Q1 2022 Applied Materials Inc Earnings Call

Yeah.

Welcome to the applied materials earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session. I would now like to turn the conference over to Michael Sullivan Corporate Vice President. Please go ahead Sir.

Good afternoon, everyone and thank you for joining <unk> first quarter of fiscal 2022 earnings call. Joining me are Gary Dickerson, our president and CEO and Bob Halliday, Our Chief Financial Officer before we begin I would like to remind you that today's call contains forward looking statements, which are subject to risks and uncertainties that could cause our actual results to differ.

Information concerning the risks and uncertainties is contained in <unk>. Most recent Form 10-K , and 8-K filings with the SEC. Today's call also includes non-GAAP financial measures reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at applied materials Dot com.

Before we begin I have a calendar announcement applied will hold its next master class on Thursday April 21 at nine o'clock Pacific time, we will cover patterning technologies for the chip, making industry, including two de scaling with <unk> lithography materials enabled patterning of gate, all around transistors, and three D patterning control using E beam.

Technology, and AI X, we hope you'll join our technology experts for presentation and Q&A.

Now I'd like to turn the call over to Gary Dickerson. Thank you. Mike. This is an unprecedented period for applied materials in the semiconductor industry demand for semiconductors has never been stronger or broader and the supply chain's ability to fulfill this growing demand is constrained in the near term while the supply.

Remains challenging we landed our first fiscal quarter of 2022 towards the high end of our guidance range and delivered our highest ever quarterly revenues. These results are a testament to the capabilities and commitment of our global team, who are executing well and focused on doing everything possible to deliver for.

Our customers the industry clearly has a long way to go before supply catches up with demand applied orders for the quarter were an all time high beating our previous record by a half billion dollars to ensure our own manufacturing capacity is not a limiting factor we've made and continue to make strategic investments in our globe.

Infrastructure. This includes our state of the Art Logistics Service Center in Austin, Texas that were bringing online. This month like many in the industry. The biggest challenge we face today is the availability of certain silicon components that go into sub systems within our products. We are working closely with our supplier.

To find solutions and eliminate bottlenecks I would like to thank them for their partnership as we collaborate in new ways to overcome near term headwinds and build a stronger supply chain that better supports the future needs of the industry in today's call I'll talk about our demand outlook, which is very strong and strengthening.

I will provide our longer term perspective on the secular trends reshaping that semiconductor industry and I'll give you some updates on the progress, we're making against our strategic goals and how we're positioned to outperform our markets over the coming years later in the call Bob will share his perspective on the state of the industry.

And our financial outlook.

Let me start with market demand, it's clear that wafer fab equipment spending in 2021 was limited by supply with unmet demand pushing into 2022 if.

If we look at our semiconductor systems revenues from the second quarter of 2021 to the end of Q1 2022 and compare to the prior 12 month period, they were up 43% year on year.

We think this is a good approximation for industry growth in calendar 2021, which would put Wi Fi in the mid $80 billion range demand is very strong and continues to grow we believe wafer fab equipment spending could reach $100 billion in 2022 and since we.

We are already close to being sold out for the year. We also have a positive growth outlook for 2023.

Within Wi Fi foundry logic spending grew faster than memory in 2021, and we see it growing faster than memory again in 2022, we believe foundry logic made up more than 60% of total Wi Fi investments last year and will remain at these levels or increase as a percentage of the mix.

Over the next several years.

Innovation at the edge and in the cloud it means that foundry logic demand is broad based and split relatively evenly between the most advanced nodes and I kept customers, who serve the Iot communications automotive power electronics and sensors markets.

It's also important to put this near term demand outlook in the context of the secular trends driving longer term growth and structural changes in the industry. While digital transformation is already reshaping the global economy today, It will take decades to fully play out around the world and at the foundation of this month.

<unk> trillion dollar inflection is advanced silicon today nine of the top 10, most valuable companies in the world either design or build chips eight of the nine are now designing their own customized silicon in house and the other one manufacturers a large percentage of the world's Chi.

<unk> by value.

I think this is a great example of the fundamental role of Silicon plays in driving the system level power performance and cost improvements that will unlock the full potential of digital transformation and the meta versus.

Back in 2018, we introduced our framework for describing the semiconductor industry's future technology Road map, we called this the new Pea pack T playbook and said it had five key elements, new chip architectures like workload specific <unk>, new <unk> structures like gate all around <unk>.

Sisters Backside power distribution next generation three D. NAND in three D DRAM, new materials and gate contact and interconnect new ways to shrink from EU V lithography to advanced patterning and advanced packaging from 2.5 D. Silicon inner Posers two three D.

Chip, let's and hybrid bonding.

As the major technology inflections that makeup the Pea pack T playbook take shape. It is clear this future roadmap is more multifaceted and complex than anything the industry has done before.

This increasing complexity has positive implications for applied materials first we expect capital intensity to remain at the levels. We have seen over recent years and second applied broad capabilities are more valuable because they allow us to address higher order problems for our customers.

And provide them with more complete solutions on top of the opportunities created by the Pea pack T. Playbook major supply chain inflections are underway that are also positive for industry economics. This starts with a shift from just in time to adjust encase philosophy. The most visible example of.

