Q1 2025 Applied Materials Inc Earnings Call
Welcome to the applied materials first quarter fiscal 2025 earnings conference call. During the prepared remarks, all participants will be in a listen only mode. Afterwards, there will be a question and answer session I would now like to.
Speaker Change: Turn the call over to Liz Murali, Vice President of Investor Relations you may begin.
Liz Murali: Thank you good afternoon, and thank you for joining us for today's call.
Gary Dickerson: With me today are Gary Dickerson, President and CEO and Brice Hill CFO.
Gary Dickerson: Before we continue let me remind you that today's discussion contains forward looking statements within the meaning of the federal Securities laws.
Gary Dickerson: <unk> predictions estimates projections or other statements about future events.
Gary Dickerson: Actual results may differ materially from those mentioned in these forward looking statements as a result of risks and uncertainties.
Gary Dickerson: Information concerning these risks and uncertainties is discussed in our most recent Form 10-K, and 8-K filings with the SEC.
Gary Dickerson: We do not intend to update any forward looking statements.
Gary Dickerson: During today's call. We will also reference non-GAAP financial measures 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 Dickerson: I will now turn the call over to Gary.
Gary Dickerson: Thanks, Liz and our first fiscal quarter of 2025 applied materials delivered record revenue surpassing the prior high we set last quarter.
Gary Dickerson: The major technology trends reshaping the global economy are made possible by advanced semiconductors, underpinning long term secular growth for the industry and especially applied materials.
Gary Dickerson: We are providing our customers a unique and connected portfolio of solutions to accelerate the technology roadmap positioning us for continued growth and outperformance in the years to come.
Gary Dickerson: In my prepared remarks, I'll share our latest market insight.
Gary Dickerson: Describe how our innovations are enabling the major device architecture inflections that are critical to advancing energy efficient AI and I'll talk about why high velocity co innovation is more important than ever as the industry races to bring next generation technology to consumers.
Gary Dickerson: Faster and at lower cost.
Gary Dickerson: With the market.
Gary Dickerson: AI remains central to our outlook.
Gary Dickerson: With almost infinite possible uses.
Gary Dickerson: <unk> is the most transformative technology change of our lifetimes and a major catalyst for innovation and growth across the technology sector.
Gary Dickerson: Early deployment of AI supported approximately 20% year on year growth of global semiconductor sales in 2024.
Gary Dickerson: And the market remains on track to exceed one trillion dollars of annual revenues by 2030.
Gary Dickerson: We are only at the beginning of what's possible.
Gary Dickerson: And as we look ahead, we expect disruptive innovations to significantly improve the energy efficiency and cost of AI opening up new applications and growing the overall market opportunity.
Gary Dickerson: To unlock this potential innovation is required across the technology stack from the models and software as we've seen in recent weeks with deep seek to data Center architecture Chip design and how those chips are made advancements.
Gary Dickerson: Advancements in foundational semiconductor technologies will have a dramatic impact on system level energy and cost reduction and the AI data center.
Gary Dickerson: I've previously described four critical areas. The industry is currently focusing on <unk>.
Gary Dickerson: Leading edge logic high performance DRAM, DRAM stacking referred to as high bandwidth memory or HBM.
Gary Dickerson: And advanced packaging to connect a logic and memory chips together in an integrated package.
Gary Dickerson: There's also a fifth theme emerging as we are seeing major innovations and power electronics.
Gary Dickerson: These innovations can address data transfer energy consumption within the data center as well as significantly reduce grid to data center power losses.
Applied has strong leadership in all of these areas and we're best positioned at future device architecture inflections, including next generation gate all around transistors.
Gary Dickerson: Oxide power delivery for F squared in three D. DRAM advanced packaging compound semiconductors for power electronics and Silicon Photonics.
Gary Dickerson: These device architecture, inflections, and logic compute memory packaging and power devices.
Gary Dickerson: So the market for wafer fab equipment increase the relative mix of materials engineering technologies and provide opportunities for applied to gain market share.
Gary Dickerson: Taking leading edge foundry logic as an example that transition from the most advanced generation of Finfet to the first nodes with integrated gate, all around and backside power delivery grows our total available market by more than 15% to around $14 billion for every one.
Gary Dickerson: <unk> hundred thousand wafer starts per month of capacity.
At the same time, we expect related applied revenues to grow in the 30% range for the equivalent wafer fab capacity.
Gary Dickerson: While the bulk of spending for these inflections is ahead of US we are already seeing a positive impact on our business. In 2024, we believe we outperformed the market in aggregate across leading edge foundry logic, DRAM advanced packaging and the <unk> markets outside of China.
Gary Dickerson: The ability of U S companies to serve the China market is constrained and has been further limited by updated trade rules announced in December and January.
Gary Dickerson: We estimate the incremental impact of these new rules will be around $400 million of revenue in fiscal 2025.
Gary Dickerson: Approximately half of which is service revenue, we also see China being a smaller portion of global wafer fab equipment spending in 2025.
Gary Dickerson: At applied materials, our strategy is to develop and commercialize the most enabling technologies for the industry across leading edge logic memory advanced packaging and <unk>.
Gary Dickerson: We have focused our investments on these high growth inflections that allow us to create and capture more value.
Gary Dickerson: One of the ways. We are implementing our strategy is to provide our customers unique and connected solutions that take advantage of our broad portfolio of technologies capabilities and partnerships.
Our co optimized and integrated solutions address higher value device challenges for our customers and are difficult for competitors to replicate.
