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

All right. Good morning. Welcome to day 1 of Citi Global TMT Conference. My name is Atif Malik. I cover U.S. semiconductors and semiconductor equipment stocks. It's my pleasure to welcome Brice Hill, Senior Vice President and CFO from Applied Materials; also Mike Sullivan, Corporate VP and Investor Relations. I'm going to kick it off with my questions first. If you have a question, save it for the end. I'll call the mic to come to you, and you can raise your hand and you can ask your question. Welcome, Brice.

Good morning.

Brice, let's start with the market outlook. A very exciting year. You've described customer visibility as the best you've had. Rolling 8-quarter forecast, tracking 10-plus new fabs, having conversations extending to 2030. You have been raising your semis revenue expectations to more than 30% now. Can you just talk about the confidence on this continued growth and how you're looking at your opportunity in the next few years?

Sure. Nice to see everyone. Thanks for hosting us at the conference, Atif. So the demand confidence that we have, we look at -- we have a lot of information coming in from our customers, especially the DRAM and leading logic companies. We have a rolling 8-quarter forecast we get from our largest customers, which has been increasing all year, and we attribute that to the AI, artificial intelligence systems demand that's happening across the market. So we've got that information coming in directly from our customers that's been rising. That gives us some confidence. When we look beyond our customers to their customers, cloud service providers as an example, we see the CapEx forecast rising all year from the cloud service providers. I think it's over $700 billion this year for the U.S. companies, almost $1 trillion for the global companies. Those numbers continue to go up. When we look at the underlying trend dynamics of AI itself, we see token demand rising. We see the economics of token demand and the economics of the cloud service providers to be positive. And so this underlying trend seems very strong. And when we think about it from a microeconomic perspective, what we see inside Applied Materials, we're, of course, using AI inside the company to accelerate software development, to accelerate product development, to accelerate schedules for our products. And our own utilization is increasing significantly, which gives us a lot of confidence that this trend, the AI data center investment trend is investable and is durable from an economic value perspective. The last thing on this is we've seen across the whole ecosystem, we've seen utilizations increasing almost every different end market, including our mature technology nodes, which just says that the semi devices themselves are increasing in volume, which also gives us confidence. So really, all the indicators, all the arrows point up, our customers are investing, our customers' customers are investing and highly profitable, and we're investing. So we think we have a lot of confidence in the future.

Brice, one thing that we've started to do in terms of forecasting wafer fab equipment, I understand you guys really don't talk about that number is start using the hyperscaler forecast. And you guys have a good team to do this kind of bottoms-up. And kind of help us understand if you guys are doing anything differently in this spending environment, tracking like the hyperscalers' investments or any other metrics that is extending your visibility?

Well, for sure, we're monitoring actual system designs as an example. So we do look at the GPU content, the accelerator content, CPU content, memory content on systems. We're trying to understand what the shape of the demand by DRAM, by leading-edge logic and by advanced packaging will be for our forward-looking forecast. So that's probably at a deeper level than we've seen before. The other thing, of course, that we track is all the factories announced across the world. So we have a fab tracker -- it's well over 100 factories that we're tracking at this point. There were 10 -- more than 10 added in each of the last 2 quarters. And that's another strong leading indicator for us is how much clean room is being put in place. We've said over the medium term, this ramp, there's more demand than there is supply. So we've said in the medium term, it's gated by clean room. And so we're looking closely at the investments customers are making in clean room when those factories come on, and that gives us confidence also and then the triangulation of that system architecture and the amount of capacity that's being put in place across those different device types, we work hard on that.

Great. Let's talk about the growth drivers. You guys have talked about foundry-logic, advanced packaging and DRAM driving more than 80% of your growth this year and next year. Can you talk about the areas like NAND capacity and mature node our ICAPs business, power semiconductors, silicon photonics, -- like which one of these areas have the most potential for upside to your current already very strong expectations for DRAM and foundry-logic?