This is the automotive industry.

The major carmakers are quantifying the cost of loss business in 2021 and rapidly changing the way they work with suppliers of their most critical components.

We're also working differently with our customers they are providing us with longer term visibility and we are collaborating more closely on capacity planning. In addition, the strategic and economic importance of semiconductors is being recognized at a national level in the coming years government support and incentives in the U S.

Europe , and Japan will translate into regionalization of supply as I've highlighted before these regional supply chains will be more resilient, but also less capital efficient, which is an additional tailwind for us.

Overall, our outlook for the next decade is very positive, we expect semiconductor wafer fab equipment to grow significantly faster than the economy with outsized opportunities for applied materials to be ready for this exciting future we've aligned our organization and investments around three strategic pillars first.

To be the Pea pack T enablement company and provide the foundation for our customers' Roadmaps for power performance area cost and time to market.

To shift more of our business to subscriptions and third to generate incremental free cash flows and profitability from our businesses in adjacent markets earlier I talked about key technology inflections that makeup the Pea pack T playbook gate, all around backside power distribution <unk> NAND three D DRAM.

New materials in the gate contact and interconnect and advanced packaging.

All of these inflections are primarily enabled by materials engineering applied core strength and as a result, they grow our total available market. Thanks to our relentless focus on developing differentiated technology to enable these inflections. We are also in a great position to capture more of that growing to.

Dan.

For example in the transition from Finfet to first generation gate, all around our transistor Tam grows by more than $1 billion per 100000 wafer starts per month and based on our tool of record positions, we expect to capture the majority of the inflection.

We will provide more details about these inflections and how we expect them to play out in our 2022 master classes.

While our current supply constraints mean that we can't fully realized the strength in our business. We are executing very well against our product roadmap and there are clear leading indicators of our future growth potential I'll highlight a few recent examples.

We've recently won multiple tool of record positions at advanced nodes in foundry logic across all three leading edge customers. This is significant because these wins are in areas. We haven't served in the past and demonstrate how our next generation of etch solutions address customers' most challenging app.

Obligations.

And then inspection and metrology, where we have fewer supply chain constraints. Our trailing 12 month revenues were up 68% year on year and our E beam revenues nearly doubled in that period, we expect to outperform the market again in 2022, with especially strong growth in optical wafer.

Our inspection combined with further extension of our E beam leadership.

<unk> unit process excellence applied is able to combine the industry's broadest technology portfolio in unique ways to create co optimized and fully integrated solutions. For example, co optimization of hard mask deposition and etch is an enabling solution for high aspect ratio structures.

Adoption of our co optimize draco solution is accelerating and on track to generate an incremental $600 million of revenue this year.

And we recently secured our first wins with a new carbon hard mask deposition and etch solution at a leading memory manufacturer.

Another key component of our technology portfolio is our digital tools that accelerate R&D technology transfer and ramp and optimize productivity and high volume manufacturing.

We are engaged with a broad range of customers and this quarter, we secured a new strategic penetration for R&D acceleration using our AI acts actionable insight accelerator platform at a leading customer as part of this engagement, we will use our unique sensor technology and proprietary machine learning algorithms.

Our rapid process window tuning and process variability reduction.

We're also making progress on our multiyear journey to increase subscription revenues within a G S more than 60% of our parts and service revenue is generated from subscriptions in the form of long term service agreements.

The average tenure of these agreements is now 2.3 years up from 1.9 years 12 months ago and the renewal rate is over 90%.

In addition, when we look at our combined software business in Ags and semi systems, which are also subscription based we expect them to generate more than $300 million of revenue this year.

Before I hand, the call over to Bob I'll quickly summarize applied and our global teams are executing well in a challenging and dynamic environment and our near term focus is on doing everything we can to expedite deliveries to our customers demand for semiconductors in wafer fab equipment remains strong and continues to grow.

There's still a long way to go before supply catches up with demand our outlook for 2022 and beyond is very positive as long term secular trends drive our markets structurally higher.

In addition, the major technology inflections that make up the industry's P pack T roadmap expand applies addressable market opportunities and our broad and differentiated technology portfolio puts us in a great position to capture a larger portion of our served markets in years to come with that.

Rob it's over to you.

Thanks, Gary I'd like to begin by thanking our teams and our partners for doing everything they could in a challenging supply chain environment.

We still have a lot of work to do to satisfy our customers' needs and this is job one for all of us.

I have three main messages for you today.

One demand for <unk> products is very strong and continues to grow too we remain supply chain limited that we forecast gradual improvement over the course of the year.

Three we expect to grow our revenue and earnings each quarter through the end of the calendar year that we believe it is increasingly likely that 2023 will be another growth year.

Next I'll summarize our Q1 results.

Then I'll provide details about the demand environment for applied materials and.

And finally I'll share our guidance for fiscal Q2, and the rate of growth, we expect to see throughout the year.

In Q1, we delivered strong year over year revenue and earnings growth and exceeded the midpoint of our guidance.

The supply chain environment was challenging.

Our teams collaborate broadly with partners upstream and downstream are applied to maximize the supply of components to our manufacturing sites and service locations.

This work enabled us to deliver record semiconductor systems revenue, which we grew by 29% year over year.