Gary Dickerson: A good example is our integrated hybrid bonding interconnect solution that combined six technologies, including one module from a partner into a single integrated system in the past quarter. We successfully completed important qualification milestones and received volume orders from multiple leading edge customers.
Gary Dickerson: Our integrated hybrid bonding system is one of our next generation solutions that is allowing us to extend our leadership in advanced packaging in 2020 for our packaging business captured more than half of the market, we serve and we remain on track to double our revenues over there.
Gary Dickerson: Next several years.
Gary Dickerson: Another key pillar of our strategy is high velocity co innovation. We believe this is key for applied and our customers to bring next generation technology to market faster and at lower cost by speeding up cycles of learning through tighter ecosystem collaborations where AXT.
Gary Dickerson: <unk> no chip architectures, driving higher mutual success rates and optimizing R&D efficiencies.
Gary Dickerson: Among our accomplishments in the past quarter, we launched our epic advanced packaging strategy and technical summit, we hosted in Singapore that brought together R&D leaders, representing more than 20 global companies.
Gary Dickerson: We were part of two teams that received chips Act grants to develop an advanced packaging substrates for three D. Integration, we are leading the team for silicon substrates, and we have a long term partnership and investment in the company that won the grant for glass core packaging, we made significant progress with the construct.
Gary Dickerson: And of the Epic Center in Silicon Valley, which is on track to come online in 2026 and will become the centerpiece of our global epic collaboration platform and we partnered with TPG to transition applied thin film battery business into an independent company.
Gary Dickerson: We're also evolving our collaborative model and services, where we are helping customers manage increasing complexity in their business as they ramp next generation technology into high volume manufacturing we.
Gary Dickerson: We are deploying our advanced service products, including our actionable insight accelerator data platform, our AI acts to help accelerate customers' R&D programs reduce technology transfer times and optimize device performance yield output and cost in their fabs.
Gary Dickerson: These closer working relationships a high percentage of our service revenues is generated from subscriptions in the form of multiyear agreements.
Gary Dickerson: While our near term service growth is negatively impacted by trade restrictions. We remain confident that we will still grow ags at a low double digit annualized growth rate over the longer term.
Before I hand over to Bryce I'll quickly summarize as major technology trends reshape the global economy, and the semiconductor industry applied continues to deliver strong financial performance in the near term. We are best positioned at major device architecture inflections in fast growing areas of the market that are critical to enter.
<unk> efficient AI and we are focused on high velocity co innovation with our customers and partners to bring breakthrough technology to market faster than ever before.
Gary Dickerson: Bryce.
Speaker Change: Thanks, Gary and thank you to everyone joining us for today's call we.
Speaker Change: We had a strong start to the fiscal year with healthy revenue growth and meaningful margin expansion, which helped drive a 12% year over year increase in non-GAAP earnings per share. In addition, we distributed $1 6 billion to shareholders with $1 3 billion of share repurchases and $326 million of dividends for.
Speaker Change: Fiscal Q1.
Speaker Change: Our results were largely in line with our expectations with total net sales of approximately $7 2 billion up 7% year over year with growth in both semiconductor systems and applied global services.
Speaker Change: non-GAAP gross margin was 48, 9% up 100 basis points year over year, and our highest quarterly gross margin since fiscal year 2000.
Speaker Change: The strong margin performance in Q1 was the result of a very favorable mix and increasing adoption of our leading edge technologies and advanced integrated systems. In addition, we progressed on our value based pricing initiatives and cost reductions.
Speaker Change: non-GAAP operating expenses were $1 31 billion with increased R&D investments to support our technology growth areas non.
Speaker Change: non-GAAP EPS was a record $2 38 up 12% year over year, given the revenue growth better profitability and share repurchases.
Speaker Change: Moving to the segments semiconductor systems sales were $5 36 billion for Q1 up 9% year over year driven.
Speaker Change: Driven by 20% growth in foundry logic, partially offset by an expected decline in DRAM sales as prior year sales to customers in China did not repeat.
Speaker Change: non-GAAP operating margin of 37, 3% was up 160 basis points year over year.
Speaker Change: Sales for the <unk> nodes, which serve customers across the Iot communications automotive power and sensor markets were down slightly year over year and flat quarter over quarter.
Speaker Change: Moving to applied global services.
<unk> delivered revenue of 1.5 dollars 9 billion in Q1 up 8% year over year with healthy growth in services, partially offset by a decline in sales of 200 millimeter equipment.
Speaker Change: non-GAAP operating margin of 28% was down 30 basis points year over year.
Speaker Change: Lastly, our display business delivered revenue of $183 million.
Speaker Change: Moving to the balance sheet and cash flows we ended the quarter with cash and cash equivalents of $6 3 billion and debt of $6 3 billion.
Speaker Change: Cash from operations in the quarter was $925 million capital expenditures were $381 million and free cash flow was $544 million.
Speaker Change: We distributed $1 6 billion to shareholders in the quarter, including $1 3 billion in share repurchases and $326 million of dividends as of the end of the quarter approximately seven 6 billion remains available under our share repurchase authorization.
Speaker Change: Turning to our outlook.
Speaker Change: We're seeing strong momentum for leading edge foundry logic, where we are particularly well positioned as our customers ramp the most advanced technology nodes with gate all around transistors into high volume manufacturing.
Speaker Change: Offsetting leading edge is a more measured level of investment in the <unk> nodes following strong spending in 'twenty, three and 'twenty four and.
