Q3 2024 Applied Materials Inc Earnings Call
Okay.
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 applied to third quarter of fiscal 2024 earnings call. Joining me are Gary Dickerson, our president and CEO and Brice Hill, our Chief Financial Officer before we begin I'd 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 and apply its most recent Form 10-Q filing with the SEC.
Speaker Change: 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 our website at IR dot applied materials dot com and with that introduction I'd like to turn the call over to Gary Dickerson.
Thanks, Mike with record revenues in our third quarter and earnings toward the high end of our guided range applied materials continues to deliver strong results in 2024.
Gary Dickerson: Secular trends are growing our available market and our unique and connected portfolio of capabilities products and services positions us to outperform the industry over the longer term.
Gary Dickerson: At our recent Investor event at Semicon West leaders from our semiconductor business share their perspective on the powerful multi decade technology trends driving the industry forward and explain the role applied is playing to enable the next generation of semiconductor technology.
Speaker Change: In today's call I will summarize some of the key themes, we talked about at that event, including how advancing energy efficient computing performance is critical to deploying AI at scale.
Speaker Change: Why the energy efficient computing roadmap is increasingly enabled by materials engineering and applied materials and how we're working in new ways to accelerate this complex roadmap and create new growth opportunities for applied.
Speaker Change: Semiconductors provide the foundation for a tectonic shifts in technology that will reshape the global economy over the next several decades, including AI Iot robotics.
Speaker Change: <unk> and autonomous vehicles and clean energy. These multi trillion dollar global inflections are increasing demand for chips and driving the need for significant advances in semiconductor technology.
Speaker Change: Biggest tectonic shift of all is the AI and the rates for AI leadership, well in large part be determined by which companies in the semiconductor industry are first to deliver substantial improvements in energy efficient compute performance.
Speaker Change: In our discussions with leading AI companies, they are telling us that reducing power per operation is now more important than increasing operations per second. They are also talking about the need to drive a 10000 times improvement in performance per watt over the next 15 years.
Speaker Change: Evolutionary innovation is insufficient to deliver improvements of this magnitude.
Speaker Change: And we're seeing the emergence of a new industry playbook made up of major device architecture inflections in logic memory and advanced packaging.
Speaker Change: These device architecture inflections are increasingly enabled by materials science and materials engineering, where applied is the clear market and technology leader.
Speaker Change: For AI the advanced chips in a data center used for training AI models are built upon four critical categories of semiconductor technology.
Speaker Change: Leading edge logic high performance DRAM high bandwidth memory enabled by die stacking technology and advanced packaging to connect the logic and memory chips together in a single integrated package.
And leading edge logic key device inflections in both transistor and interconnect are currently moving from Chipmakers R&D pilot lines to high volume production.
Transition from Finfet gate, all around transistors grows supplies available market for their transistor module from around $6 billion to approximately $7 billion for every 100000 wafer starts per month of capacity.
Speaker Change: We also expect to gain share through the gate all around transition and we're on track to capture more than 50% of the process equipment spending for the transistor fabrication steps.
Speaker Change: For the interconnect module our available market is also about $6 billion for every 100000 wafer starts per month we.
Speaker Change: We forecast this will also grow.
Speaker Change: By about $1 billion with the implementation of backside power delivery and we expect to win more than 50% of the applications, we address and interconnect went back side power ramps in volume manufacturing.
Speaker Change: In DRAM, we have also established clear leadership and process equipment and are in a great position for future growth over the past decade, we've grown our market share in DRAM by around 10 points as DRAM plays a critical role in energy efficient computing performance there as of yet.
Speaker Change: Huge focus on advancing the roadmap. The next major DRAM inflection from six F squared to four F squared or vertical transistor architectures is materials enabled and we expect our market opportunity to grow by approximately 10% to around $6 $5 billion for <unk>.
Speaker Change: Each 100000 wafer starts per month of capacity. We also expect to increase our share based on our position to enable the four F squared inflection.
Speaker Change: In addition, we believe the subsequent transition to three D. DRAM will grow our addressable market by an incremental 15% further compounding applies opportunity.
Speaker Change: And the die stacking technologies that enable high bandwidth memory. We also have strong leadership positions both in micro bump and through silicon via we've seen demand for high bandwidth memory accelerating in 2024 and expect to generate more than $600 million of HBM packaging revenue there.
Speaker Change: This year, which is approximately six times 2023.
Speaker Change: Overall, including H P. M. We expect revenue from our advanced packaging product portfolio to grow to approximately $1 $7 billion in 2024.
Speaker Change: We believe this business can double in size over the next several years as heterogeneous integration is more widely adopted and we introduced new solutions that grow our addressable market.
Speaker Change: Advanced logic high performance DRAM high bandwidth memory and advanced packaging are all great. Examples of how future device architecture inflections are increasingly enabled by materials engineering as a result, we expect materials engineering as a percentage of total.
Speaker Change: Wafer fab equipment to grow in both logic and memory through the coming though transitions at the same time, thanks to our inflection focused approach to R&D and the strong positions. We've established at these future device architecture inflections, we expect to capture more of the.
Speaker Change: The opportunities we serve.
Speaker Change: The value of bringing next generation semiconductor technology to market faster has never been greater at applied our strategy and investments are focused on accelerating the industry's roadmap to support the highest growth rates global inflections spanning AI data centers.
Speaker Change: Edge, AI, and Iot robotics electric vehicles and clean energy.
Speaker Change: This strategy has enabled by three pillars first we have built a broad unique and connected portfolio of highly enabling technologies as well as providing traditional best in class unit processes, we can co optimize combine and integrate our technologies to.
