Q4 2024 Applied Materials Inc Earnings Call
Yeah.
Speaker Change: Welcome to the applied materials fourth quarter fiscal 2024 earnings conference call. During the prepared remarks, all participants will be in a listen only mode. Afterwards, it will be a question and answer session I would now like to turn the call over to Liz morale.
Liz Morale: President of Investor Relations you may begin.
Liz Morale: Thank you.
Speaker Change: Good afternoon, and thank you for joining us for today's call.
With me today, Gary Dickerson, President and CEO and Brice Hill CFO.
Before we continue let me remind you that today's discussion contains forward looking statements within the meaning of the federal Securities laws.
Speaker Change: Including predictions estimates projections or other statements about future events.
Speaker Change: Actual results may differ materially from those mentioned in these forward looking statements as a result of risks and uncertainties infill.
Speaker Change: Information concerning these risks and uncertainties as discussed in our most recent Form 10-Q, and 8-K filings with the SEC.
We do not intend to update any forward looking statements.
Speaker Change: During today's call. We will also reference non-GAAP financial measures.
Speaker Change: Reconciliations of GAAP to non-GAAP results can be found in today's earnings press release and in our quarterly earnings materials, which are available on our Investor Relations website at IR that applied materials Dot com.
Gary: I'll now turn the call over to Gary.
Gary: Thanks, Liz with record revenue and earnings in our fourth quarter applied materials delivered a strong finish to fiscal 2024, and our fifth consecutive year of growth.
Gary: I would like to recognize the hard work and commitment of our global team for delivering these outstanding results.
Gary: As this is our year end call I'll begin by highlighting our key accomplishments over the past 12 months a.
Gary: A year ago, and our November 2023 call I said, the Companys priorities for 2024, we're driving R&D programs to further differentiate our unique and connected portfolio to extend our leadership at key inflections that enable future industry growth.
Gary: The operational and supply chain improvements to better serve customers and drive productivity across the enterprise.
Gary: And ensuring that we scale the company in ways that are sustainable and environmentally responsible.
Over the past year, we've made significant progress in all these areas, we strengthened our position at major inflections in logic, DRAM and advanced packaging, we delivered double digit growth in our parts and services business, we made improvements to our operations and supply chain that supported strong cash flow and margin performance.
Gary: And our key strategic initiatives are on track.
Gary: The build out of our epic collaborative R&D platform and the deployment of our net zero playbook.
Gary: In my prepared remarks today I'll talk about three key topics first how large scale secular trends are driving growth and innovation in semiconductors, and why energy efficient computing is emerging as a unifying driving force for the industry second how the major device architecture inflect.
<unk> that make up the semiconductor industry's roadmap are increasingly enabled by innovations in materials science and materials engineering, where applied has clear leadership and third as the industry roadmap becomes increasingly complex, how we are creating incremental growth opportunities for the company to offer new.
Gary: <unk> with our unique and connected portfolio, our high velocity collaborative R&D platform.
Gary: And our advanced service products.
Gary: In the coming years, we're going to experience the biggest technology changes of our lifetimes with major advances in automation and robotics electric and autonomous transportation clean energy and artificial intelligence.
All of these tectonic shifts are made possible by semiconductors and this provides a catalyst for the semiconductor industry to create and capture more value than ever before.
Gary: The biggest tectonic shift as AI, which has virtually endless applications and therefore, the potential to transform almost every area of the economy.
Gary: Large scale will require AI computing to be significantly more energy efficient than it is today to realize the full potential of AI. The leading AI companies are talking about the need to drive a 10000 times improvement in computing performance per watt over the next 15 years.
Yeah.
To deliver energy efficiency improvements of this magnitude evolutionary innovation will be insufficient.
Gary: Third we see a new technology roadmap emerging made up of multiple device architecture inflections in logic memory and advanced packaging.
Gary: This creates three significant opportunities for applied to deliver more value to customers and extend our differentiation in the market first we have built a broad unique and connected portfolio of highly enabling technologies that we can supply to customers as co optimized.
And integrated solutions by combining adjacent to process steps such as material deposition etch and material modification into an integrated system, we are providing chipmakers innovative and comprehensive solutions to enable their energy efficient architecture inflections.
Gary: Integrated solutions account for around 30% of our semiconductor systems revenue and we expect them to become an even larger part of our portfolio in the future.
Gary: We are driving earlier and broader collaborations with our customers and partners to bring next generation technology to market faster.
Gary: Our global epic platform that we will build out over the next several years is specifically designed to accelerate cycles of learning increased mutual success rates and improve investment efficiencies in the U S. Construction of the Epic Center in Silicon Valley is well underway and on track to come online in two.
Gary: And in 'twenty six.
Gary: And we will share more details about our epic advanced packaging strategy at a technical summit, we are hosting for R&D leaders next week in Singapore.
Gary: And our third key opportunity is in services, where we're focused on helping customers manage increasing complexity in their business as the industry scales.
Gary: We are deploying our advanced service products to help them accelerate their R&D speedup transfer of new chip technologies from lab to Fab and then optimize device performance yield output and cost in high volume manufacturing.
Gary: This is supporting double digit growth in our parts and service business with a high percentage of these revenues coming from subscriptions in the form of long term agreements. These.
Gary: These subscriptions have a high renewal rate and the average tenure of the agreements is growing this year, we signed our first five year service agreements with multiple customers.
Gary: Overall, Ags delivered a record quarter a record year in their 20 <unk> consecutive quarter of year on year growth.