Speaker Change: In DRAM, we are seeing healthy demand, but faced tough year over year compares given the purchases from Chinese customers in 2024 that do not repeat this year.
Speaker Change: We are also seeing growth in NAND, albeit from historically low levels.
Gary Dickerson: As Gary mentioned as a result of the expanded export controls announced in December and January we expect to face a headwind to revenue of approximately $400 million in fiscal 2025.
Speaker Change: Nearly half of that impact will be in Q2.
Speaker Change: The impacts in the second half of the fiscal year will be more weighted to Ags as we are no longer able to service certain customers.
And following the step down in revenue in Q2, we would anticipate a return to growth in Q3 for Ags.
Speaker Change: Based on these trade restrictions and our view of our business for Q2, we expect that China as a percentage of total revenue will be about five percentage points lower than in Q1.
Speaker Change: This is below the normalized level of approximately 30%.
Speaker Change: Taking all of these factors into account for fiscal Q2, we expect total revenue of $7 1 billion plus.
Speaker Change: Plus or minus 400 million, which represents a 7% increase year over year and non-GAAP EPS of $2 30.
Speaker Change: Plus or minus 18, which represents a 10% increase year over year.
Speaker Change: We expect semiconductor systems revenue of approximately $5 3 billion up 8% year over year Ags revenue of approximately 155 billion up 1% year over year and display revenue of approximately $250 million.
Speaker Change: We expect non-GAAP gross margin of approximately 48, 4% and non-GAAP operating expenses to be approximately $1 3 billion.
Speaker Change: We are modeling a tax rate of approximately 13%.
Speaker Change: In closing our business is strong and we remain confident in our growth opportunities across all of our business segments.
Speaker Change: We are making significant investments in R&D to grow our share at the leading edge and we are increasing our capital investments to be the leader in high velocity co innovation with our customers. This is an important indicator of the confidence we have in the growth trajectory of our business and with our differentiated technology unique insights and deep industry relationships.
Speaker Change: We are poised to benefit from the technology transitions in semiconductor growth that is expected over the coming years.
Liz Murali: Liz we're now ready to begin the Q&A.
Liz Murali: Thanks Bryce.
Speaker Change: To help us reach as many people as we can on today's call. Please limit yourself to one question. If you have an additional question. Please re queue and we'll do our best to come back to you later in the session.
Liz Murali: Okay.
Speaker Change: And as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone. If your question has been answered and you'd like to remove yourself from the queue simply press star one again.
Liz Murali: One moment for our first question.
And our first question comes from the line of Toshio Harry from Goldman Sachs. Your question. Please.
Speaker Change: Hi, good afternoon. Thank you so much for taking the question.
Speaker Change: I know you guys arent or havent been giving.
Speaker Change: Specific Wi Fi numbers, but at a high level, Gary <unk> I was hoping you could provide a little bit of context.
Speaker Change: How youre thinking about the year I know you gave a couple of comments, but by application by geography.
Speaker Change: How is 2025 are likely to shape up in your view and more importantly.
Speaker Change: Your outperformance vis vis the market.
Speaker Change: What are some of the key drivers we should be focused on and if you could speak to the magnitude of outperformance relative to what you achieved in 24 that would be really helpful. Thank you.
Speaker Change: Okay.
Speaker Change: To see a nice to hear from you.
Speaker Change: First we would say that our Q2 guide gives a really good indication of how we think the market is evolving so leading edge with all the strength that you see in AI and pulling DRAM advanced logic.
Speaker Change: And HBM that factors into what we see in the market today, so leading edge is growing we've been thinking it will be accelerating through the.
Speaker Change: The course of the year and we do see that growing strongly in Q2, and we highlighted that we've also been watching the <unk> market. After the significant build out the last couple of years in China and that is lower than Q2. So those those things offset but you see a total that we still have.
Speaker Change: Consistent year over year growth in the overall market. So that's the that's the big change from a market perspective, if you look at the memory side, our memory is roughly flat quarter over quarter, we do see some additions on the NAND side, and that's offset by a slight reduction in DRAM NAND.
Speaker Change: Growing but of course, that's from a smaller level and the last thing I would share is when you think about advanced packaging, we had a significant amount of capacity adds last year in the HCM side.
Speaker Change: For the initial burst of capacity.
Speaker Change: And we're still selling into HBM still adding equipment into that market, but it's at a slower rate. So that's part of the outlook also so the key thing there is we've all been waiting to see if advanced logic.
Speaker Change: Ramp strongly enough to offset any slower rate of investment in <unk> and that is what we're seeing in Q2 and thats. Our best what we tried to do is share what we're seeing today and we think that's our best indication on how you can think about the year at this point.
Speaker Change: Yes.
Speaker Change: Relative to the outperformance.
Speaker Change: Question over the last four years, including last year, we outperformed in aggregate across leading edge foundry logic DRAM high bandwidth memory advanced packaging and high caps markets outside of China, and we've been talking about this a lot were focused on major device architecture inflections critical too.
Speaker Change: AI energy efficient computing, when we're meeting with all of our customers that's where they are all focus so for us where we're at.
Speaker Change: On track to capture greater than 50% share of our served market and gate, all around and backside power and foundry logic. We gained 10 points of DRAM share and we're positioned to gain share as for F. Squared in three D. DRAM architectures are adopted.
Speaker Change: Packaging was around $1 7 billion in 2024 up <unk> in four years and as we've said many times, we're positioned to double this business in the coming years and I caps, we gained several points of share since we formed the group's six years ago.