Speaker Change: I'll ever more comprehensive solutions that address higher value challenges for our customers. These integrated fab in a fab solutions have grown from approximately 20% of our semiconductor products revenue in 2019 to around 30% today, we expect demand for.
Speaker Change: Our integrated products to continue growing both at the leading edge and from our <unk> customers, who are serving specialty markets.
Speaker Change: Second we are changing the way, we work inside and outside the company over the past five years, we have built new capabilities and dedicated teams focused on module integration device design and simulation data analytics and AI advanced packaging and I kept at the same <unk>.
Speaker Change: We are driving earlier deeper and more extensive collaboration with our customers and partners to win the device architecture inflection races accelerate mutual success rates and increased investment efficiencies.
Speaker Change: To further support these collaborative partnerships, we will build out our global epic platform over the next several years, which is specifically designed for high velocity innovation and commercialization of next generation technologies.
Speaker Change: And third we are helping customers transfer new technology into high volume manufacturing faster and then optimize performance yield output and cost in their factory operations. This is supporting double digit growth in services with a high percentage of our service.
<unk> coming from subscriptions in the form of long term agreements overall Ags delivered another record quarter, which is their 20th consecutive quarter of year on year growth.
Speaker Change: Before I hand over to Bryce I'll quickly summarize applied materials is delivering record results in 2024, and we're in a great position to benefit from secular growth trends over the longer term.
Bryce: Semiconductors are the foundation for a tectonic shifts in technology, which will reshape the global economy over the next several decades. This is driving increasing demand for chips as well as the need for significant advances in semiconductor innovation.
The raise for AI leadership depends on delivering significant improvements in energy efficient compute performance in the range of 10000 times over the next 15 years the.
Speaker Change: The need for more energy efficient compute is driving major device architecture inflections within the semiconductor roadmap that are enabled by materials engineering and applied materials innovations. This expands our served market and is accretive to our share.
Speaker Change: And the increasingly complex industry roadmap creates new collaboration and growth opportunities for applied enabled by our broad unique and connected portfolio of capabilities products and services. Finally, as you may be aware, Mike Sullivan will be retiring at the end of this calendar year and handle.
Speaker Change: The reins to Liz morality, who recently joined applied as our new head of Investor Relations I would like to say a huge thank you to Mike for his many contributions to the success of our company and congratulate him on an outstanding career.
Bryce: Now over to Bryce.
Bryce: Gary and I would like to thank our teams for their strong execution this quarter, which enabled us to deliver record revenue improved operational performance and healthy gross margin.
Bryce: Today, I'll summarize the market environment discuss our Q3 performance and share our Q4 outlook.
Speaker Change: As Gary mentioned, Mike Sullivan plans to retire from applied at the end of this calendar year.
Speaker Change: Liz morality has joined applied as our new Vice President of Investor Relations, Mike and Liz are working on a smooth handoff of the IR function beginning with our November earnings call.
Speaker Change: Hope, you'll join Gary and me in congratulating, Mike on his extraordinary career and leadership and welcoming Liz to applied materials.
Speaker Change: Beginning with the business environment.
Speaker Change: Our revenue in Q3 as well as our outlook for Q4 reflect the industry's focus on the major inflections Gary highlighted earlier.
Speaker Change: We are seeing particularly strong pool related to AI and data center computing, specifically, our DRAM system shipments remained strong even as DRAM sales in China declined as anticipated adoption.
Speaker Change: Adoption of high bandwidth memory and other forms of advanced packaging continues to grow.
Speaker Change: And in foundry logic, leading edge investment is growing each quarter and becoming a larger percentage of our mix, while I caps demand remains strong overall.
Speaker Change: Turning to our Q3 performance, we delivered record revenue of $6 78 billion, which is up 5% year over year with growth in all three segments.
Speaker Change: Operationally, we saw improvements in a number of key metrics, such as manufacturing cycle times linearity and on time delivery.
Speaker Change: These improvements give me confidence that we are preparing the company to more efficiently support the growth we are forecasting in the year's add the.
Speaker Change: The strong operational performance helped us deliver non-GAAP gross margin of 47, 4%, which is up 100 basis points year over year.
Speaker Change: non-GAAP operating expenses of one point to $6 billion were up 8% year over year and over 70% of the increase was driven by R&D programs aimed at the technology inflections Gary described.
Speaker Change: non-GAAP EPS of $2.12 was up 12% year over year, and one sample our highest EPS quarter ever.
Speaker Change: Turning to cash flows and profit distributions in Q3, we generated nearly $2 4 billion in operating cash flow and over $2 billion in free cash flow, we distributed nearly $1 $2 billion to shareholders, including the first 40, <unk> per share dividend and $861 million and stock buybacks.
Speaker Change: Turning to the segments semiconductor systems sales were $4 92 billion in Q3 up 5% year over year segment non-GAAP operating margin was 35% up 130 basis points year over year.
Speaker Change: From a device perspective, our DRAM sales grew nearly 50% year over year to $1.16 billion or DRAM sales in China declined sequentially as we anticipated and this contributed to our company revenue in China declining by 11 percentage points sequentially to 32%.
Speaker Change: Which is in line with our longer term average inclusive of semi systems Ags and display.
Speaker Change: Our NAND memory sales grew 10% year over year to $203 million.
Speaker Change: Our foundry logic sales were down 4% year over year to $3 $56 billion.
Speaker Change: Leading edge foundry logic demand was lower year over year, but continued to strengthen on a sequential basis. We continue to expect to generate more than $2 $5 billion in system revenue from gate all around nodes. This calendar year with the potential to more than double next year.
