Applied Materials, Inc.

Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. I would now like to turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining Applied's third 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-Q 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. And with that introduction, I'd like to turn the call over to Gary Dickerson.

Gary Dickerson Thank you, Mike. In our third fiscal quarter, Applied Materials delivered results at the high end of our guidance range. Across the business, our teams are executing well. We are making incremental improvements in our operations as we productively scale the company. and we're driving our technology roadmap, introducing enabling new products and solutions for our customers. In my prepared remarks today, I will start with our big picture view of the IoT AI era and how this is driving growth and innovation across the industry. I'll then summarize applied strategy and how this is enabling us to outgrow the industry this year while also positioning us for sustained growth outperformance over the longer term. And finally, I'll cover our near-term performance and outlook, including some recent business highlights. In the summer of 2018, at our AI Design Forum, Applied laid out a thesis explaining how we expected IoT and AI to drive a new wave of semiconductor growth and innovation. Five years later, IoT and AI inflections are having a profound impact across many sectors of the economy, as well as within the semiconductor industry. We view IoT and AI computing as two sides of the same coin. At the edge, consumer devices, vehicles, buildings, factories, and infrastructure are all getting smarter and more capable. Our customers that serve these IoT communications, auto, power, and sensors markets, or ICAPs, are growing and represent the largest portion of wafer fab equipment sales in 2023. Increasingly intelligent edge devices are fueling an explosion of data generation that can then be transmitted and combined to create very large data sets for training AI models. High performance AI computing is primarily enabled by hardware innovations. As a result, AI is becoming the key driver of the leading edge logic and DRAM roadmaps, as well as heterogeneous integration, which creates exciting new innovation opportunities for device designers. In summary, the first part of our thesis is that the combination of IoT and AI drives demand for significantly more chips as well as next generation silicon technologies. The second part of our thesis relates to how those chips and new technology innovations will be supplied. In terms of technology, as the benefits of traditional Moore's Law 2D scaling slow down, the industry is moving to a new playbook to drive improvements in power, performance, area cost, and time to market. The PPAC-T playbook has five elements, new system and device architectures, new 3D structures, new materials, new ways to shrink, and heterogeneous integration. The transition to the new playbook is positive for Applied in two key ways. First, as the roadmap evolves, it is increasingly enabled by advances in materials engineering where Applied has differentiated capabilities. Key examples of this include the move to gate-all-around transistors and backside power distribution in advanced logic. Second, the PPAC-T playbook is inherently more complex, and we can help customers manage this complexity by providing more comprehensive solutions, which include integrated products and advanced services to accelerate R&D, technology transfer, ramp, as well as yield and cost in volume production. In parallel to the new PPAC-T playbook being implemented, we're also seeing regionalization of semiconductor supply chains as countries seek to build resilient local capacity to support industry verticals that are essential to their economies. As a result, hundreds of billions of dollars of government incentives will be deployed globally over the next five years. At Applied, we recognized these trends early and made important changes to our strategy, organization, and investment profile. In the past five years, we created a dedicated organization to focus on the ICAPS market and released more than 20 new products for ICAPS applications. We also formed a team focused on co-optimized and integrated products to accelerate solutions for leading-edge logic and memory. This has resulted in much deeper strategic relationships with our customers, new highly differentiated products, and increasing market share. We developed a very strong portfolio of products to enable multiple generations of DRAM technology that is fueling share gains in this market segment and contributing to our outperformance. we established a clear leadership position in heterogeneous integration and advanced packaging. In fact, we just announced five new heterogeneous integration products at Semicon West in July. This strategy and increased focus on IoT and AI-driven inflections has enabled us to deliver more value to customers and strong performance in 2023, even during a period of very low investment by memory makers. It also positions us for ongoing outperformance in 2024 and beyond. Let me highlight a few key areas. In DRAM, our revenues in the first half of 2023 were higher than our two closest process equipment peers combined. Our strength in DRAM is underpinned by multiple factors. We have gained significant share in DRAM patterning, both for EUV-based and multi-patterning. We have developed unique co-optimized hardmask solutions, which are a key enabler for capacitor scaling. We have successfully ported key technologies developed for logic to DRAM, where they are used in the peripheral circuitry to significantly increase IO speed. And we are the largest supplier of advanced packaging solutions with leadership positions in Microbump and through Silicon VIA, that enable multiple generations of high bandwidth memory. As DRAM investments increase, we feel very positive about our opportunities, especially in high performance DRAM for the data center. High bandwidth memory is less than 5% of DRAM capacity today, but it is expected to grow at a 30% compound annual growth rate over the coming years. If you look at an HBM2 die compared to DDR5, it's about 25% larger because of additional IO routing and the area needed for the TSVs. On top of this, the extra processing steps needed for die stacking further increase our total available market by approximately 5%. Another key growth driver is our ICAPS business. We see ICAPS demand as sustainable as these customers are delivering enabling technology for large global inflections that will play out over the next decade. These include industrial automation, electric vehicles and vehicles with advanced driver assistance systems, solar and wind energy, where each megawatt generated requires $3,000 to $4,000 of power chips, and the smart grid. which could drive $50 billion of annual silicon demand by the end of the decade. ICAP's investments are also expected to be underpinned by government support around the world, and we expect these markets to be a significant beneficiary of regional incentives. The increasing complexity needed to enable the PPAC-T playbook, combined with a broadening of the industry's geographic footprint, are both key growth drivers for our service business. AGS delivered record revenue this quarter and is on track to grow in 2023, even with this year's low fabulization rates and after absorbing the impact of new U.S. trade rules. This year, more than 60% of our service revenue is generated from subscriptions in the form of long-term agreements. These agreements are growing at a faster rate than the installed base and have a high renewal rate of more than 90%. With strong customer pull for our services and a robust pipeline of new capabilities, we believe we're on track to achieve low double-digit AGS growth in the coming years. While I'm excited about the opportunities ahead, it's important to recognize that to deliver this future, the industry must also overcome significant challenges relating to complexity, cost, and our combined carbon footprint. At Applied, we believe the way to do this is through closer collaboration and higher velocity innovation and commercialization of next generation technology for energy efficient computing. In the past quarter, we announced two major initiatives, our epic platform in the United States and a collaborative engineering center in India. These investments will support even faster and better relationships with customers universities, suppliers, and government partners to accelerate time to innovation and time to commercialization while increasing our combined R&D productivity. In addition, we're also driving a collaborative approach to reduce carbon emissions as the industry grows. In July, we rolled out our collaborative Net Zero Playbook, and we announced two major new products that help customers with carbon reductions. Our Vistara platform, which lowers platform energy consumption by up to 35% and increases throughput density by as much as 30%. And EcoTwin, that enables customers to monitor, model, and optimize chemical and energy consumption by tool and by recipe. Before I hand over to Bryce, I'll quickly summarize. Advanced chips are at the foundation of major global inflections And as the IoT AI era takes shape, it's driving a new wave of growth and innovation for the semiconductor industry. At Applied, we have focused our strategy and investments to deliver high-value technologies that enable key IoT and AI-driven inflections. We have strong leadership positions in ICAPS, leading-edge Foundry logic, DRAM, and heterogeneous integration using advanced packaging. This strategy is enabling us to consistently deliver strong results in 2023 despite lower overall wafer fab equipment spending and positions us for sustainable outperformance over the coming years. Now, Bryce, it's over to you.