Speaker Change: Brought several new products to market, we have a strong.
Speaker Change: <unk> pipeline of new products that will grow our available market and position us well in this segment.
Speaker Change: And materials engineering intensity, where applied has clear leadership is increasing and next generation chip architectures, so going forward I like how we're positioned to win these major.
Speaker Change: Inflections.
Speaker Change: Again, we've been outperforming in all of these segments over the last four years, and we're well positioned to continue to outperform going forward.
Speaker Change: Yes.
Speaker Change: Thank you and our next question comes from the line of <unk> Malik from Citi. Your question. Please.
Speaker Change: Hi, Thank you for taking my question I appreciate the color on the April quarter.
Speaker Change: Silicon systems down a little bit.
Speaker Change: But the China impact.
Speaker Change: And you're talking about the return to growth in Ags can you also comment on the silicon systems related turn.
Speaker Change: Sequential growth in the in the July quarter, or we'll have to wait and see.
Speaker Change: Yes. Thanks.
Speaker Change: We will have to wait and see on the semiconductor systems, but what we're sharing is we've been expecting the leading edge to accelerate.
Speaker Change: When you think about the gate, all around and backside power nodes in the market and the advantages of those nodes for leading edge architectures.
Speaker Change: We expect a significant amount of capacity to be put in place in those nodes.
Speaker Change: It is what you see in Q2, and we expect that.
Speaker Change: That is a good indication of where the market will be going and then on the offset for that we highlighted the caps and we've been watching that but I'll, just say that market continues to evolve.
Speaker Change: Our forecast for <unk> and for <unk>, China seems to change every single quarter and so we'll see how that evolves through the rest of the year and then on the services business.
Speaker Change: Yes. This will be similar to 2022, when there were new trade rules will have a step back as you can see in our guide in Q2, but we expect to grow from there at the low double digit rate as we continue to add customers add new types of services and the new customers and new locations will make it more likely the services business.
Speaker Change: Is utilized by the customers.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line of Stacy <unk> from Bernstein Research. Your question. Please.
Stacy: Hi, guys. Thanks for taking my question.
Speaker Change: You said that.
Speaker Change: China impact in the second half will be weighted to Ags, but you also said ags returns to growth.
Speaker Change: In Q3, so like how do I square that circle, what's what's offsetting the China impact in the second half and.
Speaker Change: Just like broadly if I were to add the $200 million ish or so that that Ags is getting hit by the China sanctions. If you added that 200 million backend would it still grow double digits. This year.
Speaker Change: Yes, that's a good that's a good question. Thank you Stacy for the question. So on the on the HCI side the way to think about it is.
Speaker Change: Approximately half of the impact will be taken in Q2, and then it'll be a continued impact in the following quarters, but.
Speaker Change: But we don't expect it to be sequential reconciling line item in other words whatever business. We can't support in Q2, that's the same business or less in Q3 and Q4. So there is a there is an impact in Q3 and Q4, but we think you shouldn't worry about it from a modeling perspective, we'll just big.
Speaker Change: Again to add from there and we will grow at the rate that we've described low double digits as we continue to add installed base and tools to support and then didn't do the calculation I guess, what I would say is from our core Ags perspective, if you take the 200 millimeter.
Speaker Change: We're absolutely growing at low double digits or higher.
Speaker Change: Yes.
Speaker Change: Thank you and our next question comes from the line of C. J Muse from Cantor Fitzgerald. Your question. Please.
Speaker Change: Yes. Thank you for taking my question I was hoping you could speak a bit to gross margins you talked about value based pricing starting to come in in the January quarter would love to hear more about how.
Speaker Change: You see that flowing through the model throughout all of calendar 'twenty, five and I guess as part of that how should we be thinking about kind of evolving mix.
Speaker Change: In terms of modeling gross margin.
Speaker Change: Either first half second half or kind of exit rate for calendar 'twenty five would be very helpful. Thank you.
Speaker Change: Okay. Thank you C. J good to hear from you. So on the gross margin 48, 9% and 48 four in our guide in Q2 very strong mix in both quarters, obviously with the with the China impacts for Q2, it's a little bit lesser.
Speaker Change: Mix strength.
We're still going to reiterate our 48% underlying rate so we think with.
Speaker Change: When we don't have those quarters with ultra strong mix, that's still about the ballpark for our normalized rate. So think in the second half that unless we maintain the exact.
Speaker Change: Same mix, which we likely don't expect we will be closer to that 48% gross margin for the year are not for the year, sorry, we're not giving a guide for the year, but that is our underlying baseline rate to think of as you think about where the business is normally and then if you think about the pricing I think of.
Gary Dickerson: Two dynamics with pricing one the solutions that we're developing that Gary has pointed the company toward the inflections those are increasingly valuable solutions for the customers and so there is increasing value proposition for the equipment itself and then our pricing mechanism is to make sure that we are.
Gary Dickerson: We're including that in our thinking with respect to the pricing and we also have a disciplined infrastructure to have those discussions with customers. So as we allocate our R&D where of course allocating to the areas that we think are most valuable in the market and we think.
Gary Dickerson: It's a matter of execution to achieve that value in the marketplace, which is what we're trying to do so I said third inning last quarter on those on the process for pricing and I think thats still accurate.
Gary Dickerson: Yes.
Speaker Change: Thank you.
Gary Dickerson: Our next question comes from the line.
Gary Dickerson: Alright. Thank.
