Applied Materials, Inc.

Q1 2023 Earnings Conference Call

2/16/2023

spk14: Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. I would now like to turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.
spk19: Good afternoon, everyone, and thank you for joining Applied's first quarter of fiscal 2023 Earnings Call. Joining me are Gary Dickerson, our President and CEO, and Bryce Hill, our Chief Financial Officer. Before we begin, I'd like to remind you that today's call contains forward-looking statements which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning the risks and uncertainties is contained in Applied's most recent Form 10-K filing with the SEC. Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at AppliedMaterials.com. Before we begin, I have a calendar announcement. Later this month, Applied Materials is participating in the SPIE Advanced Lithography and Patterning Conference. For those who aren't traveling to San Jose for the conference, we plan to hold a new product launch event on our IR website on Tuesday, February 28th at 9 a.m. Pacific time. We hope you'll join us. And with that introduction, I'd like to turn the call over to Gary Dickerson.
spk12: Thank you, Mike. Applied materials executed well in our first fiscal quarter, delivering results towards the high end of our guidance range. We also grew our backlog for the ninth consecutive quarter. Going forward, we expect backlog to start declining as we move through 2023. Overall, we are making good progress closing our supply versus demand gap. However, very recently, one of our major suppliers encountered a disruption that will impact our second quarter shipments. Bryce will provide more details about this when he shares our guidance. In my prepared remarks, I will cover three main topics. Our current outlook for 2023, our longer-term growth thesis for the industry, and how Applied is positioned to grow faster than our markets overall, and finally, a brief overview of the investments we are making to productively scale the company and accelerate our customers' roadmaps. Let me begin with our near-term perspective on the market. In this environment of mixed macroeconomic signals, our customers are facing a variety of demand dynamics. Consumer-driven markets, including PCs and smartphones, are clearly weaker while inflection-driven markets remain more resilient, especially high-performance computing and AI, automotive, industrial automation, and clean energy. In terms of wafer fab equipment investments, 2023 will be a down year for memory spending as customers rebalance inventories and defer capacity additions in both NAND and DRAM. We expect DRAM to pick up ahead of NAND potentially beginning to recover later this calendar year. We now see leading-edge Foundry logic spending being slightly down year on year. While near-term demand headwinds are causing customers to trim capacity additions, they remain firmly committed to strategic investments in advanced nodes to win the battle for next-generation technology leadership. Our view of ICAPS, chips for IoT, communications, auto, power, and sensor applications, is incrementally more positive than it was last quarter, and we now see spending being up year on year. Leading ICAPS companies are investing in both technology and capacity to serve growing demand across a wide range of verticals. In addition, there is strong government support around the world to build resilient, regionalized ICAPS supply. Based on what we're seeing in our business and hearing from our customers, we believe Applied Materials is well positioned to outperform the market in 2023. The resilience in our business is driven by several contributing factors. First, our balanced market exposure, which allows us to perform well in a variety of spending mix environments. Second, our position with technology leaders who remain focused on investing in their long-term strategies. We have strong positions at all the key technology inflections in advanced foundry logic, ICAPS, DRAM, and advanced packaging. Third, our record backlog, of which a significant percentage is made up of our most differentiated products, including metal deposition, that is uniquely enabling for critical next-generation wiring resistance improvements. And finally, our services business, which is on track to grow in 2023, even after the impact of current U.S. export control regulations. More than 60% of our service revenue is generated from subscriptions in the form of long-term agreements. These agreements have an average tenure of 2.6 years and a high renewal rate of more than 90%. While we are cognizant of near-term volatility in our markets and ready to respond to both upside or downside, our long-term outlook remains highly positive. Semiconductors are the foundation of the digital economy, making them more strategically and economically important than ever before. Around the world, governments are incentivizing the industry to build regional manufacturing capacity and accelerate investments in strategic next-generation technologies. The semiconductor industry remains on track to grow from approximately $600 billion in 2022 to a trillion dollars or more by the end of this decade. Technology complexity of chips is increasing significantly As traditional 2D Moore's Law scaling slows and the industry transitions to a new PPAC-T playbook to drive improved performance, power, area cost, and time to market. In addition, as 2D Moore's Law decelerates, we are seeing average die sizes in advanced foundry logic grow. This drives the need for additional wafer capacity while also accelerating the transition to chiplets and heterogeneous designs. Beyond advanced packaging, major technology inflections in transistor, wiring, and patterning are also enabled by new materials and materials engineering. These inflections increase the size of applied available markets. As we have been investing in these inflections for multiple years, we are now well positioned to capture a larger share of our available market. We have a deep pipeline of solutions to enable new wiring innovations, gate all-around transistors, backside