We grew fastest in foundry logic year over year, and we continue to expect foundry logic to outgrow W. A fee in 2022 with strength in both leading edge anti caps.

From a product perspective in Q1.

We generated record quarterly revenue in process control CVD and CMP.

And we achieved our highest ever DRAM revenue.

We also grew non-GAAP operating margin in semi like 280 basis points year over year.

In Ags, we grew revenue by 14% year over year and increased non-GAAP operating margin by 110 basis points.

About three quarters of the Ags as year over year growth wasn't recurring revenue.

Our Ags service revenues grew sequentially and year over year.

We increased our tools under comprehensive service agreement by 13% year over year.

And our subscription renewal rate was 92%.

Our parts business met our expectations, but could have been even higher.

H S includes our legacy 200 millimeter equipment revenue, which was below our expectations in Q1 due to supply chain constraints that prevented us from shipping to demand within the quarter.

For the fiscal year, we continued to expect Ags to grow in the low double digits.

With potential upside depending on the supply chain recovery.

In display we exceeded our revenue goal in Q1 and increased non-GAAP operating margin by 280 basis points year over year.

Summarizing applied Q1 results on a year over year basis.

We increased revenue by 21%.

non-GAAP gross margin by 140 basis points non-GAAP operating profit by 270 basis points.

And non-GAAP EPS by 36%.

In addition, we generated record free cash flow and distributed over $2 billion to shareholders.

With $1 8 billion in repurchases and $214 million in dividends.

Next I will address the impact of the supply environment on our business in the near term.

Underlying demand for <unk> technology is very strong and growing.

And we believe that as we work through the supply chain constraints, we will demonstrate the progress, we're making toward our market share and gross margin targets.

Although we don't usually report backlog on a quarterly basis I'm going to give some further color on today's call to help you understand our confidence.

In Q1, our semi systems backlog increased by more than $1.3 billion to a record $8 billion.

Moreover, the backlog includes a rich mix of products that are highly enabling to our customers' roadmaps.

What this tells US is that in an unconstrained environment. We would have produced substantially higher revenue and demonstrated a healthy share gain in calendar 2021.

Also absent the supply chain issues, our gross margin in fiscal 2022 would be very close to the targets in our 2024 financial model.

We are laser focused on improving the supply chain, which will enable us to support our customers and demonstrate the strength of our business.

As Gary outlined we expect the Wi Fi market to grow by over 15% in 2000 $22 billion to $100 billion or more.

Even with the constraints, we expect to outgrow the market in our semi business and carries sizable backlog into 2023.

Now I'll share our guidance for Q2.

We expect to increase revenue 263, 5 billion plus or minus $300 million.

Which is up almost 14% year over year.

We expect non-GAAP EPS in Q2 to be around $1.90.

Plus or minus 15.

Which is up around 17% year over year.

Within this outlook, we expect semi systems revenue of around $4 6 billion.

Up 16% year over year.

Ags revenue of around $1.35 billion up 12% year over year.

And display revenue of around $380 million.

Applied to non-GAAP gross margin should decline to around 47% in Q2, as we absorb near term cost pressures primarily related to expediting shipments to our customers.

After Q2, we expect to gradually increase the gross margin by mitigating cost pressures and shipping a richer mix of high margin products.

non-GAAP opex should be around $1 billion $15 million in Q2.

And our non-GAAP tax rate should be around 12%.

Looking ahead, we expect we can grow revenues by increasing mid single digit percentages each quarter through the end of the calendar year.

And based on customer conversations about semiconductor demand and technology inflections were increasingly optimistic that 2023 will be another growth year for the industry and especially for applied.

Now, Mike let's begin the Q&A.

Bob to help us reach as many people as we can please ask just one question on today's call. If you have a second question. Please re queue and we will do our best to come back to you later in the session operator, let's please begin.

To ask a question you will need to press star one on your Touchtone telephone again Thats Star one on your telephone to ask a question to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of C. J Muse of Evercore. Your line is open.

Yes, good afternoon, and thank you for taking the question I guess a question on gross margins, particularly in the current challenging supply environment.

You're guiding to 47% and expectations for that to grow through the year can.

Can you speak to.

What it will take two to two to build out greater scale upstream for your key suppliers.

In fact that might have on input costs for you and then your ability to pass those down to your to your customers and what gives you the confidence that you can get to that 48% as part of the target model and I guess as part of that if you can frame.

What your expectations are when you might be able to hit that.

That type of number thanks, so much.

So let me take the six question C J.

So first what's going on with gross margins, what's your outlook and what can we do so whats good gross margins as you know in Q4 of 2021, we did 48 to the long term model at 2024 I guess it is it is 48 five at 87 billion 48 800 billion.

We were at 47 three this quarter, we got around 47 go up a half a point down the other two things are hitting us one is cost increases from logistics in effect inefficient factory ops.

Operations like overhead burden absorption and thirdly, some material cost issues.

Those at one or one 5% on gross larger impact probably about 1.2 is the middle point.

I'd say that most of those are transitory.

Absorption logistics and a bunch of the material cost stuff should get better. So I would say over two thirds of this kind of transitory.