Gary: Across the business, we're translating opportunities into results as the major device architecture inflections grow our available market and we gained share through the technology transitions.
Gary: In 2020 for the leading edge logic companies started moving the first gate all around nodes from their R&D pilot lines into high volume production, we generated more than $2 $5 billion of revenue from these advanced nodes in the fiscal year and expect those revenues to approximately double in two.
Gary: 25.
Gary: Overall, the transition from our Finfet based node to node with gate, all around transistors and backside power distribution grows applies available market from around $12 billion to approximately $14 billion for every 100000 wafer starts per month of capacity.
Gary: We also expect to capture more than 50% of the process equipment spending for the gate all around nodes up from the mid to high 40% range for Finfet generation Fabs.
Gary: In DRAM. Our revenues also grew significantly in fiscal 2024 up more than 60% year on year.
Gary: Computer memory as a critical technology for AI data centers and DRAM makers are accelerating their capacity plans, especially in high bandwidth memory, where high performance DRAM dies are stacked and connected to our logic die with advanced packaging the diodes used in high bandwidth memory.
Gary: Are much larger than standard DRAM, which means that more than three times the wafer capacity as needed to produce the same volume of chips on top of this the packaging steps needed for die stacking further increase our available market in fiscal 2020 for our H B M <unk>.
Gary: <unk> revenues grew to more than $700 million.
Gary: DRAM is a great example of how our inflection focused innovation strategy is succeeding by focusing on the most enabling steps for next generation technologies applied has increased our share of the DRAM market by around 10 points over the past decade.
Gary: Future DRAM inflections will further expand our available market as next generation four F squared and three D. DRAM architectures are even more materials engineering intensive advair.
Advanced packaging is another major device architecture inflection that provides significant improvements in the performance energy consumption and cost of next generation chips.
Gary: We have been investing in new technology to enable advanced packaging for more than a decade, establishing strong leadership positions and micro bump and through silicon via.
Gary: In fiscal 2024, our overall advanced packaging product portfolio generated close to $1 $7 billion of revenue up three times in the last four years. We believe this business will double in size in coming years as heterogeneous integration is more widely adopted and we.
Gary: Introduce new solutions that grow our addressable market.
Gary: Gate, all around transistors backside power distribution for F squared and three DRAM advanced packaging and next generation power semiconductors are all examples of device architecture inflections that are enabled by materials engineering.
As a result materials engineering, which spans all the technologies needed to deposit materials remove or shape materials and modify the property of materials at an atomic level is growing as a percentage of overall equipment spending at advanced nodes.
Gary: Before I hand over to Brian Let me summarize in fiscal 2024 applied grew revenue and earnings for the fifth consecutive year, we strengthened our position at the key technology inflections that customers will ramp in volume production over the next several years, we delivered double digit growth in parts and.
Gary: Services, and we drove operational performance improvements across applied in our supply chain as.
Gary: As we look ahead to 2025 and beyond we see AI and energy efficient computing remaining the key driver of innovation in the semiconductor industry.
Gary: And the industry's roadmap, becoming increasingly dependent on materials engineering, which grow supplies addressable market and provides a tailwind for us to outperform through the investment cycle.
Gary: I strongly believe that applied materials has the right capabilities strategy and partnerships at the right time and this puts us in a great position for the future.
Gary: We are delivering differentiated solutions to our customers to help them win the key device architecture inflection races.
Speaker Change: We are strengthening R&D collaboration with customers and partners to drive innovation and commercialization velocity and optimize mutual success rates and we are growing our service business by helping customers manage increasing complexity as the industry scales now I'll hand over to Bryce. Thanks.
Bryce: Gary and thanks to everyone. Joining today's call we had a strong fiscal 2020 for delivering record revenue and earnings per share generating healthy operating cash flow and distributing over $5 billion to shareholders via dividends and share repurchases.
Speaker Change: I would like to thank the entire applied materials team for their hard work and execution, which enabled us to achieve these excellent results for.
Speaker Change: For the full fiscal year net sales were $27 2 billion.
Speaker Change: Two 5% on a year over year basis with growth in all three business segments non.
Speaker Change: non-GAAP gross margin was 47, 6% up 80 basis points year over year, and our highest annual gross margin rate since fiscal 2000, as we optimized our operations and made progress on value based pricing.
Speaker Change: On a year over year basis, non-GAAP operating profit grew two 7% and non-GAAP operating margin was up 10 basis points.
Speaker Change: non-GAAP earnings per share grew seven 5% year over year to $8 65.
Speaker Change: For fiscal Q4, net sales were $7.05 billion.
Speaker Change: Up nearly 5% on a year over year basis, driven by solid growth in semiconductor systems and services.
Speaker Change: China declined to 30% of revenue in line with our previously communicated expectation and our historical average.
Speaker Change: non-GAAP gross margin was 47, 5% up slightly on both a year over year and quarter over quarter basis, driven by a favorable mix and operational improvements offsetting headwinds related to the lower China revenue.
Speaker Change: non-GAAP operating expenses were one point to $8 billion.
Speaker Change: Or 18, 2% of revenue and roughly in line with our expectations as we prioritize funding long term strategic programs.
Speaker Change: non-GAAP earnings per share was a record $2 32.
Speaker Change: Up 9% year over year, and benefiting from higher gross margin higher interest income a lower effective tax rate and share repurchases.
Speaker Change: Turning to the segments semi.
Speaker Change: Semiconductor system sales were $5, one $8 billion for Q4 up 6% year over year, driven by leading edge foundry logic demand.
