Applied Materials, Inc. ($AMAT)

I think we're set to go. Well, good morning. Welcome to day 1 of Cantor Fitzgerald's Tech and Industrial Conference. This is our second year. Very pleased to have Applied Materials and Brice Hill, CFO of the company. Welcome.

Thank you. Thanks for hosting us. New York, wonderful weather.

Yes, yes. We brought this lovely weather for you. Be assured, it will snow on Thursday.

But to start, I think the world has dramatically changed in the last 3 months, both from your outlook, your competitors' outlook. You called for revenue growth for silicon of greater than 20% growth here in 2026. This is, of course, limited by clean room space availability, resulting in seeing plenty of room for another double-digit year in '27. Do you agree with this line of thinking? And what do you see as the biggest risk to this view?

Well, certainly, the demand signal is extremely strong. I've been talking to people about artificial intelligence and AI. And we've expected our business to pick up based on the demand. When we look at cloud service provider investments -- top cloud service provider investments and data center AI, CapEx are in the $600 billion this year, projected to be in the $700 billion next year. And we've seen a lot of pull from our customers for more advanced logic, more DRAM and more advanced packaging solutions. Right now, the market is constrained with the leading-edge semiconductor components, those 3 areas. And we expect that demand signal to continue very strong and that dynamic of being constrained not to change in the foreseeable future. That's the expectation. C.J., you mentioned that it's constrained by fab space. We did, of course, increase our expectations for this year. So there was more space available to utilize this year. But to your point, it's -- we think it's fully utilized at this point with the space available. So the ramp will be metered by space in leading logic and DRAM as we go through the, let's say, next -- it might be more than a year that we experience that.

So with that as a backdrop, are you starting to see customers slot tool availability in '27 and even '28?

We definitely see slotting into '27 at this point, but I'll back up and say foreseeing this ramp that we're talking about, we've been working with customers on improving our visibility to 2 years with all of our top customers. And in fact, all the customers across our network, we're asking for 2 years of visibility into the equipment that they need. And then, we provide that signal to our suppliers. I've highlighted before that we have over 2,000 suppliers that we work with on a day-to-day basis. You have to give those suppliers a signal if they're going to change their capacity, if they're going to hire people and train people. You have to give them enough lead time to do that because this is a significant increase in output. And so we've got 2 years visibility from our customers. We're providing that to our suppliers. And when it gets closer, when it gets within 1 year, that's part level detail, so the suppliers can truly ensure they can meet your needs.

And in terms of the 2-year slotting, are all customers willing to share that information or only the majority, let's say?

Well, I looked at it this morning, just so I would -- I know that. But I would say it's -- thinking generally about the world, first of all, it's all customers. It's an ask of all customers. I will say that the visibility into the longer list of China customers is more difficult for that period of time. In some cases, they haven't completed those plans. But I think if you think about the largest customers, leading logic, DRAM, NAND, largest customers, those are very complete views.

So if you think about operational readiness, and I know your goal based on that backdrop is to be ready for everything. But this is the first cycle that I've ever seen, and that is a 26-year view, where you're seeing leading-edge logic, DRAM and even NAND all in an upturn. And when you put it all together, you're potentially talking about during COVID, where WFE grew by $35 billion nominal dollars, where this time, it could be $60 billion, $70 billion, $80 billion, $90 billion over a 1-, 2- or 3-year period. And so can the industry support that kind of rapid growth?

We think the industry can support that growth, and that's why the supply chain is so important in this process. As you highlighted, during COVID, we experienced -- there were different pockets of the supply chain that were very difficult to improve. We've never stopped working on supply chain since COVID. We've had to reengineer it to be more regionally self-sufficient. We've had to reengineer it to make sure we have fewer sole reliances across the supply chain. We've made our own supply chain more global than it was in the past. We've increased our capacity. We've increased our inventory positions, and we've improved the signaling to the suppliers. So I would say at this point, we don't see any roadblocks to the supply chain being able to support the lift that we're talking about.