Second one is mix, we have a couple of Michigan, which we have very very strong orders and backlog, particularly in semi so if we had a higher mix of semi versus non semi to help our gross margins. Secondly, if you had a better if you look we priced out the mix of our semi backlog so our mix in the semi back.

Clark is very attractive. So if you look at those two mix things and you normalize by pass backlog levels, while we could ship.

Again, another one to one five points of gross margins and again, our sweet spot is kind of one point too so if you're at.

80, 47 next quarter, if you could get one point to 1.2, you pretty much on modeling might be above it a little bit actually so that's.

That's the scale of what we're looking at.

So we're pretty confident we're on the model trajectory of 48 and a half at 87 and 48 eight at 100 billion W. Fitt second.

Secondly, the cost increases can.

Can we do anything to mitigate that and pass it along.

With customers. Our three primary issues are one we have to do better on deliveries job one for us is to ship more tools get them out the door on time to customers and that's our commitment to customers.

Secondly for a long time, we have created really valuable tools and shared that valuable with our customers and ourselves and I think we've done a good job. Both sides now that we have these unusual cost pressures I think it's fair to have that discussion with customers, but job one job two is to get our products shipping in volume on time and also to create value.

For customers, but I think we can have that type of conversation.

Great. Thanks P J.

Thank you. Our next question comes from Stacy Rapkin Raskin of Bernstein Research. Your line is open.

Hi, guys. Thanks for taking my question, Bob I just wanted to.

Clarify and be Crystal clear. So you said you started the year you could grow.

By increasing mid single digits do I read that as the actual percentage of sequential growth as you go through the year goes up every quarter.

So growth is actually accelerating itself through the year.

Yes, it's kind of.

It's roughly five seven and then into.

Fiscal Q1, we figure out nine that semi in Ags and display a similar type of number so the overall number is pretty close.

Got it that's helpful.

I think that's a fair estimate you know we still got to work through issues, but I think it's a good estimate.

Got it and I guess, along those lines like what gives you confidence is that just you.

Your visibility on how the supply constraint themselves are easing shipping for example, like partially done tool, where you just have to supply like a final module or something to make it work like what gives you the confidence that the supply constrains will actually ease along that trajectory.

Well, if you look at total material receipts for us in Q1, they were up a good amount, but we didn't get exactly the mature parts.

Well they were all kind of mid to high single digits and if you look at that type of increase in Q2, we think that silver, but I think we'll have a better match of the parts you remember we said last quarter was.

There's a lot of stuff, we're tracking but the hotspot is kind of some semi device type things that are supplied through the distribution channel to our customers.

So we think that's a fair estimate of what we could do it's not internal capacity constraints more some parts of the supply chain, but I think it's a reasonable estimate.

Got it that's helpful. Thank you so much.

Stacy and then.

Those numbers are right for semi systems, we would say that ags year over year Ags tends to grow a little bit slower than semi systems. So it's probably just up.

Low double digits, and then display you already have our view that it's probably up a little bit year over year also depending on the supply chain, but that'll help you with.

The $5 79 for semi and that gives you the shape of the rest of the revenue.

Got it very helpful. Thank you.

Thank you. Our next question comes from John Pitzer of Credit Suisse. Your question. Please yes. Good afternoon, guys. Thanks for let me ask the questions and congratulations on the solid results.

Gary and Bob the bookings number in the backlog number in the Jan quarter were extremely impressive.

Yes.

Argue that when your customers can't get what they.

They always ordering more than they need and so from your perspective, how do you safeguard against the fact that you and all of your peers are having supply constraints right now.

On your customer I at the very least better get in line, alright, I might not get what I need to kind of grow supply how do you kind of safeguard against.

Double ordering.

Well I'll give you my perspective, and Gary talked for customers.

Yes.

I think one if you look at the magnitude of the orders and how much they grow that's a pretty big number. So we're not gonna be overbuilding inventory or anything in the second thing is if you look at the mix I think that's worth doing so.

Memory, So I'll give you some data.

So if you go look at the history of the industry. The last 15 years 20 years.

Some of the leading indicators of when you overbuild is particularly strong memory years or three years that a strong memory is seven to 17 and 18 were all over 50% in memory. So if you look at it right now memory was 40% of <unk> in 2021 and going down several points in 'twenty two.

So we look at memory as moderate growth and we don't see double bookings. There second thing is a leading indicator of whether their overbooking in the short term we look at wafer starts and we look at our fab utilization. So I said last quarter fab utilization was at a record at our fiscal Q4 in fact in Q1 fab utilization slightly higher so very.

Hi.

Thirdly, if you look at wafer starts over the last several years.

Wafer starts from 16 to 21 in.

Memory, DRAM and NAND, what both 19% that's at a compound rate of growth. That's a total growth from 16 to 21. If you look at 200 millimeter at 70%. If you look at where the growth was it was kind of 300 millimeter stuff, 100% from 16 to 21 and logic and foundry logic foundry.

No no you, though well so G was let's look at logic foundry. So if you look at TSMC has put long term spending out a forecast of $100 billion kind of Capex 40, 42 billion in Capex next this year and we've talk closer to them I mean, they're pretty committed to spend if you look at Intel pretty cool.

Let it to spending announced new Fabs were tracking Fabs last quarter, we stated a number 59 shells.