Gary Dickerson: Thank you for American Securities Your question. Please.
Speaker Change: Thanks for taking my question I actually had a longer term conceptual question for Gary related to little versus etch and dep intensity, let's.
Speaker Change: Let's say overall WSI intensity stays around mid teens. It means <unk> will grow in line with semiconductor industry sales over the next several years and if that happens do you think any little takes more share or do you think <unk> take more share and hence grow faster or slower than overall semiconductor industry I've heard arguments on.
Speaker Change: Both things, but would appreciate your views.
Speaker Change: Oh, Hi, Vivek. Thanks for the question. So if I look at the major inflections that we're focused on going forward. If you look at leading edge foundry logic.
Speaker Change: Gate, all around and backside power.
Speaker Change: Our customers have talked about being able to achieve and backside power 30.
Speaker Change: <unk> area scaling benefit beyond power and performance benefits.
Speaker Change: With really no change in feature size. So that's basically what we're seeing in foundry logic and we think that continues going forward and DRAM. If you look at what our customers have talked about and Forex for F squared.
Speaker Change: You also talk about significant area of savings as they implement that new architecture and of course again for all of these things we're incredibly well positioned and then when you get to three D. DRAM DRAM is more similar not the same materials, but a similar impact where the.
Speaker Change: Relative spending for our materials engineering goes up significantly versus lithography.
Speaker Change: And then of course another area that we're focused on in the entire industry is focused on.
Speaker Change: As advanced packaging and when we look at what the AI servers look like three or four years from now.
Speaker Change: The architectures are going to be very different and the way the data is connected.
Speaker Change: In those architectures.
Speaker Change: Going to be tremendous innovation again around materials innovation. So when I look across any of these different markets and of course <unk> is really all driven.
Speaker Change: Through materials innovations.
Speaker Change: We've talked about this before in our master classes, we see the percentage of materials engineering relative spending to be increasing going forward around all of these different architecture inflections.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line of Timothy Arcuri from UBS Securities. Your question. Please.
Speaker Change: Thanks, a lot.
Timothy Arcuri: Do you think as you look at I know that you don't have to give us a number for last year, but do you think you've gained Wi Fi share. That's the first question and then how do you kind of assess Gary.
Speaker Change: From these.
Speaker Change: Please.
Speaker Change: China, because I know that they have delayed Rev. Rec. So it makes it hard to sort of measure year to year, but they're about 5% now with WSI gets up like 400 basis points over the past four to five years and Thats, all dep and etch and you've done a great job holding share and gaining share, but how do you sort of think about that headwind from China because.
Speaker Change: So much of the incremental spending is from there.
Speaker Change: Okay, Tim Nice to hear from you. Thank you on the share in 24 of course, we don't know yet in terms of the final measures there, but you heard in Gary's script he talked about.
Speaker Change: We think we've gained share in all the markets except for likely China. So we'll just have to see what the what that reading is once all the share numbers are in so we feel well positioned from that perspective, and even in China. We feel good about the way. We compete is just yes, the local Chinese vendors have some advantages with the trade rules that have.
Speaker Change: <unk> been put in place and then.
Speaker Change: On the headwinds for China.
Speaker Change: I think we do have lower visibility, but we continue to add customers and we think that's a huge market. It's our our largest <unk> market and <unk> is the largest market for applied and we expect that to grow over time at the device level mid to high single digits as you know.
Equipment investments in the last couple of years have been ahead of the market. So we've expected it to.
Speaker Change: Moderate for some for some period of time, so we'll see how that plays out but for us that continues to be one of the one of the most important markets for the company, Yes, Tim I, just I would add.
Speaker Change: I talked about this a little bit earlier.
Speaker Change: Leading edge foundry logic, we're incredibly well positioned for those inflections DRAM, we've gained 10 points of share.
Speaker Change: And again really well positioned for four F squared in three D. DRAM high bandwidth memory. That's another one where we have a very strong leading position in advanced packaging is another area, where it's up <unk> in four years, and we anticipate that we will double that business and then that will keep going.
Speaker Change: Into the future and.
Speaker Change: Again, we're just really well positioned for all of those inflections and I caps, we have room to grow in PDC in etch and we have momentum in those segments and I talked earlier about the pipeline of <unk> innovations again, we formed this group six years ago.
Speaker Change: We brought 20, new products to market and we have new products in the pipeline that will expand our total available market, we have new products for our cost competitive applications and we have innovations to enable new <unk> device architectures that we're co innovating with leading customers. So as Brian said in the areas, where we can compete.
Speaker Change: Pete I feel really good about our positions and our pipeline going forward.
Yeah.
Greg: Thanks, a lot Greg.
Speaker Change: Thank you next question comes from the line of Harlan sur from Jpmorgan. Your question. Please.
Harlan Sur: Hey, good afternoon. Thanks for taking my question you know we talk many of your end customers.
Speaker Change: At the analyst through both Fabless idms.
Speaker Change: We are tracking their design starts, especially at 10 nanometer design starts appear to be <unk>.
Speaker Change: Accelerating.
Speaker Change: Second half of last year, especially in areas like AI accelerated computing mobile is the team and talking with your customers is the teams getting a sense on how big the upcoming two nanometer node transition and while importantly volume production potential could be relative to three nanometer.
Speaker Change: Hi, Harlan Gary might also add on to this.
Speaker Change: Various estimates for 10 nanometer based on the performance benefits of two nanometer I think we're expecting that to be a large node. If you look at some of the third party estimates that should be a good landing spot for designs just like seven nanometer in the past was a good landing spot for designs. So we're expecting it to be.
