right now. On metrology, other area of focus on.

I guess my last question would be the sort of I look at this industry and think with market conditions being so tight, you have a once-in-a-generation opportunity to raise prices and improve gross margins.

I know this is coming, yes.

What's your view on that?

Now if you really look at those, in terms of margin, I think -- ever since Gary joined the company, we increased 7 percentage points margin right now. I think we are on the right track right now. I think we think a little different. I had many questions from you guys, hey, 1 time, can you increase the pricing and all? We think a little differently in this space right now. Right now, I talk about -- we believe in creating the value for the customer and sharing the value for the customer. That's what we believe in. Really look at those, I talk about complexity. I talk about working with our customers much earlier 3-plus nodes ahead. This all customer, what they care about is device performance, yield, reliability, time to market. I think what we do is we partner with them, work together with them to address those challenges right now, 3 nodes ahead. This is creating a lot of value to the customers. They've got more chip, they've got a better chips. They are open to share the value right now. We see that already. We see that open to it. You see that complexity is happening where we have high share areas and partnering with the customer much earlier, and we have a control on the value what we can -- what customers can share with us. I think that's the way we think about sharing the value. So what do you do with the value, something for a margin and also R&D investment. We want to increase R&D investment, sometimes we want to return to the shareholders in some areas. That is on overall value sharing, but let's not forget that. We have a big, big focus on cost. We talk about costs through technology, cost through innovation, how we can cut down the overall cost. We are working on both fronts. I'm very confident, not only we increase the margin over the years, I think it will continue to incrementally will increase this margin over the years.

Great. Well, on that positive note, that brings us to time. Thank you, Dr. Raja, and -- yes.

Thank you.