With 300 billion of $3 35 to 300 to 335 that number is up to 68 $3 65 to 385 billion. So if you look at shell counts do you look at growth and starch look at fab utilization.

And you look at what the foundry logic guys are committing to a little more predictable and you look at memory mix is pretty good then you look at <unk> versus trailing edge right because <unk> historically it wasn't too big now <unk>, we just defined as 10 nanometer above right. So if you look at that it used to be pretty moderate.

The business model for customers was to rollover tools from leading edge to the trailing edge and that was enough tools to do trailing edge, but if you look at trailing edge demand. It is through the roof. If you look at the W. A fee by application base from $6 21 for the 26 some of the biggest growth areas.

If you look at data center accelerates, but it's also automobile Iot.

Comms and some stuff in phones, particularly sensors, so theres big demand on this I capped census stuff. So if you look at it the demand is there and the funding of that through tools is not there because you don't have enough rolling over from the leading edge because the demand is going up on the trailing edge right. So then you look at it and say.

Well what is actual demand. So we said, 53% in 'twenty, one and 'twenty two for <unk>, well, if you drill into 20 nanometer and.

Above saw ignore 10, 14, 16 and look at some of the oldest up particularly 28.

It's gone up.

As a percentage of there'll be a repeat from 31% and 20% to 43% in 'twenty, one and 44% in 'twenty two so big.

Because of two factors demand going up and less tools to rollover to those so somebody might say well Gee Whiz Thats overheated.

If you look at the rate of increase is declining right. At 131 43, 44, so it's strong but the rate of increase is declining so the very long answer, but I gave the data is I don't think we're overheated right now we have lots of orders. The mix is the type of mix to talk crazy mix that you can drill into Eyecatching, Chile, a little bit.

But I think were pretty good this year, probably next year.

Helpful. Thanks, guys.

Thanks, John .

Thank you. Our next question comes from Vivek Arya Bank of America. Your question. Please.

Thanks for taking my question.

Wanted to go back so in Q4.

I think you mentioned you were short by about $300 million or so that you were not able to fulfill them.

Wondering what that impact was in Q1, because its been bought by a 5% sequential growth through Q3, it only captures I think $300 million or so of our sequential growth shouldn't you be growing more than that going into Q3, given the shortfall that you had in Q4 or Q1 or is it still kind of.

Very supply constrained number.

It's completely supply constraint, we have more orders than we can ship. If you look at our backlog billed was $1 3 billion in the quarter and our backlog growth is pretty substantial next couple of quarters. So we are totally supply constrained as everyone is in the industry I think $300 million was the.

Starting number for what it was in Q4, I think Q1 could have been more if we werent supply constraint.

And the mix is really good for us in the backlog it's products like M. D. P in Appian.

Products like that.

Thank you Youre.

Youre welcome Thanks Vivek.

Thank you. Our next question comes from Chris <unk> of Cowen <unk> Company. Your line is open.

Thanks for taking the question Bob.

That's basically the supply constraint the semi industry has been constrained for a while.

But do you indeed equipment, because I've been experiencing it for a few quarters now and it seems like now you are talking not just to your suppliers, but suppliers and also a few levels below that and some of whom might end up being a direct customers as well.

Curious has that level of debt.

In your supply chain, given you a better insight into when these issues could abate and is that what is it for me.

MS frequently know mid single digit sequential growth for the next few quarters in 'twenty.

Yes.

I'll give you some more color then yes.

So we by an average tools got about 5000 discrete parts for US and then those parts of many sub components down to our level suppliers.

And so some of our suppliers run MRP some of them run filter stock stuff like that so our hip.

Historical visibility into their bills of material in their supply chain was limited we've gotten into a lot more depth to understand our suppliers' suppliers suppliers, which goes back to our customers, it's kind of a circuit us route and.

Many times they get their parts from our customers through distributors not directly from our customers. So as we've gotten visibility into this we've got a much more in depth understanding of the chokepoints and ways to manage is tactically and frankly long term strategically. So I think our visibility is a lot better management of us getting increments.

Better every quarter and how we think about it strategically long term I think it's a very big benefit to the company. So yes, we got better visibility I think tactically manage it better we're not out of the woods, yet, but I think theres going to be long term benefits the company in terms of our depth of understanding.

Thanks, Bob.

Thanks Rich.

Thank you. Our next question comes from <unk> Hari of Goldman Sachs. Your line is open.

Good afternoon. Thanks, so much for taking the question.

Gary in your prepared remarks, you talked about some wins in the edge.

Each market.

And areas, where you historically didn't compete all that much you talked about the advance nodes across foundry and logic, you also talked about inspection and metrology and how you've done well there on a trailing 12 month basis and the outlook into into 'twenty. Two when you. When you think about those wins and the momentum you have how should we think of.

What your overall Wi Fi market share in 'twenty two.

I realize in the near term you still supply constrained, but once supply eases should we expect you guys outperformed the market this year and perhaps into 'twenty three.

Yeah.

Yeah. Thanks for the question until ship.

No question that.

The areas that you mentioned etch PDC.

Our <unk>.

Significant opportunities for us both now and going forward I would say the biggest thing for us.