Speaker Change: non-GAAP operating margin was 35, 4% down 50 basis points year over year, given the normalizing China mix.
Speaker Change: DRAM sales declined 10% year over year, given the elevated purchases from China in Q4 of fiscal 2023.
Speaker Change: <unk> sales were flat year over year foundry logic sales increased 12% year over year fueled by robust growth at the leading edge, including increasing investments for gate all around nodes as customers invested to enable critical technology inflections sales.
Speaker Change: Sales for the <unk> nodes, which serve customers across the Iot communications auto power and sensor markets were down year over year, given high demand in the year ago period.
Speaker Change: Moving to applied Global services Ags delivered record revenue of $1 six 4 billion in Q4 up 11% on a year over year basis, and driven by robust growth in services, partially offset by a decline in 200 millimeter equipment sales.
Speaker Change: non-GAAP operating margin of 30% was up two seven percentage points year over year and non-GAAP operating income was a record $492 million.
Speaker Change: Year over year, we saw increases across many operational metrics, including a 7% increase in the installed base and a 10% increase in tools under service agreements. Our average contract length increased to $2 nine years, and we maintained a renewal rate of greater than 90%.
Speaker Change: Lastly, our display business generated revenue of $211 million in line with our expectations as the industry experienced lower investment levels amidst ongoing weakness in end market demand over time, we expect there to be an increase in capital investments to support the adoption of OLED technology in <unk>.
Speaker Change: Mrs like notebooks, Pcs and tablets, we are well positioned to enable customers for the coming OLED inflection with our technology.
Moving to the balance sheet and cash flows we ended the quarter with cash and cash equivalents of $8 billion and debt of $6 3 billion.
Speaker Change: Cash from operations in the quarter was $2 $6 billion capital expenditures were $407 million and free cash flow was $2 $2 billion. In total we generated $8 7 billion in operating cash flow and seven 5 billion and free cash flow in fiscal 2024.
Speaker Change: We distributed $1 8 billion to shareholders in the quarter, including $329 million in dividends and $1 4 billion in share repurchases.
Speaker Change: For the full year, we distributed $5 billion to shareholders of which $3 8 billion was through share repurchases up 75% from $2 2 billion in fiscal 2023.
Speaker Change: As of the end of the quarter approximately $8 9 billion remains available under our share repurchase authorization.
Speaker Change: As we contemplate fiscal Q1, we.
Speaker Change: We are seeing strong demand and leading edge logic, and AI caps nodes and sequential growth in memory with that in mind, Let me share our outlook for fiscal Q1, we expect total revenue of $7 5 billion, plus or minus $400 million and non-GAAP EPS of $2 29.
Speaker Change: Plus or minus 18.
Speaker Change: Both representing an increase of approximately 7% on a year over year basis we.
Speaker Change: We expect semiconductor systems revenue of approximately $5 3 billion, which is up 8% year over year Ags revenue of approximately $1 $65 billion.
It was up 12% year over year and display revenue of approximately $175 million.
We expect non-GAAP gross margin of approximately 48, 4% driven by a favorable mix and cost and pricing improvements.
Speaker Change: And non-GAAP operating expenses of approximately $1 33 billion we.
We are modeling a tax rate of approximately 14%.
Speaker Change: Our outlook is consistent with trade rules currently in effect.
Speaker Change: In closing we.
Speaker Change: We had a strong fiscal 2024 with momentum across the majority of our markets fueling record revenue and earnings per share.
Speaker Change: Our portfolio positions us to uniquely capitalize on the secular mega trends shaping the technology landscape from data center and AI to edge computing, the internet of things and display.
Speaker Change: Underpinning this is our strong investment grade balance sheet solid cash generation and healthy shareholder distributions.
Speaker Change: Operator, we are now ready to begin the Q&A session. Please.
Speaker Change: Thank you we will now open the line for questions. If you would like to ask a question. Please press star one on your telephone if you would like to remove yourself from the queue simply press star one again as we compiled the roster. We request that you. Please limit yourselves to one question each to enable us to reach as many participants as.
As possible during today's call one moment for our first question.
Speaker Change: Okay.
Speaker Change: And our first question comes from the line of Stacy Raskin from Bernstein Research. Your question. Please.
Speaker Change: Hey, guys. Thanks for taking my questions.
Speaker Change: First one I wanted to ask what you.
Speaker Change: Are you expecting for China mix as we go through next year and I guess, there was a little surprised you suggested.
Speaker Change: You saw I caps strengths going into Q1.
Speaker Change: I guess, maybe you can talk to us about how.
Speaker Change: Now that I kept strengths in the near term splits out between China and rest of the world and how you see China, Mexico sustaining a 30% are moving off of that number as we go through next year.
Speaker Change: Great. Thanks for the question Stacy and Hello.
Speaker Change: Yes, the China mix.
Speaker Change: Couple of signals there so 30% in Q4, as we reported and that's normalized and come down after we serve that China DRAM demand that we had in earlier quarters.
Speaker Change: Our outlook in Q1 is also contains approximately 30% for the China mix. When we think about high caps across the world. It is still very healthy. So we said it it is lower than our prior Q4. So Q4 of 24 was a little bit lower than Q4 of 'twenty three.
Speaker Change: The <unk> market is still very healthy.
Speaker Change: And it's healthy globally. It is healthy in China and it is healthy.
Speaker Change: Across the world from a total level perspective, having said that we expect <unk> markets to grow over time, we've talked about mid to high single digits at the device level we.
Speaker Change: We expect customers to continue to add capacity.