power delivery, heterogeneous integration, and hybrid bonding. Our broad portfolio of products enables us to offer customers traditional unit process equipment all the way to integrated material solutions, or IMS, that combine multiple process technologies with onboard metrology and advanced data analytics in a single platform. We are very confident about the growth trajectory of the industry and applies outperformance within that environment. To support this growth, we are making strategic investments in new manufacturing, logistics, and R&D infrastructure. The scale, speed, and location of these investments will be dependent on receiving government support, some of which we have already secured. Beyond simply expanding capacity, we see these infrastructure investments as a catalyst to change the way we collaborate with customers, suppliers, and research partners. For example, in the coming months, we expect to break ground on our next generation R&D center in Silicon Valley. We believe this new high velocity platform will increase innovation and commercialization speed while reducing the overall cost of bringing new manufacturing technologies to market. As the industry and applied materials scale, we need to do so productively and efficiently. This is a major strategic theme for us And across the company, we are focused on driving up productivity and implementing new ways to work that are better and faster. Before I hand the call over to Bryce, let me summarize. While the economy and semiconductor industry are facing challenges in 2023, we remain confident that Applied is well positioned to outperform our markets this year. Our resilience is underpinned by our large backlog of differentiated products, growing service business, and strong positions with leading customers at key technology inflections. Our longer-term outlook remains highly positive as secular trends create opportunities for Applied to outgrow the semiconductor and wafer fab equipment markets by enabling the PPAC-T roadmap with our differentiated portfolio of materials engineering solutions. In line with this view, we are making strategic investments in R&D and infrastructure while driving improvements in productivity and speed across the organization. Now, Bryce, it's over to you.
spk17: Thank you, Gary. I'd like to start by thanking our team and our supply chain partners for helping us deliver strong revenue in a dynamic environment. On today's call, I'll summarize our Q1 results and provide our guidance for Q2. Before going into the near term, I'd like to discuss the broader context for the industry and the company. Over the past few cycles, the semiconductor industry has become significantly larger and more diverse. Applieds revenue and earnings have grown and become more resilient over this period. In semiconductor systems, more than half our revenue comes from leadership businesses where our market segment share is near or well above 50%. The growth of our services business has added another dimension of stability. These factors strengthen our confidence in our ability to invest, generate high returns, and return capital to shareholders. Our business model is very efficient and generates attractive returns. In fact, from fiscal 2013 through 2022, we have grown Applied's free cash flow at a compound annual rate of 30% and increased our return on invested capital to over 35%. We have three capital allocation priorities. The first is funding future growth and returns, and the second is maintaining a strong balance sheet so we can fund R&D through market cycles. Accordingly, Even though the semiconductor market is weaker this year, we are investing to scale the company to support our customers in what we believe will be a trillion dollar semiconductor market. We are increasing our manufacturing and logistics capacity, and we are making significant investments in our R&D infrastructure to collaborate more closely and productively with our customers and industry partners to help solve their highest value problems. Our third capital allocation priority is returning excess cash to shareholders. We have committed to return 80 to 100% of free cash flow and actual returns for the past 10 years have been 106%. We have repurchased 40% of shares outstanding at the beginning of this period. As the business has become larger and more diverse, we've also increased the dividend. We've increased our quarterly dividend per share at a 14% CAGR over the past 17 years. In fact, operating income from our services business alone more than covers a growing dividend. Finally, I want our investors to know that we are increasingly focused on improving our productivity. We increased our full-time employee base by around 20% last year and have restricted hiring to critical positions and slowed our spending growth. R&D is our largest expense and we are making portfolio decisions to ensure we generate the highest possible returns from our investments. We also see opportunities to make our manufacturing more predictable and efficient and have formed new teams to drive our operational goals. Moving now to our Q1 financials, we delivered net sales of nearly $6.74 billion and non-GAAP EPS of $2.03. These results were in the upper end of our guidance range and nearly identical to last quarter's record results. Non-GAAP gross margin increased 80 basis points sequentially to 46.8%, primarily driven by improved manufacturing and logistics costs along with pricing adjustments. Non-GAAP OPEX was nearly $1.17 billion with about two-thirds of the sequential increase from R&D. Turning to the segments, semi-systems revenue grew by 13% year-over-year to $5.16 billion. Strength in ICAPS more than offset reductions in memory and advanced foundry logic. Segment non-GAAP operating margin was 37.3%. AGS revenue grew nearly 4% year over year in Q1 to approximately $1.37 billion. AGS absorbed a full quarter of revenue impact from U.S. trade regulations and performed better than the midpoint of our expectations. Segment non-GAAP operating margin was 28%. In display, Revenue declined to $167 million and segment non-GAAP operating margin