Speaker Change: Our <unk> business remains strong overall with pockets of weakness in the auto and industrial end markets longer term, we expect the <unk> market to remain around half the foundry logic market as major inflections in Iot autonomous and electric vehicles and the global energy transformation are expected to drive mid to high single digits.
Speaker Change: Through cycle growth in cap semiconductor as well into the future. We are investing in new products to compete in more areas of the ikat semiconductor and packaging ecosystem. We are also working with our customers to enable new power and sensor device architecture inflections, using our co optimized and integrated material systems.
Speaker Change: Next applied global services delivered record revenue of 1.58 billion in Q3, which is up 8% year over year.
Speaker Change: Ags recurring parts services and software revenue grew more than twice as fast as overall segment revenue during the quarter.
Speaker Change: Ags non-GAAP operating margin of 29, 6% was up 230 basis points year over year and non-GAAP operating profit was a record $467 million from a business perspective customer factory utilization continued to strengthen during the quarter across memory foundry logic and advanced packaging.
Speaker Change: Our leading indicators of future Ags growth remain positive our installed base systems in chambers increased 7% year over year and our average revenue per unit increased even more.
Speaker Change: Our average subscription agreement length increased to two eight years and the renewal rate was above 90% we.
Speaker Change: We continue to expect <unk> to grow at a low double digit rate over the long term as a reminder, the consistency of our profitable growth and services gives us confidence in our ability to continue to increase our dividend per share in fact over the past 10 years, we have increased the dividend per share at a compounded annual growth rate of approximately 15%.
Speaker Change: Moving to display Q3 revenue of $251 million was up 7% year over year and segment non-GAAP operating margin was six 4%.
Speaker Change: LCD equipment spending remains low we are becoming more confident that the OLED technology found in smartphones will be adopted in notebook Pcs and tablets who's larger screen sizes will require a significant increase in capital investments applied has built a leadership position in deposition and E beam metrology technologies for the display industry.
Speaker Change: And we are well positioned to enable our customers to convert the notebook PC and tablet markets to OLED technology over the coming years.
Speaker Change: Now I'll share our guidance for Q4, we expect company revenue was $6 $93 billion, plus or minus $400 million and.
Speaker Change: And non-GAAP EPS of $2 18, plus or minus 18.
Speaker Change: Both up 3% year over year at the midpoint within this outlook, we expect semi systems revenue of around $5 1 billion.
Speaker Change: Which is up 4% year over year.
Speaker Change: <unk> revenue of about 161 billion, which is up 9% year over year and display revenue of around $200 million. We expect non-GAAP gross margin to be approximately 47, 4% and non-GAAP operating expenses to be around one point to 75 billion.
Speaker Change: Finally, we are modeling a tax rate of 12, 5%. Thank.
Speaker Change: Thank you and now Mike, let's begin the Q&A. Thanks, Bryce to help us reach as many people as we can please ask just one question on today's call. If you have another question. Please re queue and we will do our best to come back to you later in the session.
Greater let's please begin.
Speaker Change: Certainly and just as a reminder for everyone. If you do have a question. Please press star one on your Touchtone telephone to remove yourself from the queue simply press Star. One again. Our first question comes from the line of C. J Muse from Cantor Fitzgerald. Your question. Please.
Speaker Change: Good afternoon, and thank you for taking the question I guess for my question I was hoping you could speak to how your outlook for <unk> in the second half of the year and for all of 2025.
Speaker Change: As evolved over the last three months, obviously tremendous strength anything AI related but elsewhere kind of seasonal at best So.
Speaker Change: I guess first part of your question is can you share with us how you're thinking about your silicon business.
Speaker Change: In the second half of calendar 'twenty for versus the first half.
Speaker Change: Then.
Speaker Change: The early signs that you see today and how that informs kind of in your view.
Speaker Change: Both positive and negative into 2025, thanks, so much.
Speaker Change: Okay C J, thanks for joining the call.
<unk>.
Speaker Change: What we're seeing in the business today, when we look at Q3, and our Q4 outlook.
Gary Dickerson: Very strong energy around the AI inflections that Gary talked about so leading edge is accelerating we highlighted that in the prepared remarks.
Speaker Change: Where our forecast for $2 $5 billion of gate all around related equipment.
Speaker Change: In this fiscal year, we haven't changed that forecast that stays the same and when we think about DRAM and HBM memory those kind of all go along with this energy we're seeing around the AI inflections and investments in that area at the same time, our <unk> business in both Q3 and Q4.
Speaker Change: <unk> is very strong we think that's robust and we can dig into that a little bit more during the call but.
If anything over the last 30 days you you ask us how we're feeling about the outlook I would say the <unk> business continues it seems like every quarter, we sort of raised our expectations with respect with respect to high caps. So a lot of energy around leading edge I caps remaining strong very strong.
Ron: Ron year for DRAM in HBM those are kind of the key themes for 25, we're not giving specific guidance, but would you say, we're we're pretty enthusiastic about gate all around and the technologies, we've talked about on the leading edge.
Ron: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line.
Speaker Change: Stacy Raskin from Bernstein Research your question. Please.
Stacy Raskin: Hi, guys. Thanks for taking my question.
I wanted to dig into the China revenues, a little bit so 32% of revenue this quarter.
Speaker Change: It sounds like a lot of that was DRAM.
Speaker Change: I guess, that's the way it wasn't all DRAM and then in the guidance for next quarter and I guess your expectations going forward from there.
Speaker Change: Back to China mitigating staying around these levels in the low 30 or does it go higher or lower just is there anything else going on with China that we would need to be aware of.
Speaker Change: Great. Thanks for joining Stacy so yeah on a 32%.