Speaker Change: There are signs to watch for there are slower end markets and I caps automotive industrial analog image sensors are all markets that have been slower. So we've kind of been looking to see if the investment where it would go a little bit lower but as far as our Q4 and our Q1. It remains it remains strong.
Speaker Change: Got it thanks and for my follow up then if China makes isn't going up gross gross margins are so it doesn't sound like the gross margin increase is due to an increase in trying to make so can you talk about the drivers of that gross margin increase into Q1, and I guess, maybe talk to sustainability.
Speaker Change: As we go through through next year do you think you'd get back closer to the target ranges for gross margins as we go through the end of the year.
Speaker Change: Yeah. Thanks for the question on that so our gross margin the way we want to shape that from your modeling perspective in the businesses. We think our underlying rate has improved to about 48.0% at this point. So it has improved and that's you know we've made improvements top to bottom in the business logistics.
Speaker Change: Our inventory management scrap management.
Speaker Change: Cost overall, and our implementation of value pricing. So a lot of elements working on the gross margin equation in Q1 in particular, it's we're guiding 48, 4% so above that 48.0 sort of baseline and that's based on really strong product mix that we have in Q1.
Speaker Change: So we think 48 is the right level for you to think about longer term and we'll of course continue to work on improving that.
Gary: Stacy this is Gary.
Speaker Change: Things also that we're.
Speaker Change: Very focused on it.
Speaker Change: It's winning the inflections you know there's a lot of really great inflections that provide a tailwind for applied and we're bringing enabling technology.
Speaker Change: Our customers in a number of different markets. So one thing that is also a tailwind for us as pricing improvement as we're shipping more valuable products. So that's part of what Youre seeing in that increased gross margin and I think that we have a great opportunity to continue to drive that going forward.
Speaker Change: Got it thank you guys.
Thank you and our next question comes from the line of C. J Muse from Cantor Your question. Please.
Yes, good afternoon, and thank you for taking the question.
Speaker Change: You guys don't want to talk about <unk> I was hoping you could speak to it directionally.
How are you thinking about 'twenty four 'twenty five more importantly growth.
Speaker Change: And maybe perhaps more importantly in terms of the change in the administration.
Speaker Change: How are you thinking about.
Speaker Change: Potential risk in terms of.
Speaker Change: Eddie restrictions or perhaps going the other direction, we'd love to hear your first thoughts there.
Speaker Change: Okay. Thanks for the question Stacy sorry, C J and thanks for staying up for us.
So on the W. A feed directionally for 24, so we just closed our fifth year of growth. So we will see what the print is.
Speaker Change: Across the whole industry, but we would expect it to have shown growth and then for 'twenty five if you zoom out we're talking about a trillion dollar semiconductor industry by 2030, I think thats consistent across most of the industry having that view.
Speaker Change: And we certainly have that view given the added wafer starts and added capacity across the industry basically every single year. So it's hard to guarantee 25, but I'll just call out that our Q4 was growth year over year. Our Q1 is growth year over year and we just completed those five years and we're starting to see that leading.
Edge component of logic accelerate as the gate all around nodes are being investigated invested in across the across the world.
Speaker Change: As far as the change in administration. It's early we really can't speculate on what might change. There. So we will we'll have to wait for more input on that one. Thank you very helpful.
Speaker Change: As a follow up on gross margins. The 48 now has a floor is it fairly pretty good accomplishment. So would love to hear kind of how you got there and I guess how to think about.
Growth beyond that over time.
Yeah, I don't think I can be as aggressive to call a floor, but I wont call. It peak either so.
Speaker Change: <unk> 48 for for Q1, that's mixed positive for.
Speaker Change: For Q1, but we do expect to continue to make improvements on that 48 zero baseline. So we continue to have significant cost.
Speaker Change: Projects in our pipeline and as we introduce new equipment and improve the value of the equipment that it's existing.
Speaker Change: Improve our value pricing. So we expect to continue to make progress.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line of Vivek Arya from Bank of America. Your question. Please.
Thanks for taking my question on the leading edge.
Speaker Change: The three big kind of found.
Speaker Change: Foundries and the IBM among them.
Speaker Change: One of them is doing extremely well the other two not as much. So when you say that leading edge is very strong as it is the expectation that the one there that is doing very well continues to stay very strong and the others, even if they fall behind.
Speaker Change: There's still sufficient to kind of give the overall industry strong growth outlook for next year. So I'm just I guess the direct question is how much have you handicapped.
Speaker Change: Got it back at me in the market, where one third is doing extremely well and the other two are not doing as well.
Speaker Change: Thanks for the question Vivek.
Speaker Change: Yes, the way that we think about forecasting demand long term for the business really starts with the end markets. So our view if you think about data center PC smartphones all of the things that artificial intelligence that drive the leading edge, we think the eventual footprint of capacity will need to match.
Speaker Change: Those end market requirements and there'll be sort of.
Speaker Change: Independent of which foundries are serving what amount of each of that demand and so at a high level, we haven't really changed our expectations from the amount of leading edge capacity that needs to be installed and so I would say as customers change their schedules and their micro factory.
Forecast, our forecast really hasnt changed.
Speaker Change: Yeah Vivek. This is Gary what I would add is that.
Speaker Change: I've been spending a lot of time with all of these different companies, they're really big focus for everybody is improvement in energy efficient computing AI.
Driving a significant amount of growth those die sizes are very large.
Speaker Change: And so when we look forward not just in 'twenty, five, but we look over longer term.