Thank you, Gary. On today's call, I'll discuss the business environment, summarize our Q3 results, provide our guidance for Q4, and frame the investments we're making in our R&D infrastructure. Before covering the near-term, I'll remind you of our longer-term thesis. First, we believe the semiconductor industry is on track to grow faster than the overall economy over time and reach $1 trillion in sales by 2030. Second, applied leadership in materials engineering is increasingly critical to our customers' roadmaps. Applied's broad portfolio of differentiated products, balanced market exposure, and growing services business make us less volatile today than in the past and more likely to grow faster than our markets. And fourth, our efficient business model generates strong profitability and free cash flow, which enables us to both invest in profitable growth and deliver attractive shareholder returns. Moving now to the Q3 business environment, we continue to see strength in ICAPS, which largely offset weakness in leading-edge foundry logic and NAND. ICAPS demand was broad-based, generating record revenue in 200-millimeter systems and record revenue in Europe. In fact, the United States, Japan, and Europe are the fastest-growing ICAPS regions this year. Around the world, customers and governments are making long-term investments to ensure future supply of a wide range of semiconductors needed to support growing demand in key industries such as automotive, medical equipment, and renewable energy, to name a few. Turning to our operational performance in Q3, our teams delivered strong results. We exceeded our revenue guidance across semiconductor systems, services, and display. We improved our delivery performance in systems and services and made further progress reducing inventory. Cash from operations and free cash flow were both the second highest in our history. Now I'll summarize our Q3 financial results. Company revenue was nearly $6.43 billion, down 1% year over year, and in the upper end of the guidance range. Non-GAAP gross margin was slightly above our guidance, and operating expenses were slightly below. Non-GAAP EPS was $1.90, down 2% year over year, and near the high end of guidance. Turning to the segments, Semi-systems revenue of $4.68 billion was down 1% year-over-year. Segment non-GAAP operating margin was 34.8%. Applied global services generated record revenue of over $1.46 billion and non-GAAP operating margin of 29.3%. This was AGS's 16th consecutive quarter of year-over-year revenue growth. While 200 millimeter system sales contributed to the growth, the team also made strong progress driving the leading indicators of our subscription business. For example, tools under service agreement are up 5% year over year to over 16,000 systems. And tools under comprehensive service agreement, which have the highest revenue per tool, are up 7% year over year, reaching 12,000 systems. In display, revenue grew sequentially to $235 million and segment non-GAAP operating margin was 15.7%. Turning to cash flows, we generated $2.58 billion in operating cash flow during the quarter, which is 40% of revenue. We produced over $2.3 billion in free cash flow, which was 36% of revenue. We distributed $707 million to shareholders through quarterly dividends and share buybacks. We paid $268 million in dividends, and the dividend per share was $0.32, reflecting the 23% increase announced in March. We used $439 million to repurchase nearly 3.4 million shares at an average price below $130. Now I'll share our guidance for Q4. We expect Q4 company revenue to be $6.51 billion, plus or minus $400 million. We expect non-GAAP EPS of $2, plus or minus $0.18. Within the guidance, we expect semi-systems revenue to be around $4.75 billion. We expect DRAM revenue to be up by around $500 million quarter over quarter, primarily driven by trailing edge shipments. We expect AGS revenue to be about $1.42 billion, and display revenue should be around $290 million. We expect applied non-GAAP gross margin to be about 47% and we expect non-GAAP operating expenses to be around $1.17 billion. We continue to model a tax rate of 12.3%. Finally, as we said last quarter, we plan to make a multi-billion dollar investment in new R&D infrastructure over the next several years to significantly expand our capacity to collaborate more closely and productively with our customers. as we develop next-generation materials, process technologies, and equipment. The scale of the investment will depend on our ability to secure government support. The EPIC Center is expected to come online in fiscal 2026. And while we expect our capital expenditures to be higher over the next several years, there is no change to our strong commitment to shareholder returns. In summary, Applied Materials continues to execute well. We are making good progress against our internal goals and outperforming our markets. While wafer fab equipment spending is lower in calendar 23, our semi-systems revenue in the first three calendar quarters is trending slightly up year over year, and our services business remains on track for year over year growth. We've aligned our business with the fastest growing in markets and are winning key decisions across leading edge foundry logic, DRAM, ICAPS, and advanced packaging. We are in a great position to invest for technology leadership and growth, generate strong free cash flow, and increase shareholder returns. Now, Mike, let's begin the Q&A.