<unk> your perspective on that just a little bit so.
Speaker Change: The 32% is almost no DRAM to China, So you've got it right our business mix to China declined to 32% and if I think back in time just to remind everybody. If we go just over a year back it was like 17% mix to China, we were having supply chain issues.
Speaker Change: So it was very low at that point in the last three quarters, we bounced up to the mid Forty's well, we serve the DRAM that we could ship and that's the prior three quarters and we feel this quarter a 32% is probably normal for us are in the normal range for us.
Speaker Change: That's across our entire business for shipments to China, and what it really represents the XI caps and the <unk> market. In total has been very robust we think it'll be a record year in our fiscal year for Ike apps and China also we would call. It robust there's we're adding customers utilizations are improving.
Speaker Change: Wide variety of products and factories.
Speaker Change: So we think that market is robust both in Q3 and in Q4. So that gives you a sense of what's happening for us in that next quarter.
Speaker Change: We will have a small amount of DRAM, but nothing like we've had the prior three quarters.
Speaker Change: So fair to say that you still see the mix in the low thirties next quarter to China.
Speaker Change: Yes, we expect that mix approximately normal, which we call 30 for for the next quarter yes.
Speaker Change: Got it that's helpful. Thank you guys.
Speaker Change: <unk>.
Speaker Change: Okay.
Screening Gerry: Our next question comes from the line of screening Gerry from Raymond James Your question. Please.
Gerry: Thank you Bryce just to follow up to the previous question on China DRAM.
Gerry: Obviously, you said, it's near zero levels.
Gerry: Can you talk to your visibility as to when.
Speaker Change: If youre seeing any hope on the horizon do you expect DRAM to come back at some point in China and then also high cap. So you said the demand is pretty strong in China can you talk to what kind of trends youre seeing outside of China for high caps.
Speaker Change: Yes, thanks for thanks for joining so yes, the China DRAM in Q3, and Q4 will be at nominal levels.
Speaker Change: We have speculated you may see new investments in DRAM, there I don't have any comments to make on that specifically for the roadmap, but I would say that DRAM globally is very strong should be a very very strong year for DRAM of course that includes some of that China volume, but we think that goes along with the.
Speaker Change: The mix to HBM and Utilizations in DRAM have improved and Theres a lot of energy around the high bandwidth memory.
Speaker Change: For the leading edge systems, and then on the <unk> side.
Speaker Change: No surprise here for probably anybody we expect.
Speaker Change: The edge technologies that we describe as I caps.
Speaker Change: To grow mid to high single digits over time, and that's driven by the inflections that we talk about which is clean energy renewable power electrification those sorts of AI edge sensors all of those sorts of usages. So mid to high single digits as our view long term and when.
Speaker Change: When we look at China for both Q3, and Q4 and the entire <unk> business.
Speaker Change: I said before it's probably going to be a record for us in our fiscal year and it's not just China. We've had regions other regions grow during this quarter.
Brian: Got it thanks, Brian.
Speaker Change: Thank you and our next question.
Speaker Change: Comes from the line of the deck Arya from Bank of America Securities. Your question. Please.
Thanks for taking my question I'm curious.
Speaker Change: We should bake in the impact of any capex cuts that were announced recently.
Speaker Change: <unk>.
Speaker Change: What does that imply for.
Speaker Change: Just the overall Wi Fi market for the remainder of the <unk> and into next year.
From your comment that doesn't seem like it's having a big impact is the assumption that whatever capex is being cut that is being increased.
Speaker Change: Increased somewhere else. So just what are the puts and takes because it is a fairly sizable capex cut of its they are paying.
Speaker Change: Thing is more WSB.
Speaker Change: And in terms of the mix.
Speaker Change: Yes, thanks for joining vivek.
Our outlook, we're not changing our outlook, we're still saying two 5 billion on the leading edge for gate all around.
In this fiscal year and when we think about next year. We've just had we've had every quarter accelerating this year in the leading edge.
Speaker Change: We think that's being driven by a lot of the excitement around AI and AI data center. So we get as you think you know we get regular updates from our customers.
Speaker Change: And our outlook that we've just given for Q4 is up to date with all of our customers. So I think we tend to think of the market as a macro level customers update us all the time, but no real change to our view for leading edge looking forward.
Barry: Thank you Barry.
Speaker Change: Thank you and our next question comes from the line of Chris Caso from Wolfe Research. Your question. Please.
Chris Caso: Yes. Thank you. Good evening a question is on foundry logic, and perhaps you could give some color on the growth you're expecting into 25 driven by.
Speaker Change: Some of the new process nodes, such as gate, all around as compared to capacity.
Speaker Change: We know foundry capacity has additions have taken a pause here or are you seeing any signs of that starting to improve either as you go through the second half of 'twenty four 'twenty five.
Speaker Change: Yes.
Speaker Change: Thanks, Chris and thanks for joining.
Speaker Change: When we think about leading logic actually I'll make the comment for utilization we've seen utilizations improve in every single end market.
Speaker Change: This quarter and our expectation is for that to continue next quarter. So.
Speaker Change: DRAM, NAND, I caps and leading edge and.
Speaker Change: No change to our expectation on.
Speaker Change: Absolutely leading edge investment gate, all around technologies, not changing our number for this fiscal year and we do think it's a harbinger for.
Speaker Change: Acceleration next year as we look forward, we're not giving a guide for 'twenty five, but we think theres a lot of energy around the AI markets and we see that in <unk>, we see that in DRAM, we see that in leading edge acceleration. So.
Speaker Change: We will hope that those trends continue.
Speaker Change: Okay.
Speaker Change: Thank you and our next question.