Speaker Change: We see significant growth in leading edge foundry logic.
And the good thing for applied is that those.
Speaker Change: Those improvements in energy efficient computing are really enabled through architecture changes like gate, all around or backside power distribution. We're in every one of these architecture inflections, you're improving the.
Speaker Change: Power efficiency, 20% to 30%. So it's really really important one of the customers I was talking to said that every percent of energy efficiency improvement matters.
And as we've talked about we're really well positioned to gain share as our customers are going through those inflections with new gate all around notes and backside power. So that puts that gives us a really great tailwind going forward and as Brian said you know, we really look at this from an overall market standpoint.
Speaker Change: And we're pretty optimistic relative to the growth in leading edge foundry logic. Thanks.
Speaker Change: Thanks, Vivek, we will take our next question.
Thank you and our next question comes from the line of <unk> Malik from Citi Group. Your question. Please.
Speaker Change: Hi, Thank you for taking my question I have a question for Brian.
Speaker Change: I believe on the last earnings call, you talked about China, being 20% auction sales on a normalized basis.
Speaker Change: Next year is that still your view and then some of your peers have talked about decline anywhere ranging from mid teens to down 34 data, China sales and I know you're not talking about wip next year, but is that the rate decline for China sales for you guys as well between <unk> and <unk>.
Speaker Change: Hi.
Speaker Change: If we are sort of shaking heads in the room here, we don't recognize if I heard you right, we don't recognize the 20% but.
Speaker Change: I think the last quarter, it was 32% or a quarter or this quarter reported Q4 is 30% for our China as a share of total revenue and our outlook quarter Q1 is approximately 30% also so we think thats a normalized rate it was elevated for a few quarters even up into.
Speaker Change: The mid Forty's and that was because we were shipping that.
Speaker Change: DRAM demand to some specific China customers when it was allowed.
Since then it's come back down to the 30% range and as we've highlighted in our outlook that is consistent with our Q1 and we think that's a when we look over the past several years, we think 30% is approximately normal for the company and that does include all of our businesses that includes the semi systems that includes our <unk>.
Speaker Change: Services business, and our display business, which has significant sales in China.
Thank you for the patient.
Speaker Change: Yes.
Speaker Change: Thank you and our next question comes from the line of <unk> Hari from Goldman Sachs. Your question. Please.
Speaker Change: Yeah.
Speaker Change: Hi, good afternoon. Thank you so much for taking the question.
Speaker Change: Gary and Brian. So I think you both mentioned the concept of value value based pricing a couple of times in your script and How's that's driving gross margin I know this isn't necessarily a new initiative at applied but if you can kind of expand on what youre doing exactly with your customers is it primarily tied to your IMS offering or.
Speaker Change: Or is it broader than that and which inning are you in as it pertains to you guys essentially trying to capture value. Thank you.
Speaker Change: Yeah. Thanks Toshi.
I would say third inning and the reason I say that is because.
Speaker Change: We are.
Speaker Change: Since we had the Covid event, so we had supply chain and we had changes in our cost. We also had to recognize reconcile that with that we've always had value pricing and a company. We've always thought about the value of the tools, but that was a bit of a shock in terms of what the cost levels were coming through the supply chain. So.
Speaker Change: Really had to stimulate our evaluation.
Speaker Change: Of the value being provided for each application and especially those integrated applications that are <unk>.
Speaker Change: <unk> to the company and so you know we're in the process of strengthening our training process and our analytical process.
Speaker Change: Our communications with the customers and.
Speaker Change: Since the tools that we're providing and the systems, we're providing we do think create more value for the customers, we're making progress in that.
Speaker Change: Yeah.
Speaker Change: If I look at across all of the different businesses within applied.
Speaker Change: I've never been more optimistic regarding the technology pipeline and product pipeline that we have in our positions around these key inflections that are important for energy efficient computing.
Speaker Change: So as you mentioned the integrated platform. So that's about 30% of our revenue.
Speaker Change: And that's those are absolutely crucial for these technology inflections.
Speaker Change: But I would say that if I look at foundry logic or DRAM, where we've gained 10 points of share over the last 10 years.
Or advanced packaging or even an eye caps, we have new products in the pipeline that will expand our available market and our.
Speaker Change: Incredibly valuable for some of these segments.
Speaker Change: I think we have a really robust pipeline of capabilities and that will help us from a value pricing standpoint, so as Brian said I think we have a lot of room to continue to grow.
Speaker Change: Great. Thank you.
Speaker Change: Thank you and our next question comes from the line of Timothy Arcuri from UBS. Your question. Please.
Yeah.
Timothy Arcuri: Thanks, a lot Bryan you gave a number just now you said that advanced node revenue is going to double you said it was $2 5 billion I think this year and you said, it's going to double next year.
Not all of that is going to be incremental though because someone's going to cannibalize I would think in three and four and five.
Speaker Change: Do you have a sense of how much of that would be incremental I mean I'm sure that some of it is but do you have a sense of how much of it would be.
Timothy Arcuri: Thanks, Tim So yeah. This this.
Speaker Change: Approximate doubling has to do with our shipments to the gate all around nodes across the industry and what we've said is in in fiscal 'twenty four we shipped approximately $2 $5 billion of equipment to gate all around nodes and we expect that to approximately double next year.
And.
Speaker Change: If I think about it we've also described the increment.
Speaker Change: Sure Gate all around for US is approximately $1 billion raising.
Speaker Change: What was $6 billion.
Speaker Change: Investment for 100000 wafer starts of capacity wafer starts per month to $7 billion. So.