Harlan Sur: On the large side from a node perspective, yes, Harlan I would just add that everybody's focused on energy efficient computing for AI and if you look at what our customers are saying, they're very bullish about the size of that two nanometer node.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Krish <unk> from TD Cowen Your question. Please.
Speaker Change: Yeah, Hi, Thanks for taking my question, Gary I have a question on gate all around you spoken about getting over 50% share of the incremental Tam there, but it seems like the F. B stack is one of the most critical ones.
Speaker Change: Taxi composite.
Speaker Change: It seems to be making some strides so I'm just kind of curious can you talk a little bit about market share and if you still feel confident in the 50% plus share gain.
The overall gate all around the opportunity. Thank you.
Speaker Change: Yes, we're in as I mentioned earlier, we're in deep partnerships with all of our customers focused around this concept of high velocity co innovation.
Speaker Change: We're working with every one of our customers out a decade into the future on multiple technology nodes for gate all around.
Speaker Change: We haven't we still are on track to do what we had talked about earlier with gaining more than 50% of the incremental spending for a gate all around and appia as part of that we're in very strong position I think 85% of those that'd be staffs are selective IP, where we have tremendous.
Speaker Change: <unk> strength, we have new innovations, we're bringing to market in <unk>.
Speaker Change: And so we still are.
Speaker Change: Feel very confident in our.
Speaker Change: Outperformance going forward.
Speaker Change: Thanks, Gary.
Speaker Change: Thank you and our next question comes from the line of Sheila <unk> from Raymond James Your question. Please.
Sheila: Thank you my question is on China, I think Brian you said for Q2 outlook.
Sheila: You used the word China will be below normal in terms of percent of exposure I would think that the export restrictions and those are permanent so I'm just curious as to when you say below normal are you expecting China to recover like the 30% level that you previously communicated.
Sheila: And then when do you think we might get to that level and then maybe for Gary Gary.
Speaker Change: Over the last 90 days, excluding the export restrictions can you talk to how the demand conditions within China. Thank you.
Speaker Change: Okay. Thanks, Toni So first of all 30%, we still think will be a good long term rate for us or a good long term estimate of the share to China. When you think about the market of course for US now Thats, an <unk> market, we can't serve the leading edge, but that'll be a growing market over time, the devices will grow mid to high.
Speaker Change: Single digits.
Speaker Change: If not more heading to helping to get to the one three or one to $1 three trillion dollar semiconductor market by 2030, so that market will continue to grow we may pause a little bit less we may have a little bit lower rate of investment as we go.
Speaker Change: Through the next short period of time will that adjust but that's a very strong market for us so 26% in Q2 and 30%.
Speaker Change: <unk> is a good estimate for the company and of course that includes all of our businesses.
Speaker Change: Yes, and display also and then.
Speaker Change: Gary on what we're seeing with respect to demand.
Speaker Change: Yes, I think I'll just make a comment on that it is still our largest market. So you see leading edge accelerating but <unk> is still our largest market in China is the largest country inside that market and so when youre thinking about it and youre thinking about what we're describing as the step back in the rate of investment you should see.
Speaker Change: Think about it as just.
Speaker Change: A very large opportunity and growth opportunity going forward and so we think the rate slows down a little bit after two huge areas of investment, but we expect that market to grow over time. We've continued to add customers were tracking a large number of projects that are underway, we expect capacity to be added every single year.
Speaker Change: <unk> and that forms the back bone of our expectations, yes. The one thing I would add is that we believe that the <unk> market over the longer term will grow kind of mid to high single digits.
And as I mentioned earlier, we have new products in the pipeline that expand our total available market new products for cost competitive segments and opportunities to grow and large segments.
Speaker Change: Where we have momentum so I think longer term, where we're positive on the market and positive on our position in the market.
Speaker Change: Yes.
Speaker Change: Thank you.
Moderator: Our next question comes from the line of Brian Chin from Stifel. Your question. Please.
Brian Chin: Good afternoon, and thanks for letting us ask a few questions or maybe one question.
Speaker Change: Maybe for Brian I think you've previously disclosed a 549 million reduction in backlog for the fiscal year in our filing.
Speaker Change: Quantifying a $400 million impact for the year did you revise what that actual impact would be or is there some.
Uh huh.
Speaker Change: Maybe.
Speaker Change: The residual amount of 149 that sits outside of the 12 month horizon.
Speaker Change: You've got it exactly right, Brian So it's not much of a change that $5 49 was our backlog and it covered.
Speaker Change: More than just the year and so we shared I think what was in the 12 months and if you did that math I think it was about $3 80, So we're still very close in.
Speaker Change: In terms of what we're thinking the impact is for the year.
Speaker Change: Thanks.
Speaker Change: Thank you and our next question comes from the line of Joe Quattrochi from Wells Fargo. Your question. Please.
Joe Quattrochi: Thanks for taking the question I was wondering if you could talk a little bit more about your expectations for DRAM growth. If we were to exclude just the benefit of China, DRAM spending and the comparison a year ago, how should we think about the growth of your business. This year.
Joe Quattrochi: Yeah. Thanks, Joe I'll start on this one I think we've seen two record years of DRAM and of course 24 was buoyed by.
The extra China.
Joe Quattrochi: <unk> that we saw and.
Joe Quattrochi: Can't call the year here, but we see the rate of investment in DRAM continuing in the rest of the world. So there's a lot of Paul.