Comes from the line of Krish Shankar from TD Cowen Your question. Please.
Krish Shankar: Yeah, Hi, Thanks for taking my question gallium price I'm, just curious about I know you don't want to comment on next year, but qualitatively.
Krish Shankar: Optimism on DRAM, and NAND wip growing, but if you strip out HBM, we're beginning to see big demand and re pricing model for DDR, a noncompetitive first half of this year. So I'm curious how to think about we haven't seen.
Speaker Change: So let me take this.
And what end market is actually drive what spending next year.
Speaker Change: Okay, Chris you're right, we won't give a guide for 'twenty five specifically, but we do think that DRAM even outside of HBM. We do think that DRAM will put new capacity in place. So we expect invest investment in DRAM.
Speaker Change: There has been additions and wafer start capacity in DRAM and <unk>.
Speaker Change: Theres more allocation of the DRAM capacity to HBM as you sort of highlight so.
Speaker Change: The investment level, there is higher than NAND looking forward of NAND NAND still it still remains fairly low, but we did see as I highlighted utilizations, improving I would call them, probably normal range for both DRAM and NAND, we see prices improve we saw.
Speaker Change: Tori positions improve at the vendors. So we think it's a more positive environment looking forward than prior quarters for actually both memory technologies.
Brad: Thanks, Brad.
Brad: Thank you.
Speaker Change: And our next question.
Speaker Change: Comes from the line.
Speaker Change: Joseph Moore from Morgan Stanley Your question. Please.
Joseph Moore: Great. Thank you.
Joseph Moore: It looks like you had some good solid growth from the services business again.
Joseph Moore: Are you benefiting there from the utilization increases in memory that you just talked about are you seeing offsetting utilization declines on the services side and then any indication of.
Joseph Moore: No.
Customers worry about export controls stockpiling on spares anything like that just any puts and takes around that service growth. Thank you.
Speaker Change: Hi, Joe Yes. Thank you services business very exciting for US we grew 8% year over year in Q3, 9% is our expectation.
Speaker Change: For Q4, and just a reminder for everybody, we expect low double digit growth going forward.
Speaker Change: Expanding our services book with customers kind of getting into information AI related services that help them ramp et cetera.
Speaker Change: We actually did expect a little more growth in Q3, we had thought we would grow double digits. This year were just short of that and it's because utilization while it grew it grew a little bit less than we are a little bit slower than we thought so there's good news share utilizations are improving across the whole system, 8% year over year growth for us.
Speaker Change: And we expect that to pick up as I highlighted as we go into Q3 and looking forward and just one.
Speaker Change: One other comment just for the rest of the investors.
Speaker Change: The thing with this business since it's mostly recurring revenue for us about 85%.
Speaker Change: That gives us a very stable operating profit and growing and so we think about our dividend is being.
Speaker Change: Enabled by the profits from the services business and that gives us confidence, we'll be able to raise our dividend looking forward.
Speaker Change: Hi, Joe just maybe a little bit more color.
Joe: If you look at what really all of our customers are focused on there is a race for these new device architectures and the complexity is going up a significant amount.
Speaker Change: And in the prepared remarks, I talked about about 30% of our tools are these integrated platforms that have a high degree of complexity.
Speaker Change: So as these customers are racing to bring these new devices complex devices to market and also we're shipping more and more of these integrated platforms with multiple technologies that also gives us a really good tailwind.
Speaker Change: Thank you.
Thank you.
Speaker Change: And our next question.
Speaker Change: Comes from the line.
Speaker Change: Joe Quattrochi from Wells Fargo. Your question. Please.
Joe Quattrochi: Yes, thanks for taking the question I wanted to ask about the advanced packaging I think based on the revenue expectations, we have for HCM and advanced packaging.
Joe Quattrochi: It implies basically the non memory advanced packaging relatively unchanged year over year is that the right way to think about it and if so why wouldn't that grow this year.
Speaker Change: I think so Joe in our forecast, we highlighted that advanced packaging was $1 $1 billion last year should grow to $1. Seven this year and we highlighted that $600 million of the growth would come from HBM related equipment. So I think youre thinking about it right. It was probably stable this year.
Joe Quattrochi: With the HBM high bandwidth memory.
Joe Quattrochi: Driving the growth in that area and again, we would point back to the energy around high performance systems and sort of the race Gary talks about to develop.
Joe Quattrochi: Our systems are optimized for the AI workloads, so theres a lot of energy there at this point and then just the last thing is we have highlighted that that total packaging business sort of to your point $1 $7 billion. We think it has the opportunity to double over several years looking forward given the.
Joe Quattrochi: Given the energy around advanced packaging technologies, So, we'll we'll keep investing there.
Joe Quattrochi: Okay.
Speaker Change: Thank you and our next question comes from the line.
<unk> Hari: <unk> Hari from Goldman Sachs. Your question. Please.
Speaker Change: Hi, Thank you so much for taking the question I was hoping.
Hari: Speak to gross margin and how youre thinking about profitability going forward.
Right and.
Gary Dickerson: Gary you talked about complexity growing and how.
Speaker Change: Things like MFS.
Gary Dickerson: Or 30% of your business in that number growing over time.
Speaker Change: I would think your ability to place would improve going forward.
Speaker Change: What am I missing in terms of.
Speaker Change: So as it pertains to gross margin.
Speaker Change: Okay.
Speaker Change: Okay. Thank you Toshi I'll start on that so 47, 4% gross margin for us in the quarter were actually very pleased with our performance and cost and pricing this quarter and I'll just highlight as our mixed of China.