Speaker Change: The increment would be about one sixth if you're if we're thinking about it from that perspective, and then I think most of our shipments at this point are on the leading edge logic are towards gate all around nodes. So most of that is replacing revenue that was at prior nodes in the past.
Speaker Change: Very very helpful. Thank you guys and then Gary I know you talk about a trillion dollars in semiconductor revenue that has this much ballyhooed longer term number but my question is how much WSI spending do you think has to be spent to support that much rev.
Speaker Change: Revenue and really it kind of gets to what the longer term WC tensity is which used to be 13, and a half before COVID-19 and it got to like 17% in 2023, but it's been coming down. Since then as you know China has come down. So how do you think about like for a trillion dollars worth of semiconductor revenue how much <unk> do you think the industry has to spend to support that I don't know.
Speaker Change: Brian if you want to answer that or Gary.
Yes, I can jump in on that because we have seen elevated intensity. This.
<unk> investment the equipment investment over semiconductor revenues, so we've seen that intensity increase largely on that.
Speaker Change: Significant ramp in China over the past couple of years as China ramped up capacity. So we do expect it to decrease a little bit over time.
Speaker Change: As we look forward in the forecast but.
Speaker Change: We're comfortable at this point that it should stay in the mid teens somewhere in the mid teens as a.
Speaker Change: As a metric.
Speaker Change: Tim the other thing I would add is that we're very deeply engaged with all of our customers I would say more so than ever this concept of high velocity co innovation, where we're co innovating with our customers a decade out over multiple technology nodes.
Speaker Change: It has never been stronger with all of our innovative technologies are device integration teams really deep partnerships.
Speaker Change: Partnerships with customers.
Speaker Change: And what we see going forward. Besides overall capital intensity is increasing intensity in materials engineering and the technologies from applied materials. So I think again, we have very very deep visibility.
Speaker Change: Across all of these different market segments and that will put us in a good position.
Speaker Change: Thank you both.
Thank you and our next question comes from the line of Krish <unk> from TD Cowen Your question. Please.
Yeah, Hi, Thanks for taking my question, Brian I, just wanted to follow up again on the value based pricing argument.
Speaker Change: He is part of it driven by some of these technologies that gate, all around where it's really difficult to do some of the vertical it be steps and therefore, there's a lot more value added to it.
Speaker Change: The reason I'm asking is is once we get past few dollars on good or bad sidebar delivery order with subsequent DRAM does that intensity come down in other words get always so difficult to do.
Speaker Change: The next steps might not be as critical I'm, just kind of curious how to think about this value pricing and whether it was a good one specific thing.
Speaker Change: Hi, Chris This is Gary Thanks for the question. So I would say that the entire industry is focused on energy efficient computing.
Speaker Change: And we've heard some of the system companies talking about 100 acts improvements in five years or 10000 times improvements in 15 years.
Speaker Change: It's really hard to accomplish those types of improvements and the value.
Speaker Change: The value why do these companies go to the most advanced nodes. They go there even though those wafers are more expensive because.
Speaker Change: One CEO was telling me, even 1% improvement in energy efficient computing is worth a lot. So when you think about all of these different knows yes gate all around as difficult backside power, it's difficult for F squared in three D DRAM are difficult.
Speaker Change: All of these areas are very very challenging.
Speaker Change: And we have unique capability with our integrated platforms. We have one platform with multiple technologies that enables a 50% improvement in resistance.
Speaker Change: And obviously, that's really critical for energy efficient computing. So I don't think this is a one shot thing with the first generation of gate all around.
Speaker Change: All of these things I think are critical for customers and applied is extremely well positioned.
Speaker Change: Thanks, guys very helpful.
Speaker Change: Thank you and our next question comes from the line of Harlan sur from Jpmorgan. Your question. Please.
Harlan Sur: Good afternoon. Thanks for taking my question on the team's services business strong performance, our 21 consecutive quarters of year over year growth in that trend clearly looks to sustain going into an improving semiconductor demand environment next year. Additionally.
You guys have driven a much more annuity like recurring.
Harlan Sur: The revenue profile. However, operating margins is still about 100 basis points below the 31% level that you drill 456 consecutive quarters.
Harlan Sur: 21, and 'twenty two timeframe and that was at a lower revenue base and then maybe.
Harlan Sur: About 200 300 basis points below your prior long term targets for low 30% operating profitability on revenue targets that were also lower so what's been responsible for the lower operating margin expansion is there are still a line of sight to getting into the low 30% range on continued AGM.
Harlan Sur: S growth or is there something sort of.
Harlan Sur: Clearly that has changed.
Speaker Change: Yeah Harlan Thanks for the question there is something structurally that's changed we have begun allocating more of our corporate expenses in our central expenses that are supporting.
Speaker Change: Each of our segments.
Speaker Change: During this year and that was accountable for a portion of the reduction in operating profit there. So I think you see.
Speaker Change: US improving our operating profit for that business over the last eight quarters generally and I think the expectation is we'll continue to be able to make improvements.
Speaker Change: Even with those allocations that allocation increase that we made.
Harlan Sur: Yeah Harlan.
Speaker Change: Also there is tremendous poll as customers are going through these inflections in all of these different markets.
Speaker Change: To accelerate time to market.
Speaker Change: For those innovations and then transferring technology first time right faster attract technology transfer and then ramp into high volume manufacturing.
Speaker Change: Those are big opportunities. We're also driving tremendous innovation in our services and you know I've been meeting with a lot of the different customers here over the next quarter Theres real traction for many of these service innovations. So that will continue to drive the value we create for.