was 4.8%. Turning to our cash flows, we generated $2.27 billion in operating cash flow during the quarter, which was 34% of revenue. We returned $470 million to shareholders, including $220 million in dividends and $250 million in buybacks. Now, I'll share our guidance for Q2. We expect revenue to be nearly $6.4 billion, plus or minus $400 million, or up over 2% year-over-year. We expect non-GAAP EPS of $1.84, plus or minus 18 cents. This guidance includes a negative estimated adjustment of $250 million related to a cybersecurity event that was recently announced by one of our suppliers. Based on our current assessment of the situation, we expect to recover all of this revenue and the majority of it in Q3. We expect semi-systems revenue to be about $4.84 billion, which is up over 8% year over year. We expect AGS revenue to be about $1.34 billion, which is down around 3% year over year, including the negative impact of recent U.S. trade regulations. Display revenue should be around $160 million. We expect applied non-GAAP gross margin to be approximately 46.5%, which is lower quarter over quarter, primarily driven by lower volumes and higher near-term supply chain logistics costs. And we expect non-GAAP operating expenses to be around $1.16 billion. We are modeling a tax rate of 12.5% and a weighted average share count of $850 million. I'll close my remarks today by saying thank you to our long-term investors for your support. We are investing for the future with confidence. Our products and services are being directed to a semiconductor industry that is growing in size and strategic importance to the global economy. Our business model is highly efficient with low capital intensity and a high return on invested capital, driven primarily by R&D spending deployed in close collaboration with our customers. Our business has become less volatile and more resilient as semiconductor demand has broadened to more markets. Equipment capital intensity has recovered, and our services business has grown larger and more subscription-based. In fact, over the past five fiscal years, we've increased non-GAAP net income by 87%, generated $18.7 billion in free cash flow, and returned 118% of free cash flow to investors. Looking forward, we believe the growing complexity of the semiconductor roadmap and our ability to deliver the innovations required by our customers will enable us to grow faster than the industry. We plan to expand our global R&D and manufacturing infrastructure, including the plans Gary previewed. Finally, we will focus on increasing our productivity and maintaining our efficient spending model. Now, Mike, let's please begin the Q&A.
spk19: Thanks, Bryce. To help us reach as many people as we can, please ask just one question on today's call. If you have another question, please re-cue, and we'll do our best to come back to you later in the session. Operator, let's please begin.
spk14: Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by for our first question. And our first question, coming from the line of, CJ Muse with Evercore. I saw you on a cell phone.
spk01: Yeah, good afternoon. Thank you for taking the question. I guess I was hoping to get a little more color on the backlog side of things. You know, to what degree do you think dollar-wise that will kind of contribute to you here in calendar 23? And as part of that, I guess, how are you thinking about kind of first half versus second half, whether on a fiscal or calendar year basis, kind of silicon trends? as that backlog unwinds. Thanks so much.
spk17: Okay, great. Hi, CJ, and thanks for the question. So on our backlog, you know, just taking a step back, we did see a lot of activity with movement in orders during the quarter. As we've described before, we go through our orders each quarter, work with the customers to update them. And there was a lot of movement. We do see the weakness in the market that everybody else sees in the leading edge logic and in memory. But as Gary pointed out, we did have strong bookings in the quarter and our backlog actually grew. We think that more than half that backlog will be executed this year. And as Gary also pointed out, we expect that we'll begin to work that down toward a more normal level. as we start to improve supply chain and be able to ship the demand that we're still shipping from last year, really. We're still working in some of our business units to cover the demand that we had last year. So it has been a little bit of a buffer, the strong backlog against the weakness in the market for us, and we think it's going to take the rest of the year, probably one to four quarters, depending on the business unit we're thinking about. to work through, you know, to normalize the lead times and recover the backlog that we need to ship against.
spk12: Yeah, CJ, one other thing I would add is that the largest part of our backlog is with our leadership products, especially MDP and Implant. So, again, that gives us strength as we go forward.
spk17: Yeah, and CJ, you know, we're not giving the guidance for the second half, but we'll just say that, you know, as I highlighted earlier, More than half of that backlog is in the year, so it's definitely helping the year. It is buffering us Q1, Q2, and it does give us confidence that we had strong bookings in the quarter. And we'll probably talk more about this, but we'll highlight that the ICAPS markets are very strong. In fact, demand has been accelerating in those markets.
spk14: Thank you. One moment for our next question. And our next question coming from the line of Stacy Raskin with Bernstein and Warren Corbin.
spk04: Hi, guys. Thanks for taking my question. I actually wanted to dig a little bit into that strong ICAPS demand. Is it coming from, I mean, is it focused in areas like China where at this point after the restrictions, they're going to be forced to take a much harder look? at their efforts in trailing node versus leading node. And I guess as an add-on to that, are you concerned at all about the strength in ICAP? Is there any concern about overbuild, I guess, as we go through the year as that gets built out?