Is capturing the inflections, we've talked about gate all around wiring, we mentioned a few months ago, bringing a new tool to market seven different technologies in an integrated platform.

To lower wiring resistance by 50% and that one platform combined platform is worth billions of dollars. So you've got the transistor to process the data wiring to connect the data.

All of the technologies associated with with those inflections. We gave some examples around capacitor scaling in DRAM. The Cmos logic also inflection in memory.

All of those inflections are really really great opportunities for applied really the unique thing for us.

When you look at whether it's the leading logic I caps memory packaging is another one where we have over 50% share of our served markets.

We have very deep visibility into all of those inflections and it's really about creating materials to enable the electrical performance shaping those structures modifying the materials analyzing too to really drive the tea and the Pea pack T for our customers we're really.

We've never been in a better position.

And any of those different areas in a specific.

Products, you mentioned, an etch certainly that's been a really a great growth platform for us the same three etch or.

<unk> has significant technical advantages higher conductance with larger chamber of volume.

Materials on our chamber wall, So, we can provide better <unk> and better yield.

And again really as I mentioned in the prepared remarks.

Not only are we doing really well in memory, there, but we're gaining significant share double digit share at all the leading foundry logic customers PTC that was another one that you mentioned.

Really tremendous growth in PDC, 68%.

In terms of the overall revenue growth a really significant position in E beam inspection E beam overall, the review inspection and measurement.

We doubled in 2021, we have significant leadership there.

In 'twenty, two will have significant growth not only in E beam, but even faster growth in optical wafer inspection. So I would say on the unit processes. We're in a really great position and really what I'm. Most excited about is our ability to capture these big inflections that I talked about.

In their prepared remarks.

<unk>.

Relative to what you see in the revenue growth and Bob mentioned that earlier.

You just can't see it because we can't ship it and also what Bob talked about earlier was that our backlog.

Booking into 2023, especially in some of our leadership areas Bob mentioned.

Our metals for wiring and again big inflections in wiring, where applied has tremendous leadership at B implant. That's another one that will grow significantly for us in 2022.

Really we've never been in a better position Tokyo than where we are right now the biggest challenge for US right now is really to close that demand supply gap.

Thank you so much.

Thanks for this year.

Thank you. Our next question comes from Harlan sur of Jpmorgan. Your line is open.

Good afternoon. Thanks for taking my question I assume that the team is placing orders for both sub systems parts and ship basically acute the entirety of this year just given the extended lead times with your suppliers.

I assume that you guys have good visibility as to what those suppliers can ship against orders.

You put all of that together and the team needed for backlog and forecasted customer shipment requirements for this year or do you think that theres a likelihood.

Exit this calendar year with your shipments below your customers with demand requirements in other words.

As the 2020, TWD 100 billion for you and peers below what your customers require and if so like what do you think is the true 2022 equipment demand profile.

Sure.

Well, you've got a couple of questions there how it mechanically what we do to the visibility through what do we think unconstrained demand is in 'twenty. Two so if you think about how we do it we send signals to the supply chain to MRP and they say they can meet or not meet frankly, they're struggling to understand what they can make border a quarter or two out because it's there.

Suppliers right. So I think visibility is kind of gray.

We mechanically do it but nobody's sure right.

The second thing is.

We see improvement Alright. The second thing is what do we think unconstrained demand is I think the tactical question, you're asked to could we go into the year with demand still north of supply, yes, we could.

We're into 'twenty three so I think our backlog probably grows throughout our fiscal year. If you go look at.

Unconstrained demand I think <unk> 100 billion is defined as what we ship for the industry.

Our competitors are also constrained this year, they're broken into 'twenty three.

I think unconstrained demand as several billion more than 100, I think it's less the 110, but it's more than 100.

I appreciate the insights thank you.

Thanks Harlan.

Thank you. Our next question comes from Joe <unk> of Wells Fargo. Please go ahead.

Yes, thanks for taking the question.

He had mentioned that you are opening a new logistics center I was wondering if you could help us understand does that give you added capacity or does that also help on the cost efficiency side.

And then are there are some startup costs that we should be thinking about that are embedded in this quarter's gross margin guidance.

They're mostly it helps efficiency of shipping receiving moving things around it doesn't do much to our cost because our volumes are up so the cost that we absorbed into the.

Burton.

So there is a percentage of cost it doesn't have much impact, we probably frankly will do further expansions in the next year or two but I don't think it hurts our cause helps her affect us efficiency.

Yeah, and Bob just to follow up so what do you think gross margin does between Q2 and the end of the year and is it impacted at all by that buildup.

I think gross margins, probably got about a half a point from the Q2 guide to Q4 and I think what we just mentioned doesn't have really any impact.

Got it that's helpful. Thank you.

Thanks, Joe.

Thank you. Our next question comes from Timothy Arcuri of UBS. Please go ahead.

Thanks, a lot.

I have a question just on the shape of the year in terms of wip and sort of how to think about Gary you talked about WP intensity and the question really is how much semiconductor revenue can this Wi Fi.

Right.

Yes.

Backstop. So if you if you take everyone's reporting and they've sort of commented on Q2 as well.

It seems like we're doing about 45 billion here in the first half and maybe 55 in the back half something like that to get you to two.