Thanks, Bryce. Our goal is to help as many of our analysts as possible. With that in mind, please ask just one question on today's call. If you have another question, please recue, and we'll do our best to come back to you later in the session. Operator, let's please begin.

As a reminder, to ask a question, you will need to press star 11 on your telephone. Again, that's star 11 on your telephone to ask a question. To remove yourself from the question queue, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Stacy Raskin. Hi, guys.

Thanks for taking my question. I wanted to ask about the DRAM in the quarter. So DRAM in the quarter was strong, and you've got a lot of growth in the next quarter. You said it was mostly from Trailing Edge. Am I right in reading that as primarily the Chinese customer driving that? And maybe you could sort of talk a little bit about your strength in China that is from DRAM versus Foundry. It almost sounds like the DRAM piece is stronger. than the ICAP space in China right now.

Thanks, Stacy. Thanks for your question. This is Bryce. Yeah, so we highlighted in Q4 that we'll see sequential growth in DRAM. It is related to confirming technologies that we can ship to customers in China. We've gotten lots of customers about that or questions about that during the quarter. So we wanted to make sure that people got that answer. So you'll see that growth in Q4. it probably won't be the only quarter where we'll have shipments along those lines, but we wanted to make that clear on the trend quarter over quarter. And one more thing that I'd add, we think that's probably something that's not well understood by the investors that, you know, while the memory market, you know, has been weak for our customers, the DRAM market actually has been fairly strong this year from an equipment perspective. And this is just a continuation of, of that profile for us. So we've got a, a good position in DRAM and, you know, that is manifesting in Q4.

Is that also in Q3? Oh, go ahead. I'm sorry.

Yeah, maybe just let me add some color, and then you can ask the following question. So DRAM, we've added about 10 points of overall DRAM wafer fab equipment share in the last 10 years. So if you look at the big inflections in DRAM, the periphery moving to high-speed I.O. for high-bandwidth memory, We're taking logic technologies into DRAM. That's a really big driver for our share gains. Capacitor scaling is an area where we have strength. Patterning share gains, advanced packaging, especially high bandwidth memory. So all of those areas are really big drivers for Applied and have contributed to this 10% overall WFE share gain in DRAM over the last 10 years. You have another question, Stacy? Yeah, I think I got it, Stacy. Yeah.

Yeah, I just wanted to follow up for the quarter. DRAM was pretty strong in Q3. Was it the same drivers?

Q3, there was a small amount of shipments to Chinese customers, so relatively small. Q4 would be larger.

Got it. Thank you so much.

Thanks, Stacy.

Thank you. Our next question comes from the line of CJ Muse. of Evercore ISI.

