Operator:

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.

Gary Dickerson:

Thank you, Mike. With second quarter revenue and earnings towards the high-end of our guided range, Applied Materials continues to deliver strong performance in 2024, and we are in a great position to benefit from secular growth trends over the longer-term. Semiconductors are the foundation of huge technology trends reshaping the global economy. These trends are driving demand for more chip manufacturing capacity, as well as better chips with higher performance and improved energy-efficiency. Key inflections that underpin the semiconductor roadmap are enabled by Applied Materials and will support our ongoing outperformance as next-generation chip technologies move into high-volume production. In addition, the complexity of implementing the industry's roadmap and bringing new semiconductor technologies to market is driving earlier, deeper and broader collaboration with customers, as well as supporting double-digit growth for our service business. In my prepared remarks today, I'll provide some examples of how Applied's innovations are helping to enable multi-trillion-dollar technology inflections, including AI. I'll explain how this translates to our performance in the near-term, and our future growth potential. I'll also describe how we are working with our customers and partners to accelerate major semiconductor inflections all the way from research and development to high-volume manufacturing, and by doing this, how we are capturing more value in our service business. I'll start with a big picture perspective. Tectonic shifts in technology, including AI, IoT and automation, electric and autonomous vehicles and clean energy, will transform virtually every area of the economy over the next several decades, and they all have one thing in common. They are built upon semiconductors. As these new technologies are deployed, they are driving growth and innovation across the semiconductor ecosystem. In terms of impact and scale, I believe AI will be the biggest technology inflection of our lifetimes. And at the heart of AI are some of the world's most sophisticated chips. In simple terms, the advanced chips that power AI datacenters are enabled by four key semiconductor technologies

Michael Sullivan:

Thanks, Brice. 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-queue, and we'll do our best to come back to you later in the session. Operator, let's please begin.

CJ Muse:

Yeah, thank you for taking the question. I guess we'd love for you to talk about your visibility today and how your ongoing conversations are going with your large customers as it pertains both to your outlook for kind of second half versus first half on a calendar basis, as well as building that potential backlog into calendar '25. Thank you.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question, please?

Brice Hill:

Yeah, thanks, Stacy, for the question. So, the way -- our perspective, we start with the longer-term view. And as Gary described, we're investing in the key inflections for the fastest-growing markets. And so, our perspective, if you stand back and think over many quarters or the next several years is that the leading-logic technologies like gate-all-around and backside power, the advanced packaging, HBM memory, our services business, we think all of those will grow faster than the average market and will help us gain share. And so, it's harder to call any particular quarter or a short time period in the near future, but that would be our perspective. And I think from a ICAPS perspective, you called out gate-all-around and ICAPS and DRAM and NAND, I think, thinking about all of them. We've talked about our DRAM share having improved over 10 percentage points over the last 10 years. And we expect that technology has great tailwinds. We talked about how HBM and utilization in DRAM is improving. So that's a positive. And if we think about ICAPS, the market, we have three quarters here that you can see, two -- our first two that are closed and our Q3 guidance, and ICAPS is very strong in those quarters and grows in Q3 to fill in some of that China DRAM business that drops off. And then finally, gate-all-around, the $2.5 billion that Gary highlighted, that's not just the incremental, that's our shipments for the entire business that are associated with gate-all-around that are shipping this year, and we do expect that to grow next year.

Stacy Rasgon:

But you said $2.5 billion this year from gate-all-around and more than double that in -- did I hear that wrong? Does that suggest $5 billion in gate-all-around in 2025?

Stacy Rasgon:

Or did I misunderstand what you said?

Brice Hill:

Yeah, that's right, Stacy. So, that's not just the increment. That's the entire equipment sales that we'll have for that technology. So, $2.5 billion for this year and opportunity to double that next year.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Mark Lipacis from Evercore ISI. Your question, please?