Joe Quattrochi: For the <unk> solution and there is a lot of Poland for DRAM in the.
Joe Quattrochi: Advanced.
Joe Quattrochi: Performance systems. So I would expect continued momentum in DRAM and that's included in our outlook in Q2.
Joe Quattrochi: Yes, Joe I would just say that as I mentioned earlier, we're more bullish on compute memory than we are in storage memory and then what our customers have said is it takes three times the number of wafers to produce the same number of bits for <unk>. So that's going to certainly help the growth rate over the longer term.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Charles <unk> from Needham <unk> Company. Your question. Please.
Speaker Change: Hi, guys. Good afternoon, I have a question about that.
Speaker Change: Revenue expected revenue from gate all around nodes.
Speaker Change: He previously served more than $2 5 billion in Cisco.
Speaker Change: We kind of into 'twenty, four and that you expect a double has the quantified number move up or down or any any changes to that number.
Speaker Change: Maybe the other part of the question I think you previously is that last years eight on around revenue plus this year kind of implies a 100 K a global capacity built up to two nanometer by the end of this year.
Speaker Change: Do you see potentially that that spending could accelerate into 2006.
Speaker Change: Yes, we were trying to think about what the end capacity it could be six.
Speaker Change: Do you want to get your early thoughts.
Speaker Change: 2026.
Speaker Change: Okay.
Speaker Change: Okay. Charles Thanks for the question. So first thing, yes, we have not changed our expectations for growth looking into.
Speaker Change: 25, with the gate all around related equipment, so $2 five and in.
Speaker Change: <unk> 24, and then the opportunity to double that in 'twenty five and if you put those together that's just over $7 billion and when we describe the Sam for US with gate all around the backside power, Yes, you come back in and say that implies that there's approximately 100000 wafer starts of pilot and HBM H B.
Speaker Change: Excuse me high volume manufacturing capacity being put in place in the beginning and then of course.
Speaker Change: You'll have to do your own research to see what size do you think that node would be I would just suggest that nodes are generally larger than that so we would expect that to continue in the ramp to.
Speaker Change: Continue beyond 'twenty five for sure.
Speaker Change: Yes.
Speaker Change: I would tell you. The one thing incrementally is that as you go forward youre going to add and backside power that also is growing our available market and we have a very strong share. There. So once you have gate all around and backside power together our opportunity grows significantly.
Speaker Change: Yes.
Speaker Change: And our next question comes from the line of Chris Caso from Wolfe Research. Your question. Please.
Chris Caso: Yes. Thank you good evening I guess the question is regarding.
Chris Caso: Sort of where your your level of confidence is and your customer forecast right now and I know you haven't given us guidance for the full year, obviously, but there's a customers.
Chris Caso: Generally give you pretty good visibility on the forecast maybe you could talk about the different segments and you sound pretty constructive with regard to foundry logic spending for the year. Your comments suggested that I kept the forecast has been changing a lot. So I'd imagine that there's some uncertainty there perhaps you could speak in those terms for the different segments.
Chris Caso: Sure. Thanks for the question, Chris So I think I would put.
Chris Caso: The level of confidence for larger customers is fairly high so, especially since COVID-19.
Chris Caso: The inflation events that we saw we've asked for longer perspectives from all of our customers. So we have more visibility with the larger customers. So if you think about leading logic more visibility certainly for DRAM certainly for NAND.
Chris Caso: And then I would split up by cap. So it would be the same sort of observation for the more mature longer standing companies in the high cap space.
Chris Caso: Good visibility St practices and then.
Chris Caso: For the long tail ni caps, including a lot of the customers in China. There is just much less experienced there on both sides and so the visibility gets lower and that's where we've seen a lot of volatility in our forecast I think.
Chris Caso: In the past couple of years, we've continually increased our China forecast as we've gone through the year and so you just have less visibility in the plants change as that goes forward and then just the last comment you know thinking about foundry logic, because theres lots of questions about the various foundries.
Chris Caso: Our perspective, there is not only do we have the information from the customers, but we try to also triangulate with our end market expectations and so we think we're pretty comfortable with our forecast for leading logic being driven by data center PC smartphone and understanding what the end demand is for those markets.
Thank you.
Chris Caso: Yes.
Speaker Change: Thank you and as a reminder, if you have a question at this time. Please press star one on your telephone. Our next question comes from the line of Vijay Rakesh from Mizuho. Your question. Please.
Chris Caso: Yes.
Speaker Change: On the packaging and packaging.
Chris Caso: Martin.
Chris Caso: And on the memory side I was just wondering if there's a way to look at.
Chris Caso: That makes sense.
Chris Caso: Just packaging was.
Chris Caso: <unk>.
Chris Caso: If you actually look at <unk> and how you see that that makes sense.
Chris Caso: Growing.
Chris Caso: <unk> becomes a bigger and bigger chunk.
Memory and logic.
Chris Caso: Thanks.
Chris Caso: I'll try I'll try Vijay.
Speaker Change: Said last year that 24 that are packaging related revenues in advanced packaging or one $7 billion and so.
Speaker Change: Know that we have an advantage share in that space, So you'll probably have to do some.
Speaker Change: Backward math to imply what packaging is and it's growing at a at a strong rate I think just thinking about the.
Speaker Change: Whats behind that we all know that.
Gary Dickerson: Gary calls it a race for performance on these leading edge systems getting the <unk>.