Yeah, good afternoon. Thanks for taking the question. I wanted to focus, I guess, on sustainability. You know, you're talking about, you know, significant outperformance versus WFE here in calendar 23. And so a two-part question. So if you look out to the January quarter, you know, representing calendar year, are you suggesting that, you know, you guys should be kind of in the flat to down 4% kind of year? And then as you look to calendar 24, Can you speak to, I guess, what kind of pent-up demand in terms of deferred revenues is helping this year that won't be replicated next year versus gains where you see leverage to the right end markets and or new technologies that can drive relative outperformance? Thanks so much.

Okay. Thanks, CJ. Maybe I'll start with the 2024 because I think you were embedding a question there on in 23, how much did we benefit from, you know, unserved orders in 22? We think that's about a half a billion to a billion dollars. All of that was served, you know, in the first half of the year. So, you know, what you're seeing from us in 23, besides that half a billion to a billion is largely tracking with the business that we see, the WFE business that we see during the year. So there shouldn't be an overhang. There shouldn't be a benefit from any you know, previously booked business, uh, that we see now or, or going forward. And, um, you know, as far as sustainability, you know, that that's one question we get regularly. The second question that we get regularly is just about ICAPS and the sustainability, uh, from China. And, you know, while that's the most, uh, the largest country in ICAPS for, for China, it's not the fastest growing. That's sort of a, that's a global trend and a global demand function. We see that as very sustainable. We think Gate all around will start shipping in earnest in 24. We think our services business will grow in 24. We think that the display business will be a little bit better in 24. So those are kind of the bits that we've given for 24. Otherwise, you know, we're not going to give a specific forecast yet for 24 or for the January quarter.

CJ, this is Gary. Maybe I'll add a little bit more color. On the Leading Edge Foundry logic, What we see is more of that spending moving to materials-enabled technologies, which is the sweet spot for Applied. So if you look at, again, the nodal spending, more is shifting to materials engineering. Gate all around, we've talked about, that's a billion-dollar opportunity for us. Backside power, when that comes in, that really leverages all of our strength and interconnect. And, you know, that's probably the same zip code in terms of size of opportunity for Applied. ICAPS, we've talked a lot about, you know, formed the organization four years ago. We've introduced 20 major new products since we formed the organization. And we still have room to grow in ICAP share. DRAM, I talked about. I think people really maybe don't understand the strength we have there. I talked about those big inflections and gaining 10 points of overall DRAM WFE share over the last 10 years. Packaging? That's a billion-dollar business for us now, and we see an opportunity to double that over the next few years. And as Bryce said, services, you know, we're going to be up in services in a relatively weak memory market in terms of utilization, and we're still on track for low double-digit growth. So, again, those are some of the things that really will help us outperform over the longer term. Thanks, T.J.

Thank you. Our next question comes from the line of Vivek Arya of Bank of America, Merrill Lynch.

Thanks for taking my question. I wanted to understand what measures do you have in place to ensure that there isn't a pull forward of your mature technology shipments because of geopolitical reasons or because of take or pay arrangements? Do you have ways to measure the utilization of what you are shipping? And if I kind of just ask that same thing in a different way, do you think Applied will grow in line above or below whatever WFE does in 2024?

Hi Vivek, thanks for the question. I'll answer the second part first. So we do think Applied will grow faster than whatever the WFE is for the market. And that's a good way to think of it because we think of, we think and plan for long-term secular growth. And we think we'll grow faster. On the question of pull forward in specific to China, we've got many ways to test that equation. One of the things that we do is we look at the amount of local capacity relative to local consumption. We think that there's strategic direction in the country and strategic incentives in the country to make the investments that will at least equal local consumption. And we think those things are tracking together and can rationalize what they've put in place from that perspective. We also triangulate the overall capacity being purchased relative to semiconductor market itself. As you know, we test that with intensity and we make sure that equation makes sense to us. And then from a micro perspective, we also look at the installation of our equipment. So we make sure when it lands in China, we understand that it's installed. And then we track the utilization also at a macro level in the market. And we know that all that equipment is being installed and operated. And so, you know, we don't see signs of, you know, unneeded or unwanted or unused equipment pooling up from that perspective. And we think the buys are rational at this point.

Thank you.

Thanks, Jose.

Thank you. Our next question comes from the line of Chris Sankar of Cohen.

Yeah, hi. Thanks for taking my question. I kind of had a two-part technology question for Gary. You spoke about high bandwidth memory and how it's benefiting advanced packaging, which makes a ton of sense given the exposure to TSC, et cetera. But on the other side, it seems like hybrid bonding is slowing down. And some of your hybrid bonding customers are looking at things like thermal compression bonders. Can you give any color on that? And along the same path, Gary, you've spoken about gate alarm being like a billion dollars. for every 100,000 rateful starts per month incremental opportunity and five-point share gains applied. You're there in most of those core technologies like FD, vertical FD, ALD, selective rates, et cetera. Are customers engaged all around making bundling decisions or are they still going with best-of-breed solutions? Thank you.