Gary Dickerson:

Yeah. Thanks for the question, Mark. So, if you look at the industry overall, all of our customers are racing to be first to market to deliver those major device architecture inflections that determine their competitive position. So, gate-all-around, backside power, those new DRAM architectures and packaging is becoming more and more important to power performance and costs. So that is really what shapes the competitive landscape in the industry. And it's very, very clear, we're working with our customers for technology generations out into the future. So, we have very high visibility in -- this broad and connected portfolio that we have gives us an opportunity to engage with customers in those early and very deep relationships on those architecture inflections. And as we look forward, we do see materials engineering as a percentage of spend and the relative contribution increasing. And Applied has clear leadership, especially with this broad, connected portfolio. We built integration capability inside Applied that is really tremendous and really co-innovating with our customers as they're driving those architecture inflections. So, I do believe, for sure, that we will be creating more value in those relationships with our customers, and that certainly is valuable for them. And our focus is to capture more value as we're delivering more value with them. So, your basic question, I agree with your thoughts.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Vivek Arya from Bank of America Securities. Your question, please?

Brice Hill:

Hi, Vivek, it's Brice. I'll just do a clarification here. This quarter -- we decided last quarter when we talked about the incremental revenue for gate-all-around that it was a little bit confusing. So, we changed. And this quarter, we're talking about all of our revenue that's associated with the gate-all-around transistor and wiring. And so, that's not just the increment. So, the $2.5 billion that we're talking about this quarter is not supposed to be interpreted as an increase relative to the $1 billion we talked about last quarter. We're just changing the basis. Now, we're just quoting all of the business that's associated with the gate-all-around product. So, hopefully, that helps. So, as far as answering the question about what's driving the increase, I don't think our perspective has changed very much. It's $2.5 billion for this year. It can grow significantly next year as the technology ramps. And then, what I would say is you do see some of that in our Q3 guide. So, as you know, we took down -- or we're dropping off the incremental China DRAM shipments that we had. And in the second half, we're filling that in with ICAPS strength and growing leading-logic shipments that are driven by gate-all-around.

Gary Dickerson:

Vivek, I'd add, relative to kind of what drives the incremental spending, these technologies where you're improving device performance, the drive current, leakage, power consumption, all of those things, are incredibly difficult. And so, the customers -- and it's really all about this materials magic that we're able to provide with that broad portfolio of different types of technologies. So, step counts are increasing at every one of those different technology nodes as they are driving those roadmaps for performance, power to meet the -- especially for high-performance computing, AI computing demand type of applications. So again, those are very, very, very difficult technologies. Whether it's 100 billion transistors in a GPU or 100 kilometers of wiring in an applications processor, those are really amazing, amazing technology accomplishments with materials. That's what drives that incremental spending.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Chris Caso from Wolfe Research. Your question, please?

Gary Dickerson:

Hi, Chris. This is Gary. So, this whole focus around advanced packaging, heterogeneous integration is really a major drive across the entire industry. When you look at AI servers or any of these different kinds of applications, you see tremendous innovation in the high-bandwidth memory. You see tremendous innovation in how you're connecting together all of those high-performance logic chips and memory chips. And we really see the growth there being very, very significant, because it's so important to the industry's roadmap as kind of classic Moore's Law has slowed down significantly. This is another major driver of how the industry will innovate going forward. And with Applied, we have the broadest portfolio of technologies, PVD, CVD, CMP, plating, etch, we've added hybrid bonding, digital lithography, eBeam test. We have a very broad portfolio. And as we see those roadmaps -- and this is why I come back to architecture inflections are really what drives your incremental business going forward. So, we can see the roadmaps for our foundry-logic customers, for memory customers, all of them are investing very heavily in these types of technologies. And some of these areas also that are new innovations from Applied will help us drive that business 2 times higher, and I think that the compound annual growth rate keeps going up from there. The other advantage that we have besides this broad portfolio in the deep, multi-generation connection that we have with all of our customers is our full-flow packaging lab in Singapore. We're working with leading customers on those next-generation innovations, Chris. So, we have pretty good line of sight to what those inflections look like, the architecture inflections will look like in a very strong position to grow our share as those inflections come to market. We're not giving a specific timeframe on the doubling. It will happen over a number of years, but very, very optimistic about our opportunities in packaging.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Srini Pajjuri from Raymond James. Your question, please?