200 number.

And I think in the past Gary you talked about 14% WP intensity, so that would have to support like $800 billion in.

Semiconductor revenue in this year, if we're lucky we're going to be at kind of $6 50. So I'm. Just wondering if you agree with all that math and sort of how you think about maybe how far out in front of semi revenue WPS. Thanks.

Well, yes. Thanks for the question, Tim in terms of Wi Fi or the capital intensity.

Number is definitely higher than 14% if you look at.

All of these big inflections that the customers are ramping.

The capital intensity is probably around 18% I would guess right now.

But definitely higher than that 14% number I'll, let Bob come in here just a second but just one one example is in wiring resistance.

There.

Really as one of the biggest areas of focus for all of the foundry logic customers. If you look at back end interconnect steps from five nanometer to three nanometer they are increasing by about to ask.

Now the other thing that's happening and by the way. It's also increasing in not only foundry logic, but also in memory. So that again, that's just an example to get that 50% reduction in wiring resistance, it's pretty complex.

That complexity also impacts the output of the system. So not only are you seeing step steps increase but you're also seeing a reduction in output and then certainly for applied our metal deposition products, where we have very very high share.

As an example of a really significant driver for us and one of the factors on why we're booking into 2023 four for those those products and about I don't know if you want to add any more color.

Sure.

Yeah. Good question, Tim I think the 14%, 15% is running a little higher I think sustainably you're at a good 15, if you look at the trend lines and just split it out Wi Fi intensity, just WP divided by customers revenues.

Look at foundry logic, DRAM and NAND foundry logics, the most and it's trending up for couple of reasons, leading edge and <unk>.

Because of Theres not enough tools for the trailing edge. So the revenue dollars take more Duffy and you can sort of see customers talking about that too and you see customers like Ti who haven't spent in years, having to add trailing capacity. So the capex as a percentage of WP capacity of revenue is trending up if you do a rough cut it.

Do you think with this foundry logic mask, which more I caps with more greenfield.

And technologically inflections around three D data all around what should I have a little more spending I think 15% is kind of new normal frankly, if you look at electronics spending in 2025, it's about 780 billion. So if you take 15% of that or about 117 billion W. Coffee and 25, So I think.

And a sustainable growth rate is high single digits for Wi Fi and that's driven partly and half of it has got a couple of tests. They happened as growth in wafer starts and if you drive.

The capital intensive 50% I think the numbers all kind of work the high single digits sustainable cross cycle growth rate photography.

Got it thank you both.

Thanks, Tim.

Thank you. Our next question comes from Joe Moore of Morgan Stanley . Please go ahead.

Great. Thank you I Wonder if you could talk about.

The nature of the supply can think a little bit last quarter, you talked about it being mostly.

Rick.

Have the challenge has broadened out from there and I guess how is it.

Theres so much visibility that this is going to continue to be constrained at the end of the year like Sydney.

I would think you are the highest utility user of a lot of these chips.

Is it possible that you could get you could sort of move up in the queue and get these products before the end of the year.

Yeah. Thanks, Thanks, Joe.

I'm living this every single day relative to <unk>.

Going deeper in the supply chain with all of the components that are constraining our output.

Really think the guidance we've given.

Bob talked about relative to quarter quarter to quarter improvement is really in the ZIP code of where we're going to land, we definitely have much much deeper visibility.

Even then we had when we were on this call a quarter ago.

As Bob talked about from a chip perspective, and a lot of cases. These chips are buried down in components.

They come from our customers through distributors and they really don't know.

Destination for those chips as they learn.

Where the constraints are they certainly responded and helping to resolve those issues, but there are just a number of those different constraints I wouldn't say, it's only chips. There are also other areas of the industry I mentioned again in our metal deposition products where the.

Really the demand has just went up so much.

Higher than where they were.

There are other components that are also constraining us, but I think that we do have much deeper visibility and what Bob said earlier I think is also true.

We will come out of this stronger I think there's no question, we'll have better visibility.

We have very we'll have deeper relationships with our suppliers.

So again.

I think from a ZIP code standpoint, the ballpark of what Bob talked about in terms of the incremental growth quarter on quarter is about right.

Again.

It may not be exactly those numbers, but that's really the relative trajectory.

Okay. Thank you.

Thanks, Joe Okay. Thank you our next.

<unk> comes from Sidney Ho of Deutsche Bank. Your line is open.

Thanks for taking my question. My question is on the memory side of the W. E. I think you guys reiterated your view that memory, Debbie you will lessen.

Less in foundry and logic, but based on some of the comments you had earlier.

Looking at the kind of low teens growth rate for four normally just curious.

He changed much given the memory market seems to have improved in the past three months or they are so supply constraint that you can't really service the upside and maybe just one more I think last quarter you talk about the main site.

I understand like is there any update to that as well. Thanks.

Sure Good question.

I think that Theres two reference points for our view of DRAM NAND growth foundry logic in the mix and I think our view has changed a little bit since last quarter, I think last quarter our outlook for 'twenty two.

We were probably a little low on the outlook for China, and we're probably a little low on DRAM in particular, so if you'll look at.

A reference point, we now believe that.

Constrained environment, which is kind of the $100 billion number we.