Speaker Change: Which are generally smaller customers declined during the quarter to 32% that gave us some headwinds on the gross margin side, we were able to get some pricing performance and also some cost improvements and improvements and managing our inventory that helped us offset that mix decline and deliver 47 four.
Speaker Change: 4% in the quarter since the China mix is 32% we call that normal I'll say now that 47, four should be approximately our baseline level.
Speaker Change: And then we look forward, we've talked about a goal of getting to 48 or higher next year. That's still our goal. We think we can make improvements going forward. There's a couple of headwinds if services or display grow faster than the core business that can be a headwind, but that's still our goal and we think we'll make continue to make cost and pricing improvements and then Gary on them.
Speaker Change: Yes.
Gary Dickerson: Again, our focus is really to enable our customers to accelerate their innovations for these new architectures, especially around AI data center.
Gary Dickerson: Data Center will pass smartphones and Pcs relative to wafer starts.
Gary Dickerson: Everybody is focused on energy efficient computing. So these inflections are.
Gary Dickerson: Credibly important for the entire ecosystem whoever gets there first wensberg and everybody else is left behind so we're driving tremendous innovations and.
Gary Dickerson: Foundry logic, leading edge high bandwidth memory DRAM, there's new architecture inflections I talked about for F squared advanced packaging. So our positions in all of those inflections are very strong.
Gary Dickerson: We're on track to capture more than 50% of the inflection spending.
Gary Dickerson: Those new devices ramp and our goal is to move the needle for our customers and for applied and that includes how we drive value for them and how we drive our margins higher.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line.
Harlan Sur: Of Harlan sur from Jpmorgan Your question. Please.
Harlan Sur: Yeah. Good afternoon. Thanks for taking my question. So as we look at those companies that are pushing the absolute limits on advanced manufacturing technologies like two nanometer.
Speaker Change: <unk> nanometer and they're maxing out their vertical.
Speaker Change: They are also pushing advanced packaging technologies. They're designed these are the guys that are designing the AI and accelerated compute Gpus accelerators for example.
Speaker Change: Here is that most of todays designs on these next generation chips are targeting.
Speaker Change: <unk> second half of 'twenty.
Speaker Change: <unk> 25, and beyond there are specifically focused around these new <unk> architectures, so using hybrid bonding chip stacking approach.
Speaker Change: Nanometer on three nanometer die 10 nanometer die on three nanometer die.
Speaker Change: The manufacture ability challenges here pretty significantly, but similar to your front end integrated solutions.
Speaker Change: The team has been working on an integrated hybrid bonding system with some of your partners.
Speaker Change: What's the timeline for introducing these integrated solutions and will you be trying to intercept. These next generation of media, So IC solutions coming to market, let's say in the 2026 timeframe.
Speaker Change: Thanks for the question.
Henry: So Henry.
Speaker Change: Heterogeneous integration is one of the biggest areas of focus for applied and for the entire industry at our AI.
Speaker Change: Event, along with AMD at Semicon.
Speaker Change: There was a discussion around.
Speaker Change: Driving 100 X improvement in energy efficient computing. So again that is the big race that everybody is focused on and certainly packaging.
Speaker Change: As a key part of that so were deep engagement, it's really you know.
Speaker Change: Multiple technology nodes 510 years out into the future.
Speaker Change: Theres going to be tremendous innovations if you look even at <unk>.
Speaker Change: DRAM technologies like four F squared.
Speaker Change: Our high bandwidth memory, youre going to see adoption of hybrid bonding technologies.
Speaker Change: That are going to be really important.
Speaker Change: For those parts of this ecosystem and you mentioned, what's happening from a logic standpoint so.
Speaker Change: I think it's a great thing for applied as we have this broad portfolio.
Speaker Change: In packaging, we have as you mentioned the hybrid bonding digital lithography, we have other new technologies in the pipeline that even expand our portfolio. Further we have an advanced full flow packaging lab in Singapore, where we're driving co innovation with our customers.
Speaker Change: To accelerate those architecture inflection. So I think this is going to be one of the most exciting segments of the market going forward, we're about $1 $7 billion today, we've talked about doubling the packaging revenue over the next few years.
Speaker Change: And I think it's going to keep going from there again. This is a really key part of the industry drive for energy efficient computing.
Speaker Change: Thank you Jay.
Speaker Change: Yeah.
Jay: Thank you.
Speaker Change: And our next question comes from the line of.
Speaker Change #100: Charles <unk> from Needham <unk> Company your question. Please.
Charles: Good afternoon, I wanted to follow up on the on the China question. It looks like your China revenue as well past the peak around the almost a $3 billion per quarter level and now it's down to a lack of in the low 2 billion and based on the commentary. It sounds like you are expect still expecting roughly.
Speaker Change #102: 40% ish of the China revenue growth year on year, but I mean should that the current dollar.
Speaker Change #103: Dollar revenue levels those things into this year.
I'm just.
Speaker Change #104: Hoping if you could give us any color because that would imply the China revenue probably is going down year on year, roughly 15, 20% next year I know youre not guiding but.
Speaker Change #105: That will be the conclusion of our drop on the auto commentary you provided plus I do on that.
Speaker Change #106: I've got a little bit more insights.
Speaker Change #107: But if I compare the China revenue performance.
Speaker Change #108: Applied materials with some of your process control peers like KLA, they weren't expecting China to be flat into the second half, but youre, obviously seeing half of the hops decline.
Speaker Change #109: Since you have the PDC business and I was hoping you definitely will have some insights into what drives that dispersion there. Thank you.
Speaker Change #110: Okay, Charles Thanks for joining.
Speaker Change #111: I think I would separate between our caps are the edge technology markets and the DRAM market for China, We had three quarters with elevated shipments that we described will be caught up on what was allowed from a DRAM perspective.