spk17: Hi, Stacy. Thanks for the question. You know, first of all, it's broad-based, I guess, would be my first answer on the ICAPs. We had significant growth last year that we highlighted, you know, when we did our year-end call. and it's actually accelerating into this year, so I'll come back to whether that's a concern or not. China is the largest region and the largest single country driving ICAPS, so it is a focus area. We're actually not concerned that it's going to be affected by trade regulations, so that's not on the radar screen at this point. As we think about ICAPS and we think about that broad-based strength, You're probably aware or certainly aware that many of the companies that we know are leading ICAPS manufacturers have announced that they're adding capacity and the capital intensity for those companies is increasing. And I think it just is a reflection of there's little used factories and used equipment available in the market. And so as companies need to add capacity to serve this market, they're having to make the new investments. We do think it's sustainable. We do think it's been, uh, it's being driven by, in some cases are being supported in some cases by government incentives, but we're not concerned that companies will put capital in place that they don't plan to use. We don't think the incentives, you know, are enough to have somebody install equipment and. You know, not use it just in the hopes of using it. So we're also fairly confident in the underlying demand, things like electrification, electric vehicles, uh, sustainable power, all these types of markets we think are sustainable. So we just, we're seeing an acceleration in that area for our business and we think it will continue.
spk12: One thing I would add to is if you remember, um, you know, several years ago, you had a lot of used equipment as the foundry business model was emerging. So that really depressed capital intensity for a number of years. And, of course, that's not happening now. So capital intensity is up, and our position there is very good.
spk04: Got it. That's helpful. Thank you so much, guys.
spk14: Thank you. And our next question, coming from the line of Vivek Arya with Bank of America, your line is open.
spk09: Thanks for taking my question. I'm curious, does your Q2 outlook kind of reflect the trough of memory demand, or do you think there is a lot more memory weakness that you could see in the second half. Because it is that when I look at your outlook, right, it seems to be very different than what we have seen from your other U.S. peers who are down 20, 30 percent sequentially in their calendar Q1. And I don't know if it's just the ICAP strength that explains that delta. So I'm just you know, puzzled as to what explains that outperformance? Is it ICAST? Is it something else? Or have you not yet seen the trough of memory weakness and that is still to come, that maybe they saw it earlier and you could see more of it in the back half? Thank you.
spk17: Thanks for the question, Vivek. We're fairly confident that we're current, you know, with our memory customers on their orders. We've definitely seen As I highlighted in our booking activity, we definitely have seen significant cancellations and pushouts from memory customers. We think we're current. Mathematically, you're exactly right. The acceleration in ICAPS has more than offset the weakness we're seeing there and any slowdown we saw in leading edge logic. So that's true. And then we've looked at the leading indicators on the memory side. We're still seeing pricing declines we're still seeing inventory increases so we don't think uh you know we don't think it's turning yet uh at least from our perspective but we're confident we're current with the customers vivek thank you thank you and our next question coming from the line of chris sankar with cowan yalan is now open yeah hi thanks for taking my question uh bryce maybe just for one for you
spk10: Um, I noticed you did not quantify WLT for this year and I understand, uh, you know, you're probably better off than the industry because of the ICAPS trend, but it seems like the range is anywhere from 70 to 75. And some people talk about 80 billion in WP this year, but just hypothetically speaking, if WP is down 20 or so more person, since you're going to outperform, is it fair to assume your revenue growth to be down more like low to mid teams and kind of how to think about the earnings power in that scenario? given that you're trying to be disciplined on office. Thanks.
spk17: Okay. Thanks, Chris. So, yes, we didn't provide a WFE because we're really just trying to focus on sharing what we're seeing, you know, all the signals that we're getting in the market because we're a little bit abstracted from it. As you pointed out, we've got the strength and acceleration and ICAPS that may make us a little bit different. We're also still shipping orders we had from 22. So, For us, we're catching up to demand, especially in some of the key differentiated business units that existed before the year. So it's not a perfect match, and it's difficult for us to estimate. Switching to OPEX, as we talked about in our last call, because we were supply constrained, our OPEX growth, that was our plan, was a little bit ahead of our revenue growth. So we have implemented headcount targets. We've moved to strategic hiring only. And we do have initiatives focused on improving our productivity on spending. So we're conscious of that. Of course, it's a balancing act, Chris, you know, through this year because we think the industry is growing. We're confident in the direction. We need to continue investing in R&D. So that's our primary goal is to deliver those programs to customers. And we have flexibility. If the environment deteriorates for us, then, you know, we'll make more appropriate changes to spending. But right now, we're comfortable with the trajectory. Thanks, Bryce.
spk14: Thank you. And our next question coming from the line of Atif Malik with Citi. Your line is now open.
spk11: Hi. Thank you for taking my question. Nice job in the execution. Surprisingly, it does sound like ICAPS is the driver for your outperformance, at least in the near term, versus the peers. And historically in your master classes, you have talked about ICAPS being around 25% of your silicon portfolio. And I'm curious, where do you think you're running this business at right now? And if you could comment on within ICAPS, is auto or silicon carbide the strongest area for you? Thank you.