Think that DRAM and NAND are kind of flattish from 'twenty, one maybe down tiny bit, but kind of flattish and if you look at foundry logic thats the biggest growth and we think that increases from 60% to.

Several points higher than that in terms of mix of $100 billion environment. So number one I think we're more positive on DRAM and NAND DRAM, particularly the way we were last quarter and we are more positive on overall Wi Fi in 'twenty two than we were last quarter.

I think we still remain pause or at foundry DRAM, probably had the biggest delta on our view from last quarter.

And then in unconstrained and I don't think they're growing too fast frankly, if you look at fab utilization by memory and DRAM is pretty darn. Good. So I think they are okay, and I think it's a little more second half weighted.

Yeah.

Okay. Thank you Sidney.

Thanks, Ed.

Thank you. Our next question comes from maybe how Seaney of.

Your line is open.

Okay.

Thanks for taking my question actually a couple of follow ups, but you were making reference to.

I think it was pretty neutral I catch you would highlighting 43% of the Devil you see mix and 40 in 'twenty, one and 44% in 'twenty two.

You mean to imply that.

So we didn't actually.

<unk> as a percentage of your fleet.

What were the two choices again Randy.

Yes.

31% mix for 2024.

And for 'twenty, one and 44% for 'twenty, two and I'm just trying to understand what you were referring to whether it goes mixes alright. So what we did is we broke down <unk> capsule that we define it captures everything except the leading nodes. So that's 10 nanometer and above okay, but then I drove into it some more and I said I want to look at 20 nanometer and above including too.

<unk> millimeter stuff because if you look at the last three years the sales and those have grown now where youre, particularly had growth is 28 nanometer stuff. So yes.

The percentage of foundry and logic that was 20 nanometer and above in 2020 in the Wi Fi numbers was 31% and then our revenue mix for us for five I was pretty similar to <unk>.

We had 43% for 2021 and 44% for 'twenty, two and where you see the biggest growth year on year is 28 nanometer is up 45 nanometers up.

The strongest.

90 nanometer not too much but we went into depth by node by year. So our conclusion is so the other thing that's interesting Mary.

Was.

It's gone up the rate of acceleration has diminished somewhat and then if you look at a curve in the out years for eye caps.

Leading edge, DRAM, and NAND and their share and growing of Wi Fi UCI kept growing in absolute volume.

So what also you have to think about is where the <unk> tools come from not only the number of devices coming but where do you get the equivalent for that so they used to take that equipment and rolled over from the leading edge. So lets make up an example, so in the leading edge you might run it for a couple of years, two nodes and you might roll 90 person.

Set of the equipment forward to the next node and then 10% for reuse of some gets left behind but if I caps trailing edge isn't growing much you'll have most of your equipment for the trailing edge fully depreciated to use on the trailing edge, but an incremental growth and I'd caps.

They believe your eye caps grows two weeks your capital equipment requirements for it goes up like 10 X relatively speaking because you don't have that much equipment rolling over from the leading edge. So that <unk> spend on I caps is driven by not just growth in high caps, but the availability of tools to roll into a digital health.

To buy new.

So I would say maybe just one more thing.

<unk>.

A dynamic over the last few years as you used to have used tools.

That were available for <unk>, that's all gone.

More of that has moved from 200 millimeter to 300 millimeter. So all of those transitions.

Increased capital intensity for our cats.

Great. If I may have just quick follow up and thanks. So much for all the insight is very helpful. If I was to think about these mixed since the above you referenced.

I think the majority of this is actually being installed in China and.

We're dealing with situations for the most of the Oems in China has become domestic China has become.

For more than a third so I'm, assuming that the investment in China for 20 nanometer and above for logic and foundry will continue with sustained regardless of what happens outside of China would that be fair.

Yes, I think that's fair the other thing you might look at med, which is interesting as is where.

Where's the growth at <unk> spend by application and you got a pretty big growth in the out years for automobiles Iot is some of the sensor stuff in phones. So I agree with the China stuff real sustained stuff I agree that the long term demand is pretty good I agree that it can't keep growing forever, but I think it's already.

It did decelerate, a little bit and the relative growth rates from.

'twenty to 'twenty, one 'twenty one to 'twenty, two and you have to look at that availability of tools to rollover from the leading edge. When you look at Wi Fi because its a compounding factor.

Yes got it. Thank you so much youre welcome. Thank you Mehdi.

Operator, that's all the time that we have for questions. Bob would you like to help us close off the call shortly.

Sure Mike I'll give you my three legged stool summary.

Forward to those number one demand continues to be very strong, but we see our business trending up as we proceed through the year and we believe 23 will be even stronger.

Number two applied position is very strong I'm confident there was really make progress with our supply chain, we will be able to demonstrate that we are very much on track to our market share and our gross margin targets and number three even in this constrained environment, we're generating record revenue and operating cash flow, which is fueling strong shareholder returns.

Now Mike, Let's go ahead and close the call alright, Thanks, Bob and we'd like to thank everybody for joining us today, a replay of the call is going to be available on our website by five o'clock Pacific time, we'd like to thank you for your continued interest in applied materials.

This concludes today's conference call. Thank you for participating you may now disconnect.

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