Applied Materials, Inc.

Welcome to the Applied Materials First Quarter Fiscal 2025 Earnings Conference Call. During the prepared remarks, all participants will be in a listen-only mode. Afterwards, there will be a question and answer session. I would now like to turn the call over to Liz Morali, Vice President of Investor Relations. Liz, you may begin.

Thank you. Good afternoon, and thank you for joining us for today's call. With me today are Gary Dickerson, President and CEO, and Bryce Hill, CFO. Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties. Information concerning these risks and uncertainties is discussed in our most recent Form 10-K and 8-K filings with the SEC. We do not intend to update any forward-looking statements. During today's call, we will also reference non-GAAP financial measures. Reconciliations of GAAP to non-GAAP results can be found in today's earnings press release and in our quarterly earnings materials, which are available on our Investor Relations website at ir.appliedmaterials.com. I will now turn the call over to Gary.

Thanks, Liz. In our first fiscal quarter of 2025, applied materials delivered record revenue, surpassing the prior high we set last quarter. The major technology trends reshaping the global economy are made possible by advanced semiconductors underpinning long-term secular growth for the industry and especially applied materials. We are providing our customers a unique and connected portfolio of solutions to accelerate the technology roadmap, positioning us for continued growth and outperformance in the years to come. In my prepared remarks, I'll share our latest market insight, I'll describe how our innovations are enabling the major device architecture inflections that are critical to advancing energy efficient AI, and I'll talk about why high velocity co-innovation is more important than ever as the industry races to bring next-generation technology to consumers faster and at lower cost. Starting with the market, AI remains central to our outlook. With almost infinite possible uses, AI is the most transformative technology change of our lifetimes and a major catalyst for innovation and growth across the technology sector. Early deployment of AI supported approximately 20% year-on-year growth of global semiconductor sales in 2024, and the market remains on track to exceed $1 trillion of annual revenues by 2030. We're only at the beginning of what's possible, and as we look ahead, we expect disruptive innovations to significantly improve the energy efficiency and cost of AI, opening up new applications and growing the overall market opportunity. To unlock this potential, innovation is required across the technology stack, from the models and software, as we've seen in recent weeks with DeepSeq, to data center architecture, chip design, and how those chips are made. Advancements in foundational semiconductor technologies will have a dramatic impact on system level energy and cost reduction in the AI data center. I've previously described four critical areas the industry is currently focusing on. Leading edge logic, high performance DRAM, DRAM stacking referred to as high bandwidth memory or HBM, and advanced packaging to connect the logic and memory chips together in an integrated package. There's also a fifth theme emerging. as we are seeing major innovations in power electronics. These innovations can address data transfer energy consumption within the data center, as well as significantly reduce grid to data center power losses. Applied has strong leadership in all these areas, and we're best positioned at future device architecture inflections, including next-generation gate-all-around transistors, backside power delivery, 4F squared and 3D DRAM, advanced packaging, compound semiconductors for power electronics, and silicon photonics. These device architecture inflections in logic, compute memory, packaging, and power devices grow the market for wafer fab equipment, increase the relative mix of materials engineering technologies, and provide opportunities for applied to gain market share. Taking leading edge foundry logic as an example, the transition from the most advanced generation of FinFET to the first nodes with integrated gate all around and backside power delivery grows our total available market by more than 15% to around $14 billion for every 100,000 wafer starts per month of capacity. At the same time, we expect related applied revenues to grow in the 30% range for the equivalent wafer fab capacity. While the bulk of spending for these inflections is ahead of us, we are already seeing a positive impact on our business. In 2024, we believe we outperformed the market in aggregate across leading edge foundry logic, DRAM, advanced packaging, and the ICAPS markets outside of China. The ability of U.S. companies to serve the China market is constrained and has been further limited by updated trade rules announced in December and January. We estimate the incremental impact of these new rules will be around $400 million of revenue in fiscal 2025, approximately half of which is service revenue. We also see China being a smaller portion of global wafer fab equipment spending in 2025. At Applied Materials, our strategy is to develop and commercialize the most enabling technologies for the industry across leading-edge logic, memory, advanced packaging, and ICAST. We have focused our investments on these high-growth inflections that allow us to create and capture more value. One of the ways we are implementing our strategy is to provide our customers unique and connected solutions that take advantage of our broad portfolio of technologies, capabilities, and partnerships. Our co-optimized and integrated solutions address higher value device challenges for customers and are difficult for competitors to replicate. A good example is our integrated hybrid bonding interconnect solution that combines six technologies, including one module from a partner, into a single integrated system. In the past quarter, we successfully completed important qualification milestones and received volume orders from multiple leading edge customers. Our integrated hybrid bonding system is one of our next generation solutions that is allowing us to extend our leadership in advanced packaging. In 2024, our packaging business captured more than half of the market we serve, and we remain on track to double our revenues over the next several years. Another key pillar of our strategy is high velocity co-innovation. We believe this is key for Applied and our customers to bring next generation technology to market faster and at lower cost. By speeding up cycles of learning through tighter ecosystem collaborations, We are accelerating new chip architectures, driving higher mutual success rates, and optimizing R&D efficiencies. Among our accomplishments in the past quarter, we launched our epic advanced packaging strategy at a technical summit we hosted in Singapore that brought together R&D leaders representing more than 20 global companies. We were part of two teams that received CHIPS Act grants to develop advanced packaging substrates for 3D integration. We are leading the team for silicon substrates, and we have a long-term partnership and investment in the company that won the grant for glass core packaging. We made significant progress with the construction of the EPIC Center in Silicon Valley, which is on track to come online in 2026 and will become the centerpiece of our global EPIC collaboration platform. And we partnered with TPG to transition applied thin-film battery business into an independent company. We're also evolving our collaborative model and services, where we are helping customers manage increasing complexity in their business as they ramp next-generation technology into high-volume manufacturing. We are deploying our advanced service products, including our Actionable Insight Accelerator data platform, or AIX, to help accelerate customers' R&D programs reduce technology transfer times, and optimize device performance, yield, output, and cost in their FABs. Through these closer working relationships, a high percentage of our service revenues is generated from subscriptions in the form of multi-year agreements. While our near-term service growth is negatively impacted by trade restrictions, we remain confident that we will still grow AGS at a low double-digit annualized growth rate over the longer term. Before I hand over to Bryce, I'll quickly summarize. As major technology trends reshape the global economy and the semiconductor industry, Applied continues to deliver strong financial performance in the near term. We are best positioned at major device architecture inflections in fast-growing areas of the market that are critical to energy-efficient AI, and we are focused on high-velocity co-innovation with our customers and partners to bring breakthrough technology to market faster than ever before.