I think the -- so if we start with DRAM and foundry-logic, the end market that we would pair with that very closely is advanced packaging. And so the advanced packaging, that was a $1.4 billion business for Applied Materials last year. We've said this year, it's growing more than 70%. And we expect that advanced packaging will grow apace with leading-edge logic and DRAM going forward. And it goes back to what I just described with the system-level architecture for AI data centers. You have a lot of leading-edge components, CPUs, GPUs and accelerators. You have stacks of DRAM and HBM on those systems, and they all have to be connected on a substrate with high-performance interconnects. And so that pulls the advanced packaging capability along with the demand for these systems. So we think that's a very strong grower. We put those 3 together and Applied has the #1 process equipment position in each of those end markets. The other one that's a little bit different than in the past year is what we call ICAPS, our ICAPS market, the mature process technologies. ICAPS is IoT, communications, auto, power, sensors, those end markets. That's been a slow market for the last couple of years as a lot of capacity had been put in place in China. And we said the world has to digest that capacity and get utilizations back up. Well, now we see utilizations coming up. We actually expect some moderate growth in ICAPS this year in 2026. And next year, we think will be a more normal growth year for ICAPS. Normal, meaning the end market, the devices themselves grow at mid- to high single digits, and we expect the equipment will eventually track that as we normalize from a utilization perspective. And so that's probably a change. If we have our ICAPS business working well along with DRAM leading logic and advanced packaging, then we can get the strong results that we're expecting. On NAND, I'll just add a comment on NAND. The bit demand for NAND is very strong. So we say in the probably high 20% range. The issue is that the additional layers that are being added in the NAND process technology is so productive from adding bits per square centimeter on the wafer that you actually need fewer wafers to complete all of the demand or to make all of the demand. And so when you do that, basically, what you have is an upgrade cycle on the NAND side. So you have fewer new factories, you don't have more wafer starts, you have a lot of upgrades. So what that does from an equipment perspective is it makes that market smaller. And we expect that to continue for at least the next few years.

Great. Brice, at June, DRAM and advanced packaging masterclass, you highlighted panel-level packaging. It's something that you guys have been kind of working towards in the last few years. Could you talk about where the industry is today on panel adoption? And what are the key hurdles and opportunities for Applied Materials?

Sure. So panels, if you picture these data center systems, all of the large cloud service providers and system design companies, again, are looking at their mix of components, accelerators, GPUs, CPUs, stacks of memory. They're trying to figure out how can they get even more performance per watt, even more performance because there's such a concern about the amount of energy being needed to run those systems. And one of the most important ways of doing that is to expand the amount of chips with higher quality interconnects on a single system. And that requires larger substrates, panel being one of the options for larger substrates. And Applied Materials is investing significantly in this trend to grow its capabilities. We just recently did a small acquisition. The company is called NEXX. And as an example, that does fine line interconnects on the on-panel levels. You ask where the industry is. The industry is currently in development on panels. We have revenue on our panel processing equipment, but I don't think there's any volume production at this point. So it's in development. From -- what are the challenges? I think the challenges are typical of what you see in new package technologies. The engineering has to do with how do we solve the thermal issues on a panel in a different substrate, how do you maximize the density and just the form factors themselves, companies are experimenting with different form factors. Some are wafer size and some are larger than wafer size. And by the way, Applied's experience on the display business gives us the ability to experiment and drive equipment solutions in those larger form factor sizes. So we've invested in litho capabilities. We have e-beam products that will help inspect on a panel or other package types. And as I mentioned, we're investing in other capabilities. So we think that will be a natural evolution in terms of larger compute systems over time.

Brice, one question we've been getting from clients is around the tightness in the DRAM market where some of the AI servers are going to be de-speccing memory content because of the availability of memory and the move down towards maybe 8-high or even lower stack that's up HBM. Can you talk about -- obviously, they have to do this to kind of adjust themselves to the availability of the memory market. But can you talk about any impact you see on the equipment demand?

Sure. I've heard this term de-speccing. And I think our view at Applied Materials is when customers are lowering the number of stacked HBM, high-bandwidth memory in a system, they're doing that to get more system output. And so from our perspective, they're going -- they're trying to be able to ship more AI data center systems in total, dealing with the memory constraint. And so they're adjusting the system throughput and orchestration in that system so that they can maximize the amount of compute with the hardware that they have. What that means on the equipment side is you're actually shipping more GPUs, more CPUs, more accelerators per memory chip. So I think from an equipment perspective, we would view that overall as neutral. And we certainly haven't seen a reduction in demand in the business because of this phenomenon. So I would just look at it like any other situation where you're managing the amount of chips available, they're trying to maximize the amount of compute they're outputting with their systems. And so it's just an adjustment to figure out what's best, the most memory or the most systems, and they're leaning toward more systems in that de-speccing situation.