spk17: Okay. Thanks, Sativ. Yeah. I think that we've characterized Foundry Logic as two-thirds of the business last year. Memory's a little slower this year, so that mix is changing a little bit. And we characterized our lagging edge or the ICAPS portion as about 50-50 with leading edge. So that's the way we characterize it. And that's all thinking of it from a TAM perspective. What we are seeing at the company level is is that the ICAPS market is accelerating and growing at a very high rate for the company this year. And we think part of that is driven by government incentives, and part of that is driven by the higher intensity, and part of that is driven by the strength in the end markets that I highlighted. And maybe, Gary, on the silicon carbide, you could make a comment.
spk12: Yeah, let me just give a little bit more color – So ICAPS, relative to market share, is similar for us with leading Foundry Logic. So we've grown share in ICAPS a significant amount over the last few years. It's also accretive to our overall gross margins. Four years ago, I think we've talked about this, we formed the ICAPS IoT Communication Autopower Sensors Organization, because we could see these markets were going to grow at a significant pace. So we pulled together a really strong team. We have the broadest exposure. If you look at all of the technologies, whether it's in, again, any of those different segments within ICAPS, we have significant strength. So again, that's something that we saw several years ago and made investments. So we have many ICAPS-specific products. Implant is one area, if we look at, there's many areas where we have strength and broad exposure in ICAPS, but in that particular area, you know, we've introduced 10 new products focused on ICAPS in the last five years. That is the largest segment of our implant business, and just in that one area, again, we've been very supply-constrained we expect that we can double our ICAPS revenue in 23 versus 22. So again, just really across the board, we have very, very strong positions. And pulling that organization together four years ago really put us in a good position for what we're seeing today.
spk14: Thank you. One moment, please, for our next question. And our next question coming from the line of Toshia Hari with Goldman Sachs. Your line is open.
spk13: Hi, good afternoon, and thank you for taking the question. I had one quick clarification and then a question. Gary, you just mentioned that you expect your ICAPS revenue to double in 23 versus 22. Was that overall ICAPS or was that just implant? That's my clarification question. And then my question, Gary, in your prepared remarks, you talked about DRAM business potentially recovering by the end of the year, which to me is a little surprising just given how weak the trends are in that marketplace today and the inventory situation. Can you kind of share what informs that view in DRAM and what are your thoughts on NAND as well? Thank you.
spk12: Okay. Let me cover the first question is on the doubling of ICAPS. That's specifically implant in 23 versus 22. And part of it was just the supply chain challenges that we had in 22 that limited our output. So that's what's happening there with ICAPS. And Bryce, you want to cover the DRAM NAND question?
spk17: I think in the DRAM and NAND, you know, we have seen the weakening in memory. We do expect that next year we'll improve on the memory perspective. I don't think, Toshia, we're going to give an exact moment, you know, when the market will turn. I mentioned earlier We kind of have three signals that we can look at internally. We can look at utilization for both NAND and DRAM, and we see utilization lower this quarter, and all of our customers are forecasting utilization to be even lower next quarter. We've looked at the pricing of memory, and it looks like it's either declining or slightly flattening. And then we've looked at inventories, and it looks like inventories are still growing. So I don't think at this point that we can say, you know, call the point in time where memory starts to grow. But we do expect next year that memory will improve and companies will begin to invest again. And, you know, it's just difficult to call that moment.
spk01: Thank you.
spk14: Thank you. And our next question coming from the lineup, Timothy Arkery from UBS. Your line is open.
spk20: Thanks a lot. Um, Bryce, I had a question on backlog. Um, it seems like backlog is sort of skewing your numbers a bit higher than your peers, given how long your lead times began, um, or, or, or, you know, got to during the, you know, during the, um, upturn. So I'm wondering if you can give us maybe a few more breadcrumbs on the backlog. I think you said last quarter, uh, SSG backlog is 12.7 billion. So I just want to be clear that the SSG backlog went up from that number. And if so, that's kind of like two and a half quarters of backlog for SSG. And when I think of normal, you always used to run more like a quarter and a half worth of SSG backlog. So is it right to conclude after all that, that you maybe have a quarter's worth of excess backlog right now as it relates to SSG? Thanks.
spk17: Yeah, I think, thanks, Tim, for the question. So, you know, color on it, I would say we did see weakness in leading logic and memory, as we described. So a lot of the strength that we're seeing comes back to this acceleration on the ICAP side. So from a mix perspective, you know, I think that's where a lot of strength in the orders is coming from. And Gary highlighted the growth of implants, so certainly the growth of total eye caps is not 100%, but it is very meaningful to us for the year. Obviously, enough in Q1 to offset weakness in memory and leading logic. That gives you some of the perspective. Most of this is in the semi-business. Some of it's in 200mm, which comes in the AGS space. And what I would say is, yes, it does tie back to the long lead times in the, you know, the areas of the business that are highly differentiated equipment where we're still working off that backlog. And we think it will take us, you know, I guess what I would say is last quarter we highlighted that a normal backlog would probably be in the $12 billion or $13 billion range. We expect to work back in that direction as supply improves and we can start catching up to the demand we had from last year.
