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

Okay. Welcome. Good afternoon, everybody. Welcome to the Goldman Sachs Communacopia and 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, to the stage today. Welcome, Gary.

Thank you, Jim. Glad to be here.

I think it's fair to say that the view of the market is pretty starkly different than we were on your stage last year at this time. Clearly, we see almost everything being constrained around AI. You commented on much stronger demand visibility that you're seeing from your customers. Can you maybe help frame the level of demand and visibility you're seeing right now, either in terms of duration of customer forecast or size of your backlog?

Yes. As you said, AI, especially data center, is an enormous driver for our business. One statistic I thought was interesting. If you look at leading-edge foundry, you go back a few years ago, smartphone wafer starts were 4x larger than data center. Today, they're 1:1. And in a couple of years, it will be 2:1 data center versus smartphone. So for sure, AI and data center are by far the biggest drivers. And relative to the technologies that are critical for AI data center, the fastest-growing segments, 80% of wafer fab equipment growth this year is leading foundry-logic, DRAM, including high-bandwidth memory and advanced packaging. Again, that's 80% of the wafer fab equipment growth this year, and we see that same mix in '27 and going forward. And then relative to our customers, we've been continually increasing our revenue forecast for '26. In February, we said greater than 20% revenue growth. In May, we said greater than 30% revenue growth. Now we're approaching 40% revenue growth and what we've communicated here recently. And both our near-term and longer-term outlook has been growing. One of the big drivers this year is Agentic AI. So you have agents consuming tokens and compute. And that's driving increase in our longer-term WFE forecast, especially around CPUs and DRAM. So we've seen that continual increase. And then relative to all of our discussions with customers, Applied is in a great position because all of those fastest-growing segments of the market are areas where Applied has clear leadership, and we're gaining share through those inflections. So customers want to make sure that from an operations, supply chain capability standpoint, we're ready. Our trained service engineers are ready. So we do have this 8-quarter forecast, rolling 8-quarter forecast and longer-term commitments from our customers. And again, that has continually went up as we progress through the years. And we even have discussions with customers all the way through 2030. My view is AI compute demand is going to remain very strong for many years going forward into the future. I look at Applied Materials and the way we're using AI in innovation, product development, operations supply chain. We have thousands of engineers in our field operations, service and process engineers. And it's just a game changer. And then for me, what is most important, we will drive tremendous productivity improvements inside Applied Materials, but way more important than that is our ability to bring multibillion-dollar products to market faster and also very valuable service innovations to market faster. So I think, again, AI is the biggest technology inflection I've ever seen in my life. If you look going forward with Agentic, physical AI, again, you're going to see increased compute demand and the need for compute innovation, tokens per second per watt has also never been greater. The position for Applied enabling these inflections is also a great tailwind for the company.

Great. Gary, you've seen a lot of cycles over your career for this industry. How does the current demand environment compare with past circle cycles you've seen over your career? And then is there any sort of warning sign at all that rhymes with past sort of cycle peaks that you've seen?

Yes. So I think it's pervasiveness of demand. I mean I look through my career, I'm an engineer, been innovating at 3 different companies in the industry. I've never seen a driver that's as broad and pervasive as what we're seeing today. I mean, certainly, when we went to mobile social media, everybody has a computer and a camera in their pocket. That increased the demand but AI is a whole different level of demand driver. So when we look out for a number of years, again, it's just so disruptive and fundamental to every single industry. My view is that companies that are not adopting this technology will be left behind. And so -- and the growth, Agentic is adding additional WFE growth going forward. Physical AI in the future will add more compute demand going forward. And I don't really spend time worrying about macro effects over a near term. Again, for me, it's very clear this compute demand is going to be strong secular growth over many years going forward.

Yes. Now your direct customers are incredibly profitable right now, as profitable as I've ever seen in my career, certainly. But some of your customers' customers who are driving ultimate spending on chips, they're spending well over $1 trillion run rate at this point. That appears to be moving higher. But many of those same companies are tapping capital markets just to sustain that low current level of CapEx. So how do you think about the ultimate returns for the AI value chain as you see it big picture? And do you see any kind of systematic risk that could kind of cause a pullback in demand?