Speaker Change: Our customers and drive our margins higher in the future.
Speaker Change: No I appreciate that and maybe just a quick follow up so as you guys focus on more value capture, especially with your integrated solutions.
Speaker Change: Gary you spent a lot of time talking about sort of new technology enablement with these integrated systems.
Speaker Change: <unk> also get the additional benefit in terms of better operational and manufacture ability dynamics I mean, I can't imagine with an integrated system you eliminate a lot of the wafer transport.
Activities, which ultimately increases plus module throughput increase in cycle time, you also potentially get smaller tool footprint right is this is this an accurate assessment in any way to kind of quantify some of these operational benefits with your integrated systems.
Speaker Change: Yeah. Thanks for the question so.
Speaker Change: We're always focused on.
Speaker Change: Improvements in energy efficient computing and all of these different architectures, but there is also a huge focus and cost innovation.
And cost innovation.
When we're combining these different technologies together.
Speaker Change: It's one aspect, but the other thing is really.
Speaker Change: Helping our customers optimize these new device architectures. So when we're in these technology discussions with a number of different companies. There are cases, where we can simplify processes.
Speaker Change: That really enable them to drive lower costs. Another example is worth our pattern shaping technology that we've talked about.
Speaker Change: Our customers can reduce the number of the steps.
Speaker Change: So there are a number of those kinds of opportunities and then getting back to services.
Again, I was with one of our biggest customers here recently and we were talking about service innovation that can drive their overall operating costs lower. So there. This is also a really big focus and I think an opportunity both for our systems business and our service business.
Speaker Change: Thank you Gary.
Speaker Change: Thank you and our next question comes from the line of Joe Quattrochi from Wells Fargo. Your question. Please.
Hey, Thanks for taking the question.
Speaker Change: You mentioned in his prepared remarks that you were seeing DRAM customers accelerate capacity, especially for <unk>.
I think.
Speaker Change: Most of you would expect HCN to continue to be strong spending but are you seeing customers look to add capacity for conventional DRAM I just want to make sure I understand excellent rate and then how do we think about just the growth that you talked about sequentially from memory.
Speaker Change: The January quarter.
Speaker Change: Hi, Joe.
Speaker Change: We do see customers, adding capacity in DRAM and in total more wafer start capacity I actually haven't calculated how much of that was driven by HBM, what what we would say is about 10% of.
Speaker Change: DRAM wafers right now are allocated towards HBM production high bandwidth memory and the high bandwidth memory demand is growing at about a 30% rate. So we do see more capacity allocated each quarter.
Two high bandwidth memory, and we do see the growth rate there very high.
Speaker Change: My sense is that doesn't equate to exactly what's being added in the overall capacity footprint, but anyway, we do see capacity increases.
In the DRAM customers and we do see that market continue to be fairly strong.
Speaker Change: Yes.
Speaker Change: Thank you and our next question comes from the line of <unk> <unk> from Raymond James Your question. Please.
Speaker Change: Thank you I have a follow up to the previous question Bryce.
Speaker Change: If I look at your DRAM, obviously very strong in fiscal 'twenty four I think.
Speaker Change: <unk> had 60 plus percent growth in you kind of quantified the HBA mid $700 million, roughly I think thats roughly about 20 points of growth.
Speaker Change: As I look out to the next I guess fiscal year I'm, just trying to understand how to think about overall DRAM growth because <unk> will obviously grow and I believe there was some China.
Speaker Change: And last 12 months, that's probably declining are already declined so.
Speaker Change: All in do you expect I guess DRAM to grow next year or do you think.
Speaker Change: It's going to be a challenge.
Speaker Change: Yes, so a couple of comments there long term, we've talked about the trillion dollar market and our view that trillion dollars semiconductor market in our view that capacity will be continued to be added across the ecosystem on the wafer side to support that.
Speaker Change: I think we've articulated in the past that for WMC, we expect about two thirds to be foundry logic and one third to be memory, we haven't gotten specific about what the share is for DRAM, but.
Speaker Change: Right now today, and our Q4 and our Q1 guide, we're seeing strong DRAM market and that's a continuation and we talked about the pull of.
High bandwidth memory from the artificial intelligence usage models. So I think it's fair that we expect capacity to be added over time, and we're not making a call on 25, but those are so those are the dynamics.
Speaker Change: Got it and then maybe another quick one on NAND I know you guys have been fairly cautious on <unk> spending when it comes to NAND.
Speaker Change: But there is definitely some optimism about.
Speaker Change: Tech transitions and in particular in Mali be transitioned so just want.
Speaker Change: I want to hear your thoughts about how you're thinking about NAND.
Speaker Change: For next year in terms of tech transitions and the opportunity for you guys.
Speaker Change: Yeah from a macro perspective similar to the comments on DRAM and we do see a little bit of growth in NAND in our Q1 outlook.
Speaker Change: And the dynamic is slightly different at the macro level four for NAND and DRAM on the DRAM side, we do see added capacity more wafer starts across the ecosystem on the NAND, we haven't seen that because.
Speaker Change: I think the bit rate density so the actual shrink rate of the NAND technologies has been so impressive and so high that its actually delivered the amount of bids that are in the demand profile and so there hasn't been new wafer starts needed on the NAND side. So most of that has been an upgrade market so that dynamic.
Speaker Change: <unk> is slightly different but in any case, we see a little bit of an uptick in in the NAND and our outlook for Q1.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line, Brian Chin from Stifel. Your question. Please.