Well, thank you. Those are two big questions. Let me start off with – high bandwidth memory packaging. So that uses two critical packaging technologies through silicon via and micro bumping to enable stack DRAM. And, you know, the great thing for Applied is that we have the broadest portfolio to enable, you know, all different types of packaging, CMP, PVD, CVD, etch, and plating. So, you know, this opportunity for us is meaningful. The TAM for HBM increases about the overall packaging by about 5%. We're the overall leader in packaging. As I've talked about, it's a billion-dollar business, and we're on track to double that over the next three to five years. So that's definitely a good opportunity. On the hybrid bonding, what I would say is that we absolutely see hybrid bonding as a great opportunity over time. It's not... something that is going to generate significant revenue in the short term. But chiplets are something that every single company is focused on. And I do believe all of the things that we've discussed relative to growth rates there, we still believe that's on track. And then gate all around, the other question that you asked, we still see that as about a billion-dollar opportunity for 100,000 wafer starts per month. And in FinFAT, we had close to 50% share of that overall FinFAT opportunity. We've indicated with the full adoption of Gate All Around, we have an opportunity to increase our share 5%. And I think one of the things that helps us a lot is that we're deeply engaged with every company in Gate All Around, even with their integration teams, because we have so many of those critical enabling technologies. So all the things we talked about back to our master class, when we sized that around a billion dollars is basically still on track. And we, relative to ramping GATE all around, we believe that is toward the end of 2024. Yeah, well, the other thing is on the unit processes in IMS, there are some areas of that market where we're combining different technologies together under vacuum, which is something that's completely unique for applied materials that has a big impact on electrical performance. But the main message is we have very, very deep engagements with all of those integration teams, and GATE all around is pretty much on track to what we had talked about previously.

Great. Thank you.

Thank you. Our next question comes from the line of Toshia Hari of Goldman Sachs.

Hi, good afternoon. Thank you so much for taking the question. I had a follow-up on your ICAPS business, maybe for Bryce. So how big was ICAPS as a percentage of your business in the July quarter? Where do you see that going in the second half of the calendar year? And maybe more importantly, you know, yourself and Gary talked about sustainability in the business. I think the rationale for China makes a ton of sense. How are you thinking about, you know, the U.S., Europe, and Japan where, you know, your customers, yes, they're strategic, but they also care about, in your term, you know, profitability and returns. With some of the end markets slowing, is there a fear that the non-China business within ICAPS could slow going forward? Thank you.

Okay, thanks, Tosia. Good afternoon. On the ICAPS, we haven't articulated exactly how big it is. What we've said is this year it's our largest market. It grew very strongly last year. It's growing strongly again this year. And we've said over the longer term, as you think about the business, it's probably a third ICAPS, a third LeadingLogic, and a third Memory. And that's about as much. But you can get a feel for it, as we've said all year, The ICAPS business growth has been strong enough to offset weakness in NAND and leading logic. So that will let you probably get a ballpark. On the regionalization, we do think that regionalization leads to a little bit more spending globally for ICAPS. But we also look and see whether that's a sustainable trend from our perspective. We look at the underlying businesses. and the growth rates of all the device types that are being invested, whether it's China or whether it's the different markets across the world. And, you know, we rationalize that and we think all of the investment that's being made is consistent with the growth rates of those underlying devices and markets. So six, seven, eight, nine percent CAGRs for the different device types that fall into that, like you know, computer vision, analog, power chips, those sorts of markets.

And then on the last piece, different geologists and profitability.

Yeah, one thing I would say on the – Toshio, this is Gary. Relative to regionalization of the supply, one of the things that is extremely important is – And some of those ICAPS segments are tied to very large vertical markets in those different regions. So having a secure supply chain is something that is a big focus for every country. There are hundreds of billions of dollars of incentives there for supporting those different ICAPS markets. So that's another thing that certainly we're seeing. And the last thing I'd say is relative to opportunities, not only is it systems, but as companies are moving into new locations, that's a really great opportunity for our service business because there is no service infrastructure set up for those companies moving into new regions. And that certainly will help us. We're on track for the low double-digit growth in our service business, but the opportunity – is supported by this regionalization. Good.

And, Toshi, yeah, I forgot the last piece of your question was on the business, the health of the business today and whether customers are lowering starts or changing their plans. And that certainly happens in the environment. We've seen it. But I would just remind you, You know, the way people are doing equipment investments, it's a two-, three-, four-year planning horizon, so they're really making investments for what the demand function they see that far out in time, and that makes their purchasing a little bit more stable than, you know, whatever the current demand function is.

Thank you for all the color.

Yep.