spk20: So I guess, Bryce, just to confirm, so the SSG backlog did go up from 12.7?
spk06: I'm looking at the data, Tim.
spk17: Let's see if I can see this. Can you see it?
spk07: Yes, sir. Got it. Okay. Thanks. Thanks for the question, Tim.
spk12: Yeah. Maybe one thing I would add that just kind of gets back to, uh, a lot of the questions, you know, we do have strengths, uh, in, uh, many of these, uh, key technology inflections. We talked in the master classes about inflections, gate all around wiring, memory with capacitor formation or new materials, PDC strength. We had that master class in December. So that's another thing. When you look at the composition of the backlog, just again, wiring alone, we have one inflection that enables a 50% reduction in resistance. The dollar per wafer goes up about 3x from 7 to 3 nanometers. So those areas are also helping us in relative performance.
spk14: Thank you. I'm on for our next question. And our next question coming from the line of Harlan Sir with JP Morgan. Your line is now open.
spk18: Yeah, good afternoon. Thanks for taking my question. You know, given the unprecedented sort of excess inventory situation in the memory space, your memory customers are being very disciplined, right? They're taking drastic actions to rein in supply, even going so far as to push out their technology migration roadmaps. You know, typically in downturns, we wouldn't hear customers pulling back on tech migrations capacity at yes, but not tech migration. So is the tech migration pullback in the associated higher capital intensity, a big contributor to the WFE pullback this year in memory? And just as importantly, does this mean the potential for a sharper spending recovery as memory fundamentals start to normalize because all of your memory customers are going to try to aggressively get realigned on their tech migration roadmaps?
spk17: Yeah, thanks for the question, Harlan. I'll start, and Gary will probably want to add something here. I don't think that the inventory situation in the current market is guiding their their technology transition choices, I think that will be driven by, you know, their opportunity to take leadership positions and improve, you know, the cost of the bits and, you know, improve the product performance, et cetera. So what does happen is, you know, they may have more equipment that they can reuse into their roadmap depending on what demand is. So they'll make changes and lower their equipment buys based on that. So I think I'm not aware of companies that are connecting the technology ramp decision with the current inventory situation and business situation.
spk12: Yeah, Harlan, I would say that your view of memory strengthening, we said DRAM potentially by the end of the calendar year and memory strengthening into 2024. you know, we would share that perspective. What I would say is that, you know, we are, you know, we also believe that foundry logic will remain strong going forward. You know, it was in this kind of two-thirds, one-third mix between foundry logic and memory. And especially with government incentives, you see a lot of government incentives, certainly in the U.S., in China, Europe, Japan, a number of different areas, potentially in India, that could add a few billion dollars per year in additional investment. And again, that profile of higher foundry logic versus memory, we think that's going to sustain for a number of years going into the future.
spk18: Insightful. Thank you.
spk14: Thank you. And our next question coming from the line of Joe Quattrochi with Wells Fargo. Your line is now open.
spk02: Yeah, thanks for taking the question. I wanted to ask about the backlog fulfillment and kind of working that back down to more normalized levels or at least 50% of that kind of where you're at today. How do we think about that from your ability to increase production supply versus your orders maybe selling from your customers? I guess, how do we split that out in terms of understanding What's driving backlog down?
spk17: It's a little hard to hear the second part of that question, but let me start with working down the backlog, Joe. Are we still getting noise there? Thanks for the question, Joe. So, I guess the way we're thinking about it, it's hard to estimate, you know, the order flow coming in and estimate the exact backlog number, but We've got several business units that are still shipping against demand, really, that we received last year. And it has been supply constrained. It's, you know, we're behind one to four quarters, depending on the business unit that we think of. So we think as supply has improved, we'll begin to ship back against last year's orders and recover to a normal position. And, you know, the quickest business unit will probably do that in the next quarter. Then we do have one or two business units that it will take into next year to be able to recover that. I don't know. Go ahead and, Joe, can you say the second part of your question again? There was some line noise that blocked it.
spk02: I apologize. The second part is just trying to understand the other piece of aside from supply is, are you predicating on orders being resilient to take that long to get back down to a more normalized level? Or are you expecting orders to maybe slow?
spk17: I think, um, you know, we're not really expect, I guess, I guess I would say we're not really expecting orders to slow. Like I said, we're current in the environment. And so as we think, uh, as we think towards next year, we expect 24 to be a better year across the whole industry memory, leading logic, et cetera. So at some point, we expect there to be stability in the market. We saw strong orders this period. I can't predict if it'll be strong every cycle, but as we head towards 24, we think there'll be firmer footing. Thank you.
spk14: Thank you. And our next question coming from the line of Sydney Ho with Deutsche Bank, Yolanda Smallman.
spk15: Thanks for taking my question. You guys talk about leading edge foundry and logic spending down slightly this year. I was just hoping that you can double click on that a little bit. Based on your business, how do you see the ramp of three nanometer production, say, by the end of this year as compared to maybe years past for leading edge? And also, how does that compare to your expectations maybe three to six months ago? And maybe you can talk about trends that are outside of three nanometers. That would be great. Thanks.
spk17: Okay, I'll start on that one on the leading edge. So I think it's pretty straightforward. The largest leading edge customers, you know, are running at lower utilization at this point. And so they're resizing their capital buys as they look at the utilization level that they are now. So we've seen, you know, pushouts or cancellations of some tools related to those customers. And I think it's pretty straightforward. They have you know, lower utilization and they have the ability to reuse some of that equipment, you know, into their next ramp. And then I don't think we typically comment on the timing of the other nodes, but Gary, you know, do you want to make a comment?
spk12: Yeah, what I would say is that from what we're hearing from customers, the demand for three nanometer is very strong. And, you know, that looks like that's going to be a very big investment for our customers. And again, for us, the positions there, we've covered that in a lot of the master classes. You know, we expect our share of gate all around to rise versus FinFET, about five points. And we have the majority of the spending in that inflection. I've talked about those wiring inflections where the dollar per wafer goes up significantly from one technology node to the next. And again, we've covered those in the master classes. So, you know, our position... at 3 nanometer is very strong. Our position gets stronger even in 2 nanometer as customers are driving improvements in power and performance. So our position there is very good. And again, what we're hearing from customers is significant demand for 3 nanometer. And then the timing, you know, we'll let them comment on the timing.
spk14: Thank you. One moment please for our next question. And our next question coming from the line of Quinn Bolton from Neham, your line is open.
spk21: Hey, guys. Just hoping you can help reconcile something for me. Obviously, it sounds like the ICAPS business is very strong in 2023. You said China is the biggest part of ICAPS, but when I look at your China revenue, it looks like it's down 40% over the past year from about $2 billion to $1.15 billion. So just trying to reconcile the slower pace of revenue in China versus the ICAPS strength you're seeing. I guess, is that ICAPS strength really coming from non-China regions, or do you expect a nice recovery in China as you come through 2023? Thank you.
spk17: Yeah, thanks, Quinn. The strength in ICAPS is broad-based, so it is growing worldwide, but China is the largest country, and most of the most of the demand that we see in China is really ICAPS related because the memory investments and leading logic investments are essentially zero or close to zero. So that's where most of that investment is.
spk12: Yeah, I would say, you know, that relative to ICAPS profile in 23, you know, China's remaining at a, you know, at a similar level. But there is growth, there's significant growth in the other regions.
spk21: Understood.
spk12: Thank you. So I think your assumption is pretty close to what we see.
spk06: Thank you.
spk14: One moment before our next question. And our next question coming from the line of Mehdi Husseini with Susakena. You want to stop in?
spk05: Yes. Thanks for taking my question. I have one clarification and one follow-up. The $250 million that is pushed out to the July quarter, could that potentially help with a rather stable SSG revenue trend? I'm just trying to get a feel for how the $250 million pushout could impact SSG two quarters out. And then would you be able to help me understand how big is ion implant within the ICAPs?
spk17: Yeah, thanks, Maddie. I'll take the $250 million. So we do expect none of that demand is perishable. So yes, in your model, I would take that $250 million and add it to whatever you're modeling for Q3. We don't know if we'll get it exactly all in Q3, but we think we'll get it most in Q3 based on our current assumptions. And then, you know, to the extent that there's weakness in the second half. If there is, then it would offset that to a degree, just like you're describing.
spk12: Yeah, Manny, is it relevant to ion implant?
spk05: Yes, I'm just trying to understand how big is ion implant within eye caps.
spk12: Sorry, sorry, I didn't push the button here. So relative to implant eye caps, we haven't quantified the amount, the size of that business, but it is the largest segment within implant medi. And as I said earlier, we believe that we can double that, roughly double that, implant ICAPS revenue from 22 to 23. We're the leader in that segment, and it is significant. But we have really broad exposure across multiple products within ICAPS. As you know, it's not really shrink-driven. It's more materials and structures-driven market. We're the leader in that market, and we expect that will remain strong in 23 and going forward.
spk05: Thank you.
spk14: Thank you. One moment with my next question. And our next question coming from the line of Brian Chin with Stiefel, your line is open.
spk03: Hi there. Good afternoon. Congratulations. And thanks for letting us ask your question. Maybe just in terms of the backlog discussion, I guess it sounds like, is there a disproportionate amount of backlog that is geared towards ICAPS? And that's really, you know, even net of you know, push-outs or cancellations that may be happening in memory, for example. This is really, I guess, the main reason why your revenue is as resilient in terms of near-term shipments. The net product is just beneficial. Is that the right way of thinking about it generally?
spk17: Yeah, Brian, thanks for the question. I do think it's fair. I didn't parse backlog in exactly the way that you described, but to your point – you know, we're seeing significant strength, accelerating demand from our ICAPS customers. That's filling in, you know, blanks that we get on the memory or leading logic side. And so to the extent that that, you know, our backlog represents the orders that we're shipping, I think it's fair to say that there's a significant amount of ICAPS strengths across that backlog. So I think that dynamic's fair. And, you know, just going back to, you know, those end markets that We do think it's sustainable. We don't think the strength is, you know, is anything unusual or driven by any unusual activity. We don't think companies are putting in capacity that they won't use. This is just, you know, growth that, as Gary said, that we've seen coming for a while and it's starting to build out. And you might have seen some of the big, you know, larger companies in the ICAP space talking about these investments. So I think you'll see it pretty much across the globe.
spk03: Great. Thank you. And I imagine some of those cylinders aren't even firing at the moment, too. So that's probably not bad as well. But thanks. Thank you.
spk19: Thank you. And operator, we have time for two more questions, please.
spk14: Our next question coming from the lineup, Blaine Curtis with Barclays. Your line is now open.
spk16: Hey, thanks for letting me ask a question. I'm just curious the message on overall foundry logic. So clearly ICAPS is up. I'm just trying to understand if you could just talk about what's kind of the trends have been in leading edge. And I think some have kind of talked about it being kind of slightly down for the year as a market. Just kind of curious what you're seeing. You talked about it getting a bit weaker on leading edge. Do you just clarify how much it has and just walk us through, you know, kind of last couple of months in leading edge foundry.
spk17: Yeah, Blaine, I think, you know, slightly weaker. We won't give an exact number. You know, we may not see the exact number either, but When we think about the big customers in Foundry Logic that everybody knows, they have had reductions in their capital plans. When we look at leading Foundry Logic, when we look at utilization, it is low at this period of time. So their customers, our customers' customers, are working through inventories at this point in time. But when you start to turn the page... The leading logic is going to invest in the next nodes and put that capacity in place. They may have a little bit more equipment available for reuse, but they're going to make those investments. And we expect that. We see that coming through. And so when we get past this year, we'll expect to see strengths in foundry logic again. Gary, do you want to add anything to that one? Okay. We're good. Thanks for the question, Blaine. Thank you.
spk14: Thank you. And our next question coming from the line of Vijay Rakesh with Mizuho Group. Yolanda Selfman.
spk08: Yeah, hi, Gary and Bryce. Going back on the backlog again, I think you mentioned your backlog is current. Does that imply that the memory exposure or memory within that is fairly small given all the cancellations? And then a follow-up.
spk17: Hi, Vijay. I don't know if, first of all, it's current. We've definitely gone through and made changes to the backlog based on our current customer situations. Whether we have more exposure or not depends on how things go. The macroeconomic factors are also important. Some people think there will be a recession. Some people don't. So it really depends on where the economy goes for the second half. But all we can say is we're current. We don't think we're missing anything. signals in the market, and we don't think there's impending changes. It'll just depend on which way the underlying demand goes.
spk08: Got it. And then on the China side, it is down 14% sequentially and looks like probably the third quarter it's been going down. Is it fair to assume that it's fairly close to a trough there on the China spend side, given some of the ICAPS commentary that you had out of China?
spk17: You know, we won't call it exact trough, but I think it's a fair thought because we expect over time, display will grow. We expect our services business will grow. And certainly China is, you know, mostly in ICAPS businesses at this point, and we're expecting strong growth there. So, you know, I won't call it trough, but if you ask, are the effects of the trade rules You know, have we absorbed those effects? I think the answer is yes. Got it.
spk08: Thanks.
spk19: Okay. Thanks, Vijay, for your question. And now, Bryce, would you like to give us your closing thoughts today?
spk17: Thanks, Mike. Absolutely. So today we emphasize that our backlog of enabling products, our ICAPS growth, and our strength in services are helping us to be resilient in this market. We're confident in the long-term growth of the semiconductor industry and committed to building the technology and capacity to support our customers. Thank you all for attending this call. We look forward to seeing many of you at our offices this quarter, and I look forward to attending the Morgan Stanley Conference in a few weeks. Mike, thank you, and please close today's call.
spk19: Great. Thanks, Bryce. And I'd like to add my own closing message, which is please do join us on February 28th for our patterning product launch webcast. You can find a registration link on the events page of our IR website, where we'll also post a replay of today's call by 5 o'clock Pacific time today. So thank you for joining us this afternoon and for your continued interest in applied materials.
spk14: Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now
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