And maybe a wildcard question that's arisen in the last, I guess, 9 days of war and how important oil production is to helium. I guess, are you hearing anything from the supply chain around challenges there?

I don't have any perspective into our customers. I know from an Applied perspective, we have reviewed that, and we don't think it will be a constraint for Applied at this point in time, but that will be a good question for the customers and how much they use of that particular gas.

Perfect. So maybe moving on to end markets. You obviously talked about a number of growth drivers here in 2026. So maybe to narrow in, for leading-edge foundry, we're seeing a broadening of spend. I guess, maybe if you could speak to that? And is that breadth something that can really help '26? Or is that more of a '27, '28 story?

Well, what you're seeing, I think the strength, the fastest driver are these AI systems. Data center now is about 30% of demand for wafers on the leading edge. So that has just eclipsed demand for PC components on leading edge. We expect it to overtake smartphone components by 2029. So that data center growth on the leading edge is really where the strength of the demand cycle is coming from. I just looked at a GPU system for 2027 that's being planned. It's got double the GPUs of a previous system. It's got about 50% higher transistor count per GPU. It's got 33% more memory per GPU. So when you tear apart these AI data center systems, you can really see the concentration continuing to improve in all the various compute and memory components. And when those systems are built in more and more high-complexity solutions, that's what pulls on the advanced packaging techniques. But that leading edge, that is the strongest pull for leading edge. You asked for breadth. I think those 3 markets are all growing, and the market is constrained at this point on leading edge. And so we see 100% utilization across all the leading-edge nodes.

And maybe on DRAM, I guess, can you speak to kind of the dynamics there? Obviously, we're in a supply-constrained environment, but would love to hear kind of how you're thinking about your leverage to HBM. And as we transition to HBM4 and beyond, how Applied Materials' share of wallet should grow?

Yes. I think DRAM similar. It's being pulled by that same demand function. About 15% of the DRAM wafer starts right now are allocated towards high-bandwidth memory. High-bandwidth memory is a double opportunity for the equipment industry because not only are you selling equipment to make the DRAM, the high-bandwidth memory is more intensive from a wafer perspective. It takes 3x as much wafer area to make the same amount of memory with the high bandwidth component. And then, you stack the high-bandwidth memory. So there's additional process steps in order to stack that memory. We think about 19 extra steps, 15 of those are equipment steps, where Applied Materials provides solutions, and we sell more than 50% of the value of the equipment that goes into those additional packaging steps for high-bandwidth memory. So very strong demand signal. I think the roadmap will continue to build out. Customers are working to accelerate floor space so that they can add capacity. And as new technologies come on, we think there'll be also other stacking and bonding solutions that the industry will develop, and we'll participate in. Those will be inflections that will be valuable for Applied.

And maybe I'm getting ahead on the service question. But I'm hearing upgrades of tools, whether it's even a micron adding an extra layer of EUV to clear up clean room space, replacing KrF tools for higher throughput. Are you seeing that particularly from the DRAM market?

We have. We have heard that -- I think we've heard that both for logic and DRAM, where customers will look to optimize floor space in various ways, and so, not surprising. We're trying to maximize output at this point in time.

And so maybe to combine leading-edge foundry and DRAM and the advanced packaging side of the house, your business has grown from $500 million to $1.7 billion, 2020 to 2024. But last year, it declined while others saw growth. Can you talk to the divergence? And how we should think about the business from here?

Yes. 2024, we're talking about advanced packaging. 2024 was a very strong year. There was the initial build-out of the HBM equipment on the DRAM side. And that was a high number. I think it was about $700 million in 2024. It was a little less in 2025 after that initial build-out. So that slowed down. As we're looking forward, we put it in the fast lane of growth, C.J., when we talked about semi equipment growing more than 20% this year. The way to think about it is advanced logic or leading logic and DRAM and advanced packaging are all in the fast lane. So they'll grow faster than that 20-plus percent growth rate. ICAPS and NAND will be on the slower growing side. So you can see the faster groups will grow much faster than the 20% and the slower is much lower. We've said ICAPS, for example, will be approximately flat this year is the expectation. So back to the advanced packaging, we think it will be fast growing this year. We think there'll be continued investment in HBM, and that will continue to grow. And we think advanced packaging overall will continue to grow with that same AI packaging-driven need.

So Life in the Fast Lane, Eagles then.

Life in the Fast Lane.

So how about on NAND? That's a market that you've talked about is not growing as fast. However, we're obviously in a very tight environment. You've got 1 player adding wafers, everyone else adding layer counts. I guess, why do you think it's not comparable to the other parts of the market?

Well, I think NAND is interesting. The bit demand, the bit rate demand has been very strong and continues to be strong. I think we've said it's in the past that it's in the high teens for a bit for bit growth. The issue with NAND is that the technologies have been so excellent in terms of providing more bit density, each advance in the technology that you just don't need more wafer starts to grow the bit supply by 20% each year. And that's been what's happening. So if you look at the NAND wafer starts over the last 4 or 5 years, they're relatively flat. We count about 1.4 million wafer starts a month on the NAND side. And that's been roughly flat. So what you see is companies adding capacity for those additional layers, but they don't need to expand the number of wafers out. We think that continues for the near future. At some point, they'll have to add capacity, but it's not in the near future. So that's what keeps it at a lower growth level from an equipment perspective. But again, there's plenty of NAND demand, the bit demand in the marketplace.

Makes sense. And maybe the last part, ICAPS in China, obviously, a place of concern from investors. And so how do you think about the trends there given your overexposure to both?

Well, it's -- I don't know if I would agree with characterizing it as overexposed to ICAPS. ICAPS is our mature node technologies for Applied Materials. The ICAPS stands for IoT, communications, auto, power and sensor chips. So it's those chips that are built on like 28, 40, 45, 60-nanometer type nodes. We have a very strong position in those nodes. And if you look over the last few years, we typically have for our Equipment and Services business in the high 20% of the business that goes towards China, and most of that demand has been ICAPS. We had a very small period of time, C.J., where our -- the reported percent of China business for Applied was much higher. And that was when we were serving DRAM. We had a build-out of DRAM capacity in China. So it went into the 40%. But otherwise, I would think, as an investor, 25% to 30% is the reasonable range where we're serving business in China, and all of that is our ICAPS business. So a very important business to us. We don't think we're overexposed. And we think that business continues. It will be flat over the near future because there's been a significant amount of investment in capacity in China, but it's a very good business for us. A lot of that future growth will be on 28-nanometer. We have an excellent position in the 28-nanometer node. And where we can -- the customers that we can serve, we'll serve -- we'll do a good job of serving. We're also continuing to innovate in that space.

Makes sense. So it sounds like flat is -- means we're derisked. Curious -- I think President Trump and President Xi will have a meeting at some point in the next month or so. And I think there's hope for some sort of grand bargain. And just curious, given the very tight nature of both DRAM and NAND, do you think there could be relaxation of restrictions for perhaps the consumer memory market? Have you heard any inklings of that from Washington, D.C.?

We've heard nothing from Washington, D.C., as far as I know. I have read in the press what you mentioned that some device companies may be trying those memories because of the constraints in the market. Certainly, that would be upside to our outlook if we were able to serve those customers again. The China market has been constrained. That's one of the reasons we grew more slowly. It's been constrained by the trade rules. Currently, U.S. companies are more constrained by trade rules than non-U.S. companies. That's something that we continue to work with the government on. And that would be an upside to our forecast if we could serve those customers.

Perfect. Now, maybe moving to service. You've guided for double-digit growth here in 2026. At the same time, we discussed earlier, upgrades and customers at near peak utilizations. I guess, how are you thinking about the drivers this year? And is there a potential as we layer in maybe more aggressive capacity adds? I don't want to say an uptick to that number, but maybe that number proving to be conservative.

Well, our reported quarter, just reported quarter, our Service business grew 15% year-over-year. Low double digits is our outlook, and it's -- when you think about that business, every single quarter, the installed base of equipment that we can serve from a services perspective grows. We expect the installed base to grow 5% to 10% depending on the market each year. And we're adding service products every single year to our portfolio, which allows us essentially to provide more value to customers. And finally, the attach rate to our equipment in terms of applying services goes up each year. Customers are building in new cities, new areas. They tend to use the services more because they're looking for qualified labor to help them ramp the factories. So those 3 dynamics help grow that Services business in low double digits. And certainly, if we have higher utilization or we have more growth on the equipment side, then that grows that installed base and gives us upside to that. But we think that low double digits is a high confidence forecast.

Perfect. And then maybe a part of the business that's not asked much about these days, and you actually just put it into the other category display. I think there's been hope that there would be an OLED-led inflection at some point. Where are we in that? And at what point and what magnitude could that start to help the story?

Yes. OLED, very important. We've got some innovations. We launched a technology called MAX OLED, where we have more of the share of wallet in terms of producing the OLED solutions going forward. And we do think that there will be an inflection with more penetration in the laptop form factor and even larger devices. Television would be the place where you get the most screen size. Nothing to announce at this point, but we think penetration for OLED will continue to increase across the industry. And we're not reporting that as a reportable segment any longer, but we did say that we would share in investors when the business changes in size. And so we can look forward to that going forward. And I forgot to mention something on the services side that I want to come back to. We recently did a reorganization. We used to have our 200-millimeter equipment business inside of our Services business. We reorganized and moved that 200-millimeter equipment business and put it in our Semiconductor Equipment business. So when investors now look at our Services business, it is pure recurring revenue. So it is the spares you need for existing tools, and then, the services that we sell along with those tools. And that gives us -- when we talk about that low double-digit growth rate and the confidence in that growth rate over time, about 2/3 of that business is under contract. Those are, on average, 2.9-year contract businesses -- contracts. There's a high renewal rate, over 90%, for those contracts. So those are all the elements that give us confidence that, that business will continue to grow at that rate.

Perfect. Maybe moving to gross margins. I think the market has been happily surprised, record 49.3% in the most recent guide. But I think as folks take kind of step back and think about where margins are pushing downstream at your customers, particularly memory, wondering why can't the equipment guys get more. And so, I know it's a very different market. You have to add value in order to derive that increase in pricing and margins. But curious, as you sit here, you've talked about trying to raise pricing. How should investors think about that progression? And what are the key underlying drivers that support those higher margins?

Yes, I think that's a great question. First of all, the portfolio becomes more valuable every year. And by the way, investors can look. We report -- now, with the new guidelines on segment reporting, if you look at our segments, for our Equipment business and our Services business, we report our gross margins. You can see those separately. It was 54.5% in recent quarter in our Equipment business. So the portfolio, as we do our R&D and make our investments in R&D, we think the portfolio becomes more and more valuable every single year. You're working on higher complexity problems for the customers, in some cases providing integrated solutions that basically deliver modular level solutions to the customers, these become more and more valuable. And you should expect the gross margin to improve over time with that higher value. At the same time, over the last couple of years, we've invested in our pricing process, which means we've got a much more sort of disciplined process in the company to determine the value of the equipment that we're selling to set a target price for the sales team to have the sales team try to achieve that targeted price. That's a much more disciplined process than what we've had before. Our pricing has gone up over the last 2 years with that general improvement in the overall portfolio, and we expect that to continue, C.J.

Perfect. And how does EPIC fit within kind of the gross margin story? Obviously, you're partnering even closer with your customers. You announced this morning a partnership with Micron. I would assume that, that speaks to years down the road of higher margins. But curious today, what's the impact of that investment? And then, how should we think about the progression of margins related to that partnership?