Gary Dickerson: <unk> utilization out of Gpus, Cpus accelerators et cetera, and that's really what's driving the increased demand for these packaging technology. So we expect that to grow significantly over the coming years.
Gary Dickerson: Yes, Vijay we'd also talked about doubling again, our packaging revenue over the next few years and there's just tremendous innovation happening in this space we talked about.
Gary Dickerson: Chips grants on new substrate technologies for silicon in glass.
Gary Dickerson: How you connect the AI server and that architecture in three or four years is going to be very different than what it looks like today. So.
Gary Dickerson: I believe this is a great opportunity for applied we're the leader in wiring on the front of the wafer back of the wafer and in advanced packaging and this this segment is going to see us.
Gary Dickerson: Significant compounded annual growth rate because it's so important for energy efficient computing.
Gary Dickerson: Yes.
Thank you and our next question comes from the line of Mehdi Hosseini from Susquehanna. Your question. Please.
Gary Dickerson: Yes, thanks for taking my question.
Gary Dickerson: One question two parts.
Gary Dickerson: Based on the last peak.
Gary Dickerson: SSG backlog of $8 3 billion down 23% year over year, and then Ags backlog, though.
Gary Dickerson: Six 8 billion up 32%.
Gary Dickerson: When do you expect backlog for SSG to show the inflection coin and show growth.
Gary Dickerson: <unk>.
Gary Dickerson: On the Ags.
The 200 million.
Gary Dickerson: He is going to come out because of the restriction in China.
Gary Dickerson: A very small part of the <unk>.
Gary Dickerson: Backlog is that a reflection of.
Gary Dickerson: The.
Gary Dickerson: Backlog is the most color you any color you can add here would be great.
Speaker Change: Yes, many thanks for the question you've got it right on the Ags, we've got multiyear contracts.
Speaker Change: That tends to make that backlog look larger than your book to Bill look much larger when we signed those contracts. So the average contract life I think is in the $2 nine year region and were signing some that are longer than that so.
Speaker Change: That really is what distorts the backlog or makes it larger for Ags and then on the equipment side.
Speaker Change: They sense, the supply chain and cove issues related to Covid, we've been normalizing on the equipment side. So we stopped reporting that on a quarterly basis, because it is not a very good indication of our of our.
Speaker Change: Underlying business changes, we're working to get longer visibility with our customers and we're working to get longer commits on the builds and so theres a lot of movement in that.
Speaker Change: Wouldn't have anything to share other than what you saw and what you've seen in our 10-K.
Speaker Change: Got it thank you.
Speaker Change: Thank you and our next question comes from the line of Tim <unk> from Redburn Atlantic Your question. Please.
Speaker Change: Yes, hi, there.
Speaker Change: Thank you very much for taking my question, maybe one for Gary and one for Greg.
Speaker Change: Gary You mentioned advanced packaging and you referenced volume orders from multiple leading edge customers, maybe could you share a little bit of color in terms of what kind of device applications. They are and when you would expect volume manufacturing to begin and then Brian just a.
Speaker Change: Modeling question on the tax asset revaluation could you maybe just provide a little more color on that and is there any read across to implication for the remaining $2 4 billion of deferred tax assets on the balance sheet. Thank you.
Speaker Change: Yeah.
Speaker Change: Yes, Tim relative to packaging revenue, it's really coming from all of the different.
Speaker Change: Packaging architectures, we have a very strong position broad unique connected portfolio. So I wouldn't say that again for us.
Speaker Change: Including an HBM or we were at $700 million revenue. This last year, we have strength across all of those different architecture.
Types I don't really want to comment.
Speaker Change: I'll, let customers comment on which architectures, they're ramping I would say as I mentioned earlier, there's going to be tremendous innovation in this space with.
With very different architectures than what are in the market. Today. This is going to be very important for energy efficient computing applied has been investing to be positioned to win those architecture inflections.
Speaker Change: Okay, and then Tim Thanks for the tax question. So yes, good to point out that on our GAAP net income Youll see.
Speaker Change: A significant difference in the growth in our non cat non-GAAP.
Speaker Change: Income and what is happening there, it's one of those situations, where a good news bad news. So we've just renewed.
Speaker Change: Renewed our incentive rates in Singapore, and so the tax asset that we have in Singapore.
Speaker Change: It was created years and years ago, when we moved assets to Singapore that is essentially less value less valuable because it will protect from lower taxes, if that makes sense. So our tax rate goes down which is good news and then the asset that you have to protect from taxes is a little bit less.
Speaker Change: Valuable than what it was with higher tax rates and so that 674, I think that number is.
Speaker Change: Is a revaluation of that tax asset and I wouldn't look.
Speaker Change: We're amortizing the benefits of that tax move of yours to go that's always in our reconciliation, but this particular event that we're talking about I don't think theres any look forward on that.
Speaker Change: Great. Thank you.
Speaker Change: Yep.
Speaker Change: Thank you and as a reminder, if you do have a question. Please press star one on your phone.
Price: And 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: Yeah.
Speaker Change: Thank you to recap, we believe we're well positioned in both the near term and the longer term as the investments, we're making in R&D for leading edge technology inflections together with our efforts to accelerate industry collaboration set us up to benefit from the semiconductor growth is expected over the coming years. Thank you for attending today and lists please close the call.
Speaker Change: Thank you Bruce and thank you to everyone for joining the call today, a replay of today's call will be available on the Investor Relations website by five P. M Pacific time today.
Speaker Change: 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.
Speaker Change: Yeah.
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