Brice Hill:

Okay. Thanks, Srini. Yes, first of all, our mix, as we move to the second half of the year, will normalize with respect to China as a percent of our total revenue. So, it will be closer to 30% as expected. And it's the dynamic that you highlighted. We had some catch-up DRAM shipments to particular customers in China for the last three quarters. Those will fall off as we go through Q3 and Q4, and that really will bring our percentage of China revenue back down to -- closer to what's average over the last few years, which we'll call about 30%. And then, with respect to the mix of business, so as that DRAM business falls off, our ICAPS business and our leading-edge logic business does increase to fill that in. And so that's consistent with continued strength in ICAPS, which the rest of the market for us in China would be ICAPS-related. And I think you described it well. The end markets are mixed. So, industrial and auto have been weaker. Smartphone, PC-related products have been slow, but gaining some strength recently. And then, as we've talked about image sensors, power chips, microcontrollers, a lot of those markets have been stronger. So, it's been mixed end markets, but the customers are investing for forward-looking demand and to get capacity in place for forward-looking demand. And when we see utilization in those markets, we've seen it improve. So, I think when people ask us for guidance, hopefully, the best thing we can tell you is Q1 and Q2 were very strong in ICAPS and Q3 will be another strong quarter in the ICAPS market. Thanks for the question.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Atif Malik from Citi. Your question, please?

Brice Hill:

I think, I'll take the first part. I think that demand is across our customer base. So, it's not one single customer, but we won't share any details about the relative balance between customers. And then, from a device mix perspective, Gary -- or I'm sorry, equipment mix, I don't know if there's anything you would highlight there.

Operator:

Does that answer your question?

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question, please?

Brice Hill:

Okay. Toshiya, it's Brice. I'll start, and then Gary may add something on the HBM. So, on the sold out comment, what we do -- we have seen utilizations improve across the DRAM wafer starts. We've seen the allocation to HBM from a wafer start perspective increase from 5% to probably something closer to 20%. That said, it's not 100% utilized. So, you could speculate what the -- if there's some restraints, it could be in the packaging side, and we have seen orders for HBM going up. So, we'll have to let you think about that and talk to those vendors from that perspective. On the NAND side, our perspective on NAND is that Moore's Law is still very much alive in NAND. The bit density is increasing with each generation of NAND fairly aggressively. And it's meeting the demand function for increased bits. And what that really means is that the business we see in NAND is for technology upgrades, more technology upgrades not really new wafer starts. So, that's what we expect to see as we move forward. And overall, we expect NAND to grow at the speed of semiconductors. It's -- obviously, storage has a very important part, and several of the vendors called out how important storage is even for AI and that it will grow. So, I think for us, it's been slow, but we expect it to grow over time and memory in total to be about a third of our sales for WFE. And then, Gary, back to you whether anything specific on HBM...

Toshiya Hari:

Thank you.

Krish Sankar:

Yeah. Hi, thanks for taking my question. Gary, I had a question on backside power delivery. It seems that the industry has two approaches to it. One is the backside wiring with direct contact with the transistors, and another one is the [nano-TFE] (ph) approach. I'm kind of curious, you've spoken about the 100 -- incremental $1 billion SAM for 100,000 wafer starts per month. How does it split between those two approaches? And also, can you quantify what kind of revenues you expect this year and next year for Applied in backside power delivery? Thank you.

Krish Sankar:

Thanks, Gary. Thank you.