Thank you. Our next question comes from the line of Harlan Sirr. I'm JP Morgan.

Good afternoon. Thanks for taking my question. Team has been doing very well in process control. It's about 10 to 12% of your system business. I think it grew about 55, 60% faster than your overall systems business last year. You know, Gary, you talked about strong technology inflections and benefits across the way for equipment portfolio, but I'm assuming this is also pulling strong requirements for more and better process control. So with that, I mean, can you just give us an update on process control portfolio and how is that segment performing relative to your overall system business this year?

Hi, Harlan. Yeah, thanks for the question. So PDC, for us, there are really two major areas of focus. One is, as you've talked about, is growth within PDC. But the other thing that is increasingly important is the synergy between with PDC and our process equipment, both for unit equipment and integrated material solutions, accelerating R&D for some of these major inflections. So on the PDC growth, the business grew about two times between 2020 and 2022. E-beam is one of the fastest growing segments there. And we've maintained our leadership with around 50% overall share in eBeam. We have new products coming to market. We've talked about in our master class the cold field emission with the highest resolution and fastest imaging. So that's helping that business growth. And then on the synergy, we had discussed the capacitor formation and DRAM, where we're bringing – new materials, new etching solutions together with e-beam technology, again, to accelerate those inflections, nanosheets and gate all around. You know, these technologies are incredibly complex, and you can't fix what you can't see, you know, and our e-beam imaging is world-class, ahead of anyone else, and so that synergy value is increasing. That will also help our growth in our market share overall in our semiconductor product group, but in PDC. So again, we're really in a great position, strong pipeline of products coming in PDC and great synergies with overall applied.

Great insights. Thank you.

Thank you. Stand by for our next question.

And our next question comes from the line of Timothy Arcuri. of UBS securities?

Thanks a lot. I had a two-part question. First of all, Bryce, can you give us a sense of the 1.7 billion that's in July for China revenue? Can you tell us how much of that is domestic China chip makers versus other multis that might have fabs in China, but they're not domestic Chinese chip makers? And then two of the questions is, is how do you handicap the potential that this China DRAM is a pull-in? I mean, we have Micron has been banned in China. We have a China memory maker now taking $500 million more worth of your tools in October versus July. That's two to two and a half billion dollars worth of extra WFE that's just in that one quarter. So how do you handicap sort of how you run the production factory, do you count on that being sustained? Do you think that it's possible that it could be a pull in if you can just comment on that? Thanks.

Sure. Thanks for the questions, Tim. So, uh, on the 1.7 billion for China, about 27% of our revenue, it's almost, it's almost all, it's not a hundred percent, but it's almost all, uh, domestic Chinese, uh, customers. Um, very little on the multinational, uh, at this point. And then, just a reminder, it does include a portion of our services business, it does include a portion of our display business in that number also. And then on the handicapping, whether it's a pull-in for the traditional or legacy DRAM, I certainly don't think it's a pull-in. This is a technology that was viewed as not being part of the rules. where technologies were restricted for China. So it's an existing technology. I think they'll put that equipment into operation as quickly as possible. And just in general, if we go up to 100,000 feet on this question, for equipment like that that's being installed in China, our view is that it's not incremental. If it weren't allowed to be shipped there, that it would be shipped somewhere else in the world for production. So We just view it as, you know, mainly location, and we triangulate the amount of equipment we're selling against the overall demand function, so we view it as location, not, you know, not incremental.

Okay, Bryce. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Joe Quattrochi of Wells Fargo.

Yeah, thanks for taking the question. When we look at your ICAPS portfolio, how do we think about your technology leadership over some of the emerging competitors, and specifically in China, just giving some of the comments around their efforts to localize their supply chain? I guess, are there certain markets where you have broader leadership or more competitive advantage? I guess, how do we think about that competition?

Yeah, thanks for the question, Joe. So I would say we're always focused on competition, even in non-critical process steps. And the main focus for us at Applied is to keep innovating in all areas of our portfolio and create deeper strategic relationships with the leaders in all device segments. In ICAPS, as we've talked about, four years ago we formed that group, and this has paid off with share gains, helped us build deep strategic relationships. with all the leading customers. And I'd say that those strategic relationships, being in with the integration teams, whether it's in the leading edge or in ICAPS, is super important because those technologies are always moving very quickly and learning faster than others is really important. We've talked about in ICAPS, since we formed this group, we launched 20 major new ICAPS products And I would say that we also have a strong pipeline of new innovations that will continue to strengthen our positions. The last thing I'd say in ICAPS is there are still, again, we have the strongest strategic position, broadest portfolio. We're working with those integration teams on their next generation technologies. But we also have room to grow in certain segments like etch and PDC. We have momentum in those segments, and that certainly is going to help us continue to gain share in the coming years.

Thank you. Our next question, please stand by.

Our next question comes from the line of Joseph Moore of Morgan Stanley.