Great. Brice, when we talk to some of your customers like big foundries and ask them, how is this cycle any different from prior cycles? One thing to point out is that the prior cycles were all about Moore's Law, just making it smaller. But with this new age of AI, the performance and the time to get the latency and those improvements is far more stringent and they're really counting on the equipment makers to provide that extra boost in performance. And you guys have the most kind of broad co-optimized portfolio. You talked about integrated process tool set. Are customers increasingly awarding you more PTORs or process tool of records because of this ability to boost the device performance in a more integrated manner?

Great. Thank you. I think that's something that I want -- I was hoping to touch on. So that's a good way to think about Applied's portfolio. When we think about our portfolio of tools and investors know that we have a large number of solutions at Applied Materials. We have deposition, we have etch, we have treatments, we have films. We have thermals. We have inspection, we have planarization tools, et cetera. I've heard some investors say before, oh, if you invest in Applied Materials, you're just investing in the entire semi equipment stack, so the company should grow like the overall market. We certainly don't view it that way. What we're trying to build is a complete set of processing equipment to be the most enabling set of tools for our customers. So the way we look at it as when our customers come into EPIC, our new development center that we're building into -- in California, when they come into EPIC and they want to work on nodes, process technologies that are 5 to 10 years out, next-generation technologies. And we need to invent the type of equipment, and we need to invent the technologies to build those new advanced architectures. Applied wants to be able to do every step in that process, so they're not having to go back and forth with other process solutions. So if there's 16 steps in a particular formation of something in the architecture, we want to be able to do all 16 steps so that we can control the interaction of those materials and control the way the process is developed and optimize the tools for that solution. The benefit for our customers is they've got a one-stop shop to do that work. The benefit for Applied is when we're successful, hopefully, we win all of the designs for those applications. So it's really a focus area for us. And so I would look at that portfolio less as a desire to be broad and more as a desire to be the most enabling technology company for our customers. And that's the way we think about recent acquisitions we've made. We've done an X-ray technology company that's going to help us inspect micro bumps between stacked chips. We did the NEXX acquisition that I mentioned that's fine layer interconnects for panels. And that's the way we think about our portfolio is what technologies will help us be the most enabling partner for the customers and be critical for our EPIC center where we're trying to invent those technologies that will be 5 to 10 years in the future.

Awesome. Now we've established the demand picture looks really strong. Let's talk about your ability to supply. You doubled your manufacturing space over the past several years, and now you're preparing 2x current systems output levels by 2028 and some planning going on to 2030. Can you just talk about when you look at your supply chain readiness to meet this demand, where you guys stand?

Sure. Well, on the capacity side, one of the most important things when you have long lead time capacity investments like clean room. Clean room typically takes 2, 3 or 4 years depending on what you're starting with. You never want to be short clean room when you're in a highly profitable business. And so when I made those comments, I wanted to make sure investors knew and our suppliers. Partially, those comments were also to be reinforcing to our suppliers who have to make the similar investments. We have invested to -- and are investing to make sure that we can produce double the amount of systems each quarter that we're producing today. And it's a capacity statement. It's not necessarily a revenue forecast, but it tells you those are possible scenarios that we're considering. You have to have the clean room and space in place. So we're putting that in place. And when we think about our suppliers, those 8-quarter forecasts that we talk about from our large customers, we aggregate that information by component type, and we send that information to our suppliers so that they're getting 8-quarter advance notice on what type of demand that they -- that we will have of them so that they can make the investments. Our suppliers, there's a lot of smaller suppliers. They're all different sizes. We typically reference 2,000-plus suppliers for Applied Materials. A lot of them have to make investments, hire people, add capacity just like we do. And so they need that signal. Now the only rub in the equation is we've had -- we have that 8-quarter forecast. And of course, every single quarter this year, it's risen even within the year. And so our suppliers are doing a great job keeping up with us and the customers understand the importance of sending those signals. And so we continue to work on optimizing that whole communication flow.