Speaker Change: Hi, there I appreciate the time.
Speaker Change: Time. This afternoon. It sounded like you still view, 30% is a normalized level of China sales, but.
Speaker Change: Of course, it did go higher than normalized into the forties in recent quarters. So I was curious is it reasonable that China could go below 30% and 25 is areas like leading edge foundry DRAM improve ni caps remains more stable plus or minus.
Speaker Change: Thanks for the question, Brian I think that most of the <unk>.
Speaker Change: Variable annuity for us will be based on the health of the <unk> market in China. That's the vast majority of our business right. Now we have served most of the DRAM and NAND business that we can serve and we can't serve leading edge in China. So most of the vast majority of the business is <unk> and it'll just depend on how that.
Speaker Change: <unk> market evolves.
Speaker Change: Earlier I shared that there is.
Speaker Change: Couple of signals that say the rate of investment might be slower those are higher inventory positions and slow end markets that are automotive industrial.
Image sensors, and analog or markets that are slower, but having said that our Q4 and Q1 outlook is still strong for caps across the world and so we'll just have to see how that matures. We do expect customers to continue to add capacity over the medium term.
Speaker Change: Alright. Thank you, maybe if I could just ask a little bit of a longer term question here.
Ethanol earlier today was upbeat outlook for AI, driven DRAM spending overall.
Speaker Change: I also talked about lithography intensity, increasing for DRAM towards decade than.
Speaker Change: This seems to differ I guess, a little bit from your prior messaging around the potential timing and introduction of <unk>.
Speaker Change: Technologies like like vertical transistor, DRAM and even <unk> DRAM can you maybe compare and contrast, where the differences here might arise.
Speaker Change: All I'll say, one thing and then Gary will help here I think my view is it's complementary very complementary so as you know.
Speaker Change: Theres more business and more demand on the litho side of the equation that of course requires more equipment to do the.
Speaker Change: Actual materials, so Gary has a comment yeah, we're deeply engaged with.
Speaker Change: All of the memory companies on their DRAM roadmaps, so relative to the vertical channel transistor also known as four F squared.
Speaker Change: Yeah, I think that's where everybody is focused in the near term.
Speaker Change: We believe that inflection will be more materials engineering intensive and again were really deeply engaged on the key technologies that will enable that architecture inflection.
Speaker Change: And I'd say that everyone is also focused on three D. DRAM and that one is further out in time and that is significantly more materials engineering intensive. So again I can't really comment on what other people are seeing but I would say that we're deeply engaged with all of those different.
Speaker Change: Companies on those architectures, we're working with their integration teams their device teams and we have high confidence that materials engineering intensity will increase with those inflections.
Speaker Change: Alright, thank you.
Speaker Change: Thank you and our next question comes from the line of Joseph Moore from Morgan Stanley. Your question. Please.
Joseph Moore: Great. Thank you I wanted to follow up the strength in I cap you sort of said, there's weakness in automotive industrial analog and image sensors. That's a lot of the trailing edge category. So I'm wondering what does that leave us that's doing well and is that sort of imply that it's geopolitically related spending is there just just what aspect of it.
Speaker Change: Is it still strong.
Speaker Change: Yeah. Thanks, Joe I think power some of the power related components and I think some of the.
Speaker Change: Microcontrollers are stronger than those markets. Those are two that I recall from the discussions so I think.
Speaker Change: What we see across ice caps is it's continued to be fairly strong it wasn't quite as high in our Q4 'twenty four is in our Q4 'twenty three but still a very strong market. So we'll just have to watch how this evolves. Our perspective is that customers will continue to add capacity as the underlying.
Speaker Change: The market continues to grow towards this trillion dollar 2030 semiconductor market, but utilizations right now are a little bit lower than the.
Speaker Change: The ideal utilization level. So we do think there could be some slowing of investment as we go through this year.
Speaker Change: Thanks, Joe we have time for one last question.
Certainly and our final question for today, then comes from the line of Vijay Rakesh from Mizuho. Your question. Please.
Vijay Rakesh: Yeah, Hi.
Vijay Rakesh: Quick question on <unk>.
I'm trying to get embraced but when you look at China.
Vijay Rakesh: It kind of hold at this level.
So kind of quantify.
Vijay Rakesh: Thanks, Vijay we in our Q1 guide we are highlighting that it is also approximately 30% so and looking historically.
Vijay Rakesh: Ben the number that we're comfortable that we've seen historically and I'll, just say that the market for us.
Vijay Rakesh: Highlighted a few minutes ago, we're not serving much DRAM or NAND and no leading edge at this point, it's mostly the <unk> business and so.
Vijay Rakesh: The fact that it's been.
Vijay Rakesh: Restricted to the <unk> business at this point it'll really change over time with the strength of that particular end market. We do expect that to grow over time, we'll have to see how 25.
Vijay Rakesh: Jakes out as you know as the market matures. Thanks for the question.
Speaker Change: Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to price for any further remarks.
Speaker Change: Thank you operator.
Speaker Change: I'm pleased with the strong performance, we delivered in Q4 and for our fiscal year. We're in a strong position with an industry, leading portfolio of products and services and poised uniquely benefit from the secular mega trends driving technology demand.
Speaker Change: Thank you for joining today's call and Liz please close the call.
Liz Morale: And thanks to everyone for joining our call today, a replay of today's call will be available on the Investor Relations website by five P. M Pacific time today. Thank you for your continued interest in applied materials.
Speaker Change: 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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