So I think the value creation to me is crystal clear, as I mentioned, for Applied. We're bringing to market products that are worth billions of dollars. So that time to market is extremely high ROI. Another area that I would say that we're getting tremendous pull higher than any point in my career is not just for performance innovation. Again, Applied is the leader in material innovation in all of these fastest-growing parts of the market being driven by AI, but the other -- and that's critical for our customers for design wins. So we're co-innovating with them on all those architectures for generations out in the future. The other big driver larger than I've seen is in yield and output innovation. So our customers, as you can imagine, every incremental chip that they can ship is worth an enormous amount of money for those customers. So if we can innovate in our services, and that business is growing over 20% today year-over-year. Margins are up 180 basis points in that part of our business. And so innovations that we're driving there for predictive models for preventative maintenance for more output or chamber matching where I can get more good chips output per wafer. Those are enormously valuable for our customers. So again, for me, what I -- what we're focused on are driving products to market faster that are worth billions of dollars, and we're doing that. It's very, very clear. Same thing with these very high-value services. That 20% growth in services over the last year, again, we see the opportunity to create more valuable services for our customers because the value of the yield and output is so high. In some cases, if we go to a different service contract, we can more than double revenue per tool for those innovations. So again, for me, that is a complete game changer in terms of Applied's position in the industry, the value that we create for our customers. And again, I have to believe that everybody else is looking at this in a similar way. So as I said earlier, if you're not implementing these technologies, you will absolutely -- by the way, I hope our competitors are not doing this. They're going to be left behind. There's no question. And so relative to financing or any of those types of dynamics, what I look at more so are the fundamental value creation drivers. As you said, the profit pools in this industry are larger than they've ever been because this technology is more disruptive than any technology that we've delivered in the past. And so I think this industry, we create miracles, if you look at the technologies that we've been able to deliver in the past that have had enormous impact. This is a whole another level. So frankly, I don't worry so much about what you just talked about. I think that this is so fundamental, the value creation is so significant that, that compute demand is going to increase significantly going forward. Now are there going to be periods of time where it's not growing as fast for whatever type of a macro effect? That could happen. But I think the trend over a number of years to me is crystal clear.

Yes. Now as you said, AI permeates everything we've talked about at this conference. One of the things I'd like to do is explore how companies are looking at AI internally. So you just raised that question. So maybe give us examples of how Applied is using AI internally. And are those mostly kind of cost efficiency and efficiency-led kind of applications or using it to drive higher revenue for the company in some cases?

By far and away. So if I look at doubling the size of Applied Materials over the next few years, we definitely -- we are incredibly clear in all of the swim lanes that we're driving relative to AI implementation in the categories I talked about earlier. By far and away, most important to me is top line growth, bringing products to market that are worth billions of dollars. One example is in coding. In some of our products, there's a high software and algorithm content. And we're driving tremendous productivity in that part of the product development. So 50% improvement in productivity has nothing to do really near term with headcount. It's all about bringing those multibillion-dollar products to market at a higher velocity. So we're using this technology in a number of different areas, hardware and software. There's no question that the value is tremendous. And I mentioned the value of yield and output innovation and services. So when I'm meeting some of our top CEOs every month, they're racing for tokens per second per watt in their new chip and packaging architectures, that's really important. But they're also phenomenally focused on increasing output of good chips per wafer and wafers through the use of these kinds of technologies. In our services, we have over 37,000 chambers in the field today connected to AI-enabled servers, most of them connected remotely. And so again, our ability to -- there's a massive amount of data there. Our ability to use AI with predictive models to increase output and good chips per wafer is off the charts valuable. And as I said, that business is growing -- has grown in the last year over 20%. The value there is higher than ever. And in some cases, we're improving the hours per task in order of magnitude. But for me, what I care about is I can accelerate scaling these high-value yield and output services faster for top line growth. So we will add headcount, but we're going to grow revenue many times faster.

Understand. Okay. I want to ask just briefly about U.S. semiconductor capacity because obviously, the U.S. has lagged the world in the last 20 years plus. But it seems like that is starting to change a little bit with increased investments from TSMC in Arizona, Samsung, potentially Intel. So maybe speak to your market position, specifically in the U.S. market. Do you think it basically matches what you see globally? Or is it higher or lower? Maybe talk about why.