Great. Thank you. I was surprised to see services at a record level, given the utilization issues in memory. Can you talk about that? And are you seeing headwinds from the memory side that are incremental, and you're just offsetting that with strength elsewhere? And kind of what does that tell us about where that business can go when utilizations come back up?

Okay. Thanks, Joe. This is Bryce. Yes, the services business, 16 consecutive quarters of year-over-year growth. You know, it was a record this quarter. And, yeah, the puts and takes there are that the transactional spares and the transactional activities that sort of are associated with utilization are, you know, significantly lower in the quarter. And then what we see that's higher in the quarter that drove that growth was really the 200-millimeter equipment. So we talk about ICAPS growth. and the strength of those markets and that 200 millimeter equipment is really what's driving the significant upside in the services business for the quarter. And then on the second part of the question, incremental headwinds for memory, when we think about the memory market, you know, there's been discussion of when will it be turning around and when will we see upside. The indicators that we follow, price, inventory, and utilization, we still see, you know, trending in the negative direction or flat, so we haven't seen a turn at this point. But we wanted to be careful to point out that in the DRAM market, we have seen strength this year. And, you know, it's sort of a normal year from an equipment perspective on the DRAM side, even though the memory market itself has been weak.

Yeah, Joe, this is Gary. I think the other thing to add is that part of our business is based on service agreements. And that also helps us have a higher level of stability. We're over 60% on the service agreements. And again, that's keeping that part of the business much more stable, even though the memory utilization is down. And the other thing I would say is that there is a significant amount of complexity. If you think about all the inflections, whether it's in memory with DRAM or ICAPS or leading-edge foundry logic, about a third of our revenue are these integrated material solutions with multiple technologies combined in a single platform under vacuum. Those are increasing. Those steps are increasing. And the service opportunity for us is also increasing. So we've talked about the low double-digit growth in service, once you come back to more normal levels of utilization, we have high confidence we're going to be able to achieve that.

Thank you very much.

Thank you. Please stand by for our next question. Our next question comes from the line of Brian Chin of Stifel.

Hi there. Good afternoon. Thanks for letting us ask a few questions. Maybe firstly, it seems difficult to imagine AI not driving incremental foundry capital spending in the next up cycle. So have you thought about how much incremental WSE spend in future years could result from AI driven wait for start expansion?

Hi, Brian. Thanks for the question. We certainly have. When we think about the WFE, you know, share of the different end markets, data center has approximately 20%. We think AI is about 5%. AI-related WFE is about 5% of our overall market. And, you know, you've heard different peers talking about a high growth rate, you know, varying between 30% and 50% for that workload and the amount of capacity. So if you view 5% as a relatively small amount, we do think that it's growing rapidly and be an important workload going forward. So that's our sizing for now. And as a comparison, we would hold that next to 10% to 15% of wafers that would be associated with IoT. And we think those things... you know, IOT, uh, wait for starts and WFE will also grow at a elevated rate.

Yeah, that's helpful. And heterogeneous integration is sort of supplemental to that as well. Right. Um, that's right. And although it wouldn't be detectable from your results, did you see any push outs from advanced foundry and logic customers? And also when you think about the several domestic foundry shells that are either constructed or, or being constructed, ready to be filled, now until, I guess, into next year. What's kind of your current expectation for the timing and significance for some of those expansions?

Yeah, there's still a lot of movement. Underneath the macro number and our results, there's still a lot of movement underneath, as you're suggesting with that question. So, we have seen a delay in installation of some of the tools, and we have seen push-outs with some of the leading foundry customers. So that's consistent with what we're seeing. And then I would just highlight again the strengths in ICAPS and the strengths in DRAM, both Q3 and Q4. Our outlook is, you know, really what's offsetting that.

Okay, great. Thank you.

Thanks, Brian.

Thank you. Please stand by for our next question.

Our next question comes from the line of Tim Scholes-Malander of Redburn.

Hi there. Thank you very much for taking my question. I wanted to ask about longer-term R&D intensity. You mentioned about the higher capex, so the epic R&D center, and just thinking about the mix of the business, a third of revenues from ICAPS, probably intuitively a lower R&D intensity. the other two-thirds leading edge logic and memory, as you say, more materials intensive and maybe higher R&D to sales intensity. Just wondering what we should expect the net of those two factors to be on a kind of multi-year view, please. Thank you.

Yes, thanks, Tim. Well, our spending at this point is 18.1% of revenue. It's a little bit higher than our model, but we're very comfortable with our spending level. We put about 66% of our spending, you know, two-thirds towards R&D. And we are fully focused on the roadmap. So when we think about the business, we think about the longer-term trajectory of the business. Our perspective is we're investing in a secular positive trend. We think about semiconductors growing, you know, high mid-single digits, so 6%, 7%, 8%, 9%. We think it's becoming more complex to build those semiconductors, which drives more equipment. So that's an additive function. We also think that applied, looking forward, designing for the inflections with our customers will gain share on top of that. So we think there's an additive function between the market growth of semis, the higher complexity of the equipment, and then the increased intensity from materials engineering and applied participation. So all those things add up to a significant growth rate. And so what I would expect is the spending level you see today will focus on maintaining approximately that spending level as we identify the best R&D projects to work on as we go forward. And then I would also highlight that just for investors who are working on their models, You know, we've held our spending flat for pretty much three quarters, and we said we've been very conscientious and very focused on strategic hires only. As we move to Q1, so the first quarter of our fiscal next year, we'll see our normal pay raise cycle, and we'll see our normal raise of spending in that cycle. So just wanted to highlight to people that that's what they'll see if they're modeling that function.

Super helpful. Thank you.

Thank you. Our next question comes from the line of Charles Shi of Niedermann Company. Hey, thanks for taking my question.

I want to ask the largest customer in Taiwan talked about CapEx leveling off on a dollar basis. I wonder what's the impact that you may be seeing in terms of your revenue coming from that particular customer in 2024 and beyond? And any preliminary thoughts on the relative outperformance of WFP maybe in 2024 by segment, meaning leading edge, founder logic, ICAPS, DRIVE, and NAND? Thank you.

Okay, thanks, Charles. All I can say about any particular customer, but, you know, especially leading-edge customers, is that we're current on their forecast, so we understand at an account level what they're forecasting in the future. They've all started, you know, as we went through the supply chain crisis, we're getting better visibility into their roadmaps top to bottom, so we have that, you know, we have a good perspective on that. In general, you know, we haven't called a number for WFE in 24 or for our business in 24. I just highlighted in the prior question that our view of the long-term growth of the market, you know, sort of what guides our investments, et cetera. What we have said for next year is that we expect the ICAPS business to be stable so that growth is durable, if you will. It's grown at a high level for the last two years, and we expect that business not to fall off but be stable. We expect our display business to grow modestly. We expect our services business to grow at the low double digits, as we've described. And I think that's the color that we've given so far for the market. That leaves out memory and leading logic, and we'll just have to wait until we get closer to give a forecast.

Yeah, Charles, this is Gary. Relative to longer term, as I mentioned earlier, we're in a great position. If you look at this incremental spending for the future technology nodes, a higher percentage of that incremental spending is going to materials-enabled technologies. And as I said, that's a sweet spot for applied. Gate all around, backside power, where you get power and performance benefits, but also you're going to get area savings with that inflection. So We have been growing our position for each technology node. I think that gets even better going forward.

Yeah, thanks, Charles. And operator, we have time for one more question, please. Yes, sir. Please stand by.

Our final question comes from the line of Sidney Ho of Deutsche Bank.

Great. Thanks for squeezing me in, guys. This is Jean-Marc Hollande for Sydney. And I want to ask about GATE all around. Gary, you've been very clear about how big this opportunity could be, both in terms of revenue and market share. And so maybe can you speak to the revenue contribution from this inflection in 24?

Yeah, thanks for the question. I think that we're not going to give a specific dollar amount. But what I would say is that that inflection is just starting to ramp up. in the latter part of 24. So, you know, it's not going to be a significant driver in 24, but certainly going forward, our opportunity there is significant.

Great. Okay. Thanks for your question. And I'd like to just see if, Bryce, would you like to give us any closing comments before we close the call?

Sure. Thanks, Mike. Just one content note that I wanted to add. So, you know, we get a lot of questions about modeling gross margin, and I just wanted to highlight for the people that are doing their models. Our 47% guide for Q4, that's a little bit higher than, you know, what we would have expected with Rich Mix in Q4. We're probably running underneath that at a normal mix around 46.6, 46.7, somewhere around that. So as people think about modeling their next year, we think we'll continue to make progress from 46.6 or 46.7 to on our way to 48 to 48.5 in 25. So if that helps from a modeling perspective, I just wanted to highlight that. From a closing comments perspective, We're executing well. We're outperforming our markets. The semi-systems year-to-date revenue is trending up year-over-year. Our services business is on track for year-over-year growth. We've aligned our businesses with the fastest-growing end markets, and we're winning in leading-edge foundry logic, DRAM, ICAPS, and heterogeneous integration. We're investing for technology leadership and growth. We're generating strong free cash flow and increasing shareholder returns. I hope to see many of you at the Jeffries Conference in Chicago, and Gary will be keynoting at the Goldman Sachs Conference in San Francisco. Now, Mike, let's go ahead and close the call.

Okay, great. Thanks, Bryce. And we'd like to thank everybody for joining us today. A replay of the call is going to be available on the IR page of our website by 5 o'clock Pacific time today. And we'd like to thank you for your continued interest in Applied Materials.

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