I think investors and customers expect Applied to be working 3 and 4 generations out with our customers. In order to do that, you need lab space. And so what we've built in Sunnyvale, right near our Santa Clara campus, is a large lab to host all of our customers and to do this long-range work with our customers on future technologies. That is really the core of the industry. You have to be 5 to 10 years out in the materials identification and the interaction between those materials in the tools that apply and remove those materials. It takes that sort of long-range investment to work with customers to provide those solutions. And when we're effective, you get designed in early on. And so you know you have those designs, and in many cases, since they are modular level, those designs can last for generations and generations in process technology. So we needed more space to do that. And C.J. referenced an announcement this morning, one of our impressive customers, Micron, long-standing partner, has announced that they're going to be joining the EPIC Lab, and they'll be part of the collaboration process in the EPIC Lab. So that's a very important announcement for the company. It joined Samsung as another founding partner in the investment. So we expect to have a large number of our customers in EPIC. It's a very important investment for the company in terms of the future of R&D for the company, and we're looking forward to opening it this fall and fitting it out with the tools that will be the newest generation tools and working with our customers on those.

And so as a plug, SEMICON West, October, I believe you'll be hosting a couple of events around this.

Absolutely. We're hosting an event around the opening of the facility, and it will be exciting and impressive.

Perfect. Perfect. Maybe to close, I think we've got little less than 5 minutes to talk about operating leverage. In late 2025, you had headcount reduction. And you guided OpEx relatively flattish into Q1, which is better than kind of normal seasonality. How should we think about, particularly thinking about a fairly steep recovery, in my view? How should we think about operating leverage for the Applied model going forward?

We expect to deliver operating leverage mechanically by raising spending at a slower rate than revenue growth. That is the expectation. But when you say, well, why is spending going up, most of our growth comes from organic investment. So we are building lab space. We are building manufacturing space. We are adding headcount for this ramp. When we sell more tools, we install and service those tools, so we're hiring the headcount and training the headcount to be ready for the ramps at our customers. And this quarter, we added a number of new R&D programs that will expand our portfolio in the future, where, of course, we have high confidence in the ROI of those programs. And so with the higher confidence outlook, the longer outlook that we gave to the Street from a revenue perspective, we felt we were in a position to fund those programs. And from an investor perspective, I would -- if you look at Applied, the way I think about it, we tend to reinvest about nearly half of our profits, and the rest, we distribute to shareholders through buybacks and our dividends. And so you will see Applied continuing to make investments in our core portfolio and in adjacent portfolios. And those are high return on investment products from our perspective.

What's the average cycle time from R&D investment dollar in to ramp HBM revenue out?

I think it's several years. So -- of course, it depends on the application because some applications are modifications of something that's existing, so that can go a lot faster. But if you have something that's 3 or 4 nodes out, that could be a 5-plus-year roadmap.

Perfect. You alluded to capital allocation, half of free cash flow. In the last 12 months, you bought back $4 billion of shares. You do sit in a position where you are above net cash breakeven. I tend to model you around net cash breakeven and return everything. Has your view changed at all? Is there a certain level of cash that you need to run the business? Or is that still a fairly decent kind of philosophy behind modeling capital returns?

I think the way I would look at it from a capital return perspective is we expect to return 80% to 100% of our free cash flow to investors over time. And that's not every quarter, C.J. So in the recent quarters, we've had pretty significant capital investments with the EPIC Lab that we're talking about. We had some other cash needs. So that will fluctuate on a quarter-to-quarter basis. But as you referenced, over the last year, our distributions, I think, were about 86% of free cash flow. So no change there.

Perfect. Maybe to close and thinking a bit longer term, particularly around your EPIC Center investment, how will you monitor or measure success with that investment?

I think that's -- if you look at speed of innovation for the company, that's what we're thinking EPIC will provide us, having our customers in our lab with the brand-new latest development technologies using those, that will speed innovation. The lab itself is built to speed up your ability to install hookup tools, change chambers, do new experiments. The lab is built to accelerate that process. I won't go into the construction details since we have 2 seconds left. But it is designed to speed the process up. It is designed to host customers, and we think that will accelerate our innovation and pace of innovation.

Well, perfect. I think we have to close there. Thank you all for coming, and thank you for coming, Brice.

Thanks, everybody.

Great to see you.