Yes. So I think relative to market share, the most important thing for us is how we're positioned in the technology inflections. So Applied is the leader in leading edge foundry. We're working across all of these different companies. We have the most valuable enabling portfolio, whether it's in transistor inflections, backside power, all of those different areas. In DRAM, one of the big inflections there is in higher speed DRAM. So adding transistor innovations in the periphery to get the data on and off the chip, that's an area where Applied has extremely high market share. And again, that's another inflection that's important for our customers. And then packaging, multichip connectivity, that is also one of the fastest-growing segments of the market -- overall semiconductor market. That's growing over 70% this year for Applied Materials, kind of midpoint between $2.5 billion or $2 billion and $3 billion relative to the size of that business, extremely high growth rate. So for us, it's really more of our positions and enabling those really important AI data center inflections than it is whether it's U.S.-based or Asia or any other location. Now the one thing I would also say, though, that is a very big positive for us, as customers are moving into new locations, that is a tailwind for our service business because that infrastructure is not set up in those new regions. And also the level of experience to ramp yield very quickly is less in some of those new regions. So I would say that we're well positioned in terms of those technology inflections. And the regionalization is a tailwind for us in our service business.

Yes. One specific I want to ask -- example I want to ask about is Elon Musk and who's being more vocal about building Terrafab in the U.S. Can you talk a little bit about the extent of your technical and commercial collaboration with Terrafab, sort of what you expect your market position to be with Terrafab as it ramps? And then maybe how big an opportunity this could be for you over time?

Yes. So I'm not going to talk about -- I have a lot of respect for Elon, very smart person. I'm not going to talk about any specific customer. What I would say is that we're engaged with every one of these companies. They're all in a race for AI compute leadership. So every technology node, whether it's 2-nanometer or A14, 1.4 or different DRAM technologies, I said, adding the transistor innovation in the periphery for higher speed memory, advanced packaging, multichip connectivity. We're engaged with every company. Applied has the broadest, most unique portfolio in enabling those technical innovations. Applied is by far the leader in deposition for all of those different segments and essential for customers in bringing those new innovations to market. So we're in deep high velocities, co-innovation relationships, co-creating those architectures, whether it's a new customer or an existing customer, the depth of the relationships are very strong. When you have a new customer, the most important first thing is the R&D relationship to create competitive technology. So we -- every single company, we have those deep relationships in all of those different areas. And then how that transitions into high-volume manufacturing depends on how fast you can create a competitive technology. And then it's not, as I said, just about performance. For design wins, you need performance and yield. And again, when you have new companies that are entering into these markets without that level of expertise, it creates an even much stronger pull, not just for our innovation teams, but also for our yield and output teams.

Great. And then maybe last regional question on China because this has been an area where there seems to be like a resurgence of CapEx on the part of those customers, but U.S. export controls have obviously put a damper on how much of that market you can address. You've talked about that market now being expected to be up for you in 2026. Maybe help profile for us how do you expect that level of structural growth in China for Applied and in light of all those kind of export controls you're subject to?

Yes. So China really for us is mostly an ICAPS, we call ICAPS market, IoT, communication, auto, power, sensors, more consumer electronics. And as I mentioned earlier, 80% of the WFE growth in '26, we think the profile is similar in '27 going forward is really driven by AI data center, leading-edge foundry logic, DRAM, high-bandwidth memory, advanced packaging, those segments. For us, we're seeing growth this year in China and overall ICAPS. And gaining a little bit of share in the areas where we can compete inside of China. So we think longer term, if you think about the fastest-growing segments of WFE, again, it's still going to be driven by AI and data center, the segments I described earlier. We think ICAPS grows at kind of mid- to high single digits over time, but not as fast as some of those other segments. And what we're seeing near term, even in ICAPS, the growth there is being driven by power in data center, photonics, that's adding some incremental growth in ICAPS. Next year, we see that business also growing a little bit faster than what we're seeing this year, but still growth rates are slower than what we see in data center. And again, one thing that I've seen over the last few years was that smartphone ratio to DRAM, 4:1 going to 1:1 and 2:1, the data center versus smartphone, that's going to be the driver for the next several years.

Yes. Okay. So maybe shifting to a discussion of your end markets for a moment. I don't -- I know you don't like to give quantitative market forecast for WFE growth, but I'd love to get your qualitative perspective on 2027, if I could. You've seen obviously very robust demand visibility as you talked about. One constraint you've mentioned on your conference call back in August was clean room space. That was a constraint this year, talk about being constrained next year. But this year, your customers kind of overcame that and accelerated that space completion. So directionally, how would you sort of handicap the chances of growth in 2027 for you being better than '26?