Speaker Change #112: If you separate that out we're currently not expecting that to repeat at least nothing near that magnitude for for next year. So that leaves us with the <unk> market and what we expect in <unk> market.
Speaker Change #112: Q3, and Q4 and all of this year has been very strong and I caps when we.
Speaker Change #112: We look at China in particular Utilizations are improving we have we're adding customers. We've got a large number of factory projects that are building out.
Speaker Change #112: So if you strip out your estimate for those extraordinary DRAM shipments the last three quarters our.
Speaker Change #112: Our expectation over time is that the <unk> market will grow we say mid to high single digits, we will make a call for next year, but we would expect growth over time.
Speaker Change #112: Thank you.
Speaker Change #113: And our next question.
Speaker Change #113: Comes from the line of.
Speaker Change #113: Brian Chin from Stifel. Your question. Please.
Brian Chin: Hi, there good afternoon, and thanks for letting us ask a question.
Brian Chin: So if I look at the past three years passed 300 10-K's, TSMC was your largest customer.
Speaker Change #116: It werent, 10% in either the April or January quarters.
Speaker Change #117: I wanted the geography was little higher this quarter, the TSMC cross the 10% threshold in fiscal <unk>, and then even bigger picture.
Speaker Change #118: This overall pattern would seem to suggest a pretty favorable year over year compare moving into 2025. When you think about the type of spending gate, all around and expansions being discussed and so it just kind of wanted to get maybe your view on that.
Speaker Change #117: Okay.
Yes, TSMC was a 10% customer in Q3, and we think obviously there are a large part of that leading edge investment when we think about the gate all around technologies and a lot of the energy being driven there as we look forward one of the other callers talked about.
Speaker Change #117: The need for innovation and Gary talked about the need for innovation on leading edge Theres a lot of energy around that we see acceleration each quarter on of this year on leading edge.
Gary Dickerson: And really haven't changed our outlook as we move through the year.
Speaker Change #119: Okay. Thank you.
Speaker Change #120: Thank you.
Speaker Change #121: And our next question.
Speaker Change #122: Comes from the line.
Speaker Change #122: Blayne Curtis from Jefferies. Your question. Please.
Blayne Curtis: Thanks for letting me ask a question maybe a little confused on some of the history with <unk> and the strength I thought you were talking about last quarter that segment kind of being down slightly I think you just said mid to high single digits. So maybe.
Speaker Change #124: I have my reference point wrong, but also maybe it'd be helpful. If you could just talk about the growth you saw in July 15% sequentially for foundry logic. If you can just relate that to leading edge and I carefully I think the reception is leading is very strong.
Speaker Change #125: But it sounds like your comments on accounts are suggesting that.
Speaker Change #126: <unk> is also strong.
Speaker Change #127: But then I'm trying to put that all with like the comment that it's going to be 50% of the mix, which I think I thought that business is running a lot higher. So if you can kind of just help us a little history and then how July played out would be helpful.
Speaker Change #127: Yes, thanks, Blayne so in the quarter, we did see strength in both end markets, leading logic ni caps.
Blayne Curtis: A leading logic is accelerating every quarter this year and we said <unk> is very strong.
Blayne Curtis: And continues to be strong throughout the year. This will probably be a record year for us and I caps.
For our fiscal year anyway, and so you know leading logic is accelerating based on the gate all around investments and the AI trends that we're talking about and then I caps, we put the mid to high single digits was our longer term forecast, we've had utilization improving and when we think.
Blayne Curtis: About that market, we don't give a guide for next year, but we think there'll be continued growth in the mid to high single digits as all of those different end markets like AI sensors electrification autonomous vehicles.
Blayne Curtis: <unk> energy all of those end markets continue to build out and grow faster than GDP, that's our expectation.
Blayne Curtis: Yeah.
Bob: Thanks, Bob.
Bob: Thank you.
Speaker Change #129: And our next question.
Speaker Change #130: Comes from the line.
Speaker Change #131: Of that door Shimer from William Blair. Your question, Please and as a reminder, if you do have a question. Please press star one one on your telephone.
Theodore Shimer: Hey, thanks for.
Theodore Shimer: Taking my question.
Theodore Shimer: Yes.
Speaker Change #133: Two part one on on the Ikat, Gary So first.
In that business that was just over in some of your some of the Fabs your customers over in Malaysia last week and it seems like capacity expansion outside of China is his started again after some of the EV.
Speaker Change #133: Pressures.
Speaker Change #133: It has shifted to opportunities in.
Speaker Change #133: In.
Speaker Change #133: Power density and.
Speaker Change #134: Datacenter. So I'm just wondering if you can comment on that and then secondly.
Speaker Change #134: Just as it relates to services for <unk>.
Speaker Change #134: Is that the same as <unk>.
Speaker Change #134: On leading edge or are there nuances in terms of.
Speaker Change #135: The amount and timing there thanks.
Speaker Change #135: Yeah, So I caps.
Speaker Change #135: We're very bullish on ipi caps are longer term, Brian talked about.
Brian Chin: Kind of mid high single digit growth rates in high caps over time.
Brian Chin: Growth driven by all of those different segments of Iot and.
Brian Chin: Industrial automation and robotics really edge computing also for AI.
Speaker Change #136: We think that's going to be a really strong business over many of the people on the call know that over five years ago. It was actually April 12, 2019, we formed our <unk> group.
Speaker Change #136: And since we formed that group just to focus on that market for Iot communication auto power and sensors, we've had share gains in that market. We've introduced more than 20 major new <unk> products.
Speaker Change #136: This group is just completely focused on innovation.
Speaker Change #136: And those device segments and there are races that are happening there.
Speaker Change #136: Your comment on.
Speaker Change #137: What's happening on the different.
Device segments. If you look at power electronics, there will be some major architecture inflections that will happen there that are important for electric vehicles.
Speaker Change #137: And renewable energy and we have an eye caps architecture innovation group working co innovating with our customers on those new <unk> architectures. That's part of the strategy that we've built over the last five years, we have new products that are in the pipeline.
Speaker Change #137: That will serve large caps, new segments and new products for cost competitive application. So again, that's been a big focus for us over a number of years, we've built tremendous capabilities.
Speaker Change #137: From a service standpoint, <unk> is also a good market for us.
Speaker Change #137: And that's part of that overall growth opportunity for us not only on systems, where we have gained a significant amount of share.
Speaker Change #138: I'm very positive on how we're positioning the actions that we've taken I think really position us going forward in <unk> I don't know if you want to add anything else no I would just say that two of our regions grew during this Q3. So if the question is is there investment in other areas of the world absolutely and we expect that to continue thanks for the question.
Speaker Change #137: Yeah.
Speaker Change #139: And operator, we have time for two more questions. Please.
And our next question comes from the line of Mehdi Hosseini from Susquehanna. Your question. Please.
Mehdi Hosseini: Yes. Thanks for taking my question just a very quick follow up for Brian.
Mehdi Hosseini: If you could give us an update with the progression towards that 48, 49% gross margin target.
Brian Chin: This full fiscal year, Tony but and how.
Speaker Change #141: Funding for epic.
Speaker Change #142: R&D Center, which I think is a 4 billion project is going to impact those targets. Thank you.
Speaker Change #143: Okay. Thanks, Thanks, Matti. So the update the gross margin of 47.4, we expect to make we talked about very gradual improvements as we work towards that 48 and that would still be my expectation and you see actually.
You know.
Speaker Change #144: The movement between last quarter and this quarter.
Speaker Change #145: It was modest we fought those headwinds that we had from a mix perspective on the epic.
Speaker Change #145: We're.
Speaker Change #145: We did get the notice that we're not getting the grant, but epic that's an important platform for us its stands for equipment process innovation and commercialization, it's going to allow us to accelerate co innovation with all of our customers. We are continuing with that investment it will elevate our capex.
Speaker Change #145: As we look forward.
Speaker Change #145: And we are benefiting from the investment tax credit that's related to those types of projects. So we still do have some.
Speaker Change #145: Help from the government from that perspective, and just a couple other modeling notes since we're on Capex. So as we look forward. The Capex will for the Epic Center and in general will be at a higher run rate than we've had in the past. If you look forward in your modeling just wanted to highlight that Q1 will be our normal step up.
Speaker Change #145: For PE related increases.
Speaker Change #145: And that you can look at the history to see what that step up should look like if you're modeling that and then the last piece would be our tax rate tax rate next year expectation will be 14% versus the $12. Five this year as more of our mix will be more of our worldwide mix will be U S related.
Speaker Change #146: So that will change the tax mix. So thanks for the opportunity to get those in there maybe.
Speaker Change #146: This is Gary maybe just a little bit more color on an epic.
Speaker Change #147: You know as we've talked about.
The whole industry is in a race to be first to market to deliver innovations for energy efficient computing. So.
Gary Dickerson: Discussions with our partners our customers and partners.
Speaker Change #148: I really believe that epic can enable us to innovate the way, we innovate really innovate in parallel so accelerating.
Speaker Change #148: Both for our customers and partners and for applied our ability to bring those energy efficient innovations to market. So the concept, we're getting tremendous traction and Paul with our customers and partners.
Speaker Change #149: And you know what.
Speaker Change #149: We also think of epic as a global platform. So where are we making investments is going to be based on incentives talents.
Speaker Change #149: Proximity to innovation ecosystem. So we are moving forward for sure with this epic concept very good traction with customers and again over the last several years. We've built out this innovation engine inside of applied materials, we have architecture innovation teams.
Speaker Change #149: That are working on I caps, they're working on foundry logic and DRAM in packaging, we have this unique and connected portfolio.
Speaker Change #149: Materials innovations that are crucial for all of those major inflections. So epic is a way for us to innovate the way we innovate to move all of that in parallel to accelerate all of these major inflections that are crucial for AI data center and all of those major tectonic shifts in technology that we have.
Speaker Change #149: About earlier, but again, where we invest is going to be based on incentives talent and proximity to local innovation ecosystem.
Price: Great. Thanks, Matt for your question I think we're approaching the end of the hour. So price I'm going to go ahead and ask if you have any closing thoughts for us.
Okay. Thanks, Mike from my perspective, I'm pleased that the investments we've been making in our technology roadmap inflections and also in our operational capabilities are showing up in our financial results. This quarter on both the revenue and gross margin lines I believe we put the company in a great position to grow along with Mega trends like data center AI as a whole host of new technologies.
Gary Dickerson: Come to market across leading edge foundry logic DRAM advanced packaging <unk> specialty chips, we have the fuel we need to keep driving the materials engineering roadmap with our customers. While also distributing profits to our shareholders through dividends and buybacks Gary will be at the Goldman Sachs Conference in San Francisco on September 11th and I Hope to see many of you at the Citi Conference in new.
Gary Dickerson: On September 4th Mike. Thank you and please close the call. Okay. Thanks, Bryce and we'd like to thank everybody for joining us today, a replay of today's call is going to be available on the IR page of our website by five o'clock Pacific time.
Speaker Change #151: Thank you for your continued interest in applied materials.
Speaker Change #152: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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