Timothy Arcuri:

Thanks a lot. Brice, I have two-part question on China DRAM. And the first part is, you talked about it coming down [$500 million] (ph). Is that stepping all the way down in fiscal Q3? So, what's the assumed step-down in China DRAM for fiscal Q3? And then, more broadly, of the $1.6 billion worth of DRAM business, I'm wondering if you can kind of help us figure out how much of that is China. If I look at Korea and I look at how much that is, it looks like about $1 billion of the $1.6 billion DRAM revenue is China. Can you confirm whether that's in the right ballpark? Thanks.

Timothy Arcuri:

Sure, Brice. Thank you.

Joe Quatrochi:

Yes, thanks for taking the question. I wanted to kind of try to understand just the trends that you're seeing in ICAPS. Can you help us just understand the difference in the growth that you're seeing from China versus non-China? Because it sounds like as we look at China revenue normalizing, the DRAM falling off, obviously, the rest of that is mostly just ICAPS. So, can you help us just kind of understand the trends between China and non-China?

Joe Quatrochi:

Thank you.

Harlan Sur:

Good afternoon. Thanks for taking my question. As we transition from a more mature specialty ICAPS-driven growth profile to a leading edge, sort of advanced foundry-logic memory spending profile this year and going forward, this typically tends to be a strong tailwind for your process control and diagnostics portfolio, which leans very heavily on your most advanced tools and solutions, right? Because [picture] (ph) sizes get smaller, so better resolution required, but also new and more [defecting yield] (ph) challenges, right? So, it's probably a driver of your leading-edge CFE-driven eBeam portfolio this year. Are you guys still seeing that portfolio grow like 4x this year? And how does the pipeline look for next year? And maybe mid to longer term, like given the significant manufacturability challenges, does the Applied team see process control and diagnostics intensity rising faster than overall WFE intensity over the next few years?

Harlan Sur:

Thank you, Gary.

Operator:

Certainly. One moment for our final question. And our final question for today comes from the line of Mehdi Hosseini from Susquehanna. Your question, please?

Brice Hill:

Yeah. Hi, Mehdi, it's Brice. I guess I'll take that one. We do expect -- I can't tell if it's a greenfield question or not, but we do expect increased wafer starts across definitely ICAPS, definitely leading logic, a smaller amount in DRAM. And probably the place where we don't really expect increased wafer starts is in NAND, but that will still be upgrades. So, most of the memory technologies are upgrades. But it will be a combination of new technologies and new plant and equipment across the board.

Michael Sullivan:

Okay. Thanks, Mehdi, for your question. And now, Brice, would you like to give us your closing thoughts?

Michael Sullivan:

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

Operator:

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.

Gary Dickerson:

Thank you, Mike. Applied Materials made a strong start to fiscal 2024 with first quarter revenue in the high end of our guidance and earnings that exceeded our guided range. Our inflection-focused innovation strategy is delivering results. We have outperformed our markets for five consecutive years and believe we are in a great position as customers transition major new chip innovations to high-volume production over the next several years. The breadth of our technology capabilities, combined with our deep customer relationships, allows us to see inflections early and accelerate key technology innovations that are critical to scaling AI, IoT, electric vehicles and renewable energy. We have reshaped and expanded our portfolio of solutions that enable next-generation transistors, new interconnect schemes, including backside power delivery, high-performance DRAM including high bandwidth memory, and specialty applications in the ICAPS market. In my prepared remarks today, I’ll provide some examples of how these inflections grow Applied’s available market and are highly accretive to our share. I’ll also talk about our long-term strategy to accelerate innovation and commercialization velocity through tighter collaboration with our customers and partners. But to begin, let me share our latest perspective on the market environment. In our discussions with customers, we’re hearing that overall market dynamics are improving. There is a reacceleration of capital investment by cloud companies, fab utilization is increasing across all device types and memory inventory levels are normalizing. In terms of Applied’s business in 2024, we see leading-edge foundry-logic being stronger year-over-year, even though some important projects are delayed. We’re forecasting ICAPS demand to be slightly lower than 2023 with weakness in some end markets being offset by strong regional investments. We expect our NAND revenues to be up year-on-year, but NAND to remain less than 10% of total wafer fab equipment spending. And we see continued strength in our DRAM business, driven by customers ramping production of high-bandwidth memory. High-bandwidth memory where high-performance DRAM dies are stacked and connected to logic die with advanced packaging is a key enabler for the AI data center. The dies used in high-bandwidth memory are more than two times larger than standard DRAM, which means that more than twice the capacity is needed to produce the same volume of chips. On top of this, the packaging steps needed for die stacking further increase our total available market. High-bandwidth memory, or HBM, made up only about 5% of DRAM output in 2023, but is expected to grow at a 50% compound annual growth rate over the coming years. DRAM is a great example of how our inflection-focused innovation approach is working, by focusing on the critically enabling process and packaging steps for next-generation technologies, Applied has significantly increased our share of the DRAM market. In 2023, we estimate that our DRAM share was more than 10 points higher than it was a decade earlier. And our DRAM revenues were larger than our two closest process equipment peers combined. We’re also best positioned for future growth, thanks to our leadership in logic technologies that have been implemented for DRAM peripheral circuitry applications to enable significantly increased IO speeds. Our strong position in DRAM patterning, our unique co-optimized hard mask solutions, which are critical for capacitor scaling and advanced packaging, where we have strong leadership positions in Micro-bump and Through-Silicon Vias that will enable multiple generations of high-bandwidth memory. In fiscal 2024, we expect our HBM packaging revenues to be four times larger than last year, growing to almost $0.5 billion. And across all device types, we expect revenue from our advanced packaging product portfolio to grow to approximately $1.5 billion. Looking further ahead, we see opportunities for this business to double again, as heterogeneous integration is more widely adopted, and we introduced new products that expand our served market. Another key inflection that will transition to high-volume production beginning this year is gate-all-around transistors in leading-edge foundry-logic. These complex 3D structures can provide a more than 30% improvement in a chip’s energy efficiency. This is especially enabling for high-performance AI data center applications. The shift from FinFET to gate-all-around grows Applied’s available market by $1 billion for every 100,000 wafer starts per month of capacity. And we’re on track to gain share and capture over 50% of the spending for the process equipment used in this new transistor module. Major advances in leading-edge foundry-logic and DRAM are also driving the need for more and better metrology and inspection to be integrated into the manufacturing flow. We have developed industry-leading cold field emission eBeam technology that enables highly sensitive 2D and 3D imaging at up to ten times higher speeds. We expect our CFE systems revenue to grow by a factor of 4 in 2024 and represent 50% of our total eBeam system sales. The incredible innovation we see in the industry today is not limited to the leading edge. In recent years, ICAPS customers have invested about 10% of their revenues or about $30 billion annually in research and development to accelerate the roadmap for IoT, communications, automotive, power and sensor technologies. ICAPS technology depends less on shrinking device features and customer investments are heavily weighted towards new structures, new materials and new integration approaches, playing to the core strengths of Applied. ICAPS is another area where we saw market inflections early. And five years ago, we formed a dedicated team to focus on the needs of these customers. Since then, we’ve released more than 20 new ICAPS products that target the highest value device innovations in these markets and we have a robust development pipeline of unit process and integrated solutions. While major end market inflections, such as AI and IoT, electric vehicles and renewable energy are already driving semiconductor growth and innovation, it’s important to recognize they are still in the early stages of adoption. For example, high-performance GPUs for AI data centers only represent 6% of leading-edge foundry-logic wafer starts today. The full potential of technologies like AI cannot be unlocked without next-generation chips with better performance, power and cost. The technology roadmap for semiconductors is rich with possibilities and opportunities, but also incredibly complex. No company is better placed to address this complexity than Applied Materials. With the industry’s broadest and deepest portfolio of capabilities and products, we have a unique ability to combine, co-optimize and integrate our technologies to develop highly differentiated solutions for our customers. To bring these advances to market faster, we’re also innovating the way we innovate, by driving earlier and deeper collaboration with our customers and partners. We are expanding our global innovation network that will connect into the EPIC center we’re building in Silicon Valley. During the quarter, we announced an expansion of our long-term partnership with Leti, which is focused on accelerating ICAPS innovation, and we launched a new collaboration with MIT, which is centered around next-generation power electronics. As industry complexity rises, we’re also delivering more value to customers with our advanced services that enable our customers to accelerate R&D, transfer new technology into volume manufacturing faster and then optimize yield, output and cost in their factories. AGS has delivered 18 consecutive quarters of year-on-year growth. Revenue for the first quarter was up 8% versus the same period last year, and the business is now at a $6 billion annual run rate. AGS has the opportunity for double-digit growth this year, and we believe we can sustain this growth rate into the future. A significant portion of AGS revenue is generated from subscriptions. We have almost 17,000 tools under service agreements, up 8% year-on-year, and these agreements have a very high renewal rate over 90%. Before I pass the call over to Brice, I will quickly summarize. Applied Materials outperformed our markets in 2023 for the fifth consecutive year and we delivered strong results in the first quarter of 2024. The positions we’ve established at key industry inflections, will support continued outperformance, as customers ramp next-generation chip technologies into high-volume production. We are strengthening R&D collaboration with customers and partners to drive innovation and commercialization velocity, improvements in mutual success rate and R&D investment efficiencies. And we see growing demand for our advanced services that are helping customers manage increasing complexity in their business as the industry scales. Now I’ll hand over to Brice.

Michael Sullivan:

Thanks, Brice. 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 re-queue and we’ll do our best to come back to you later in the session. Operator, let’s please begin.

Stacy Rasgon:

Hi guys, thanks for taking my questions. I wanted to ask about DRAM in China. So DRAM was very strong. It was supposed to be strong, but it was quite a bit stronger than, I think, we had thought it was going to be. I guess, can you tell us how much of that was China versus non-China? And going forward, last quarter, you had talked about the expectations for the China piece of that that had been pulled forward due to the sanctions to roll off as we went through the rest of the year. What are your thoughts on that China trajectory, as we go into April quarter and into the second half?

Stacy Rasgon:

Which is what? Is that – what’s the typical?

Stacy Rasgon:

Got it. That’s helpful guys, thank you.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Vivek Arya from Bank of America. Your question please?

Brice Hill:

Okay. Thanks, Vivek. No real change, I think, in our outlook for 2024, in terms of shaping how those end markets are evolving. So, we do think DRAM will continue to be a strong market. We think NAND will improve from its low levels a little bit. We think leading logic will be larger as gate-all-around and new investments start to ramp towards the back half of the year. And we do think there will be some digestion in ICAPS in China, both. Just to be crystal clear, we had enormous growth for two years in ICAPS and the China-related ICAPS business. And so we won’t see that enormous growth this year. It may be a little bit smaller. We think there’s some digestion with that capacity. But we expect that market to grow over time along with the underlying rates for the company. So that’s – those – the shape of those end markets hasn’t changed in our outlook.

Brice Hill:

Well, all we can do is tell you what we see from Applied’s perspective. When we commented on 2023, we said it was a strong year for Applied. And to the way you asked your question, we had strong ICAPS. We had strong DRAM; we were strong in growth in packaging. And so as we look toward 2024, those are the puts and takes. We’re not going to give a precise number for 2024.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of CJ Muse from Cantor Fitzgerald. Your question please.

Brice Hill:

Okay. So I’ll tackle the first part, and then I know Gary wants to tackle the second part of the question. So on outperforming in 2024, CJ, we do expect, because of our exposure to the fast-growing markets and some of the inflections growing quickly in 2024. We do expect to outperform. We’re not making a call on the size of the market. It’s like you said, there’s a couple of markets that are growing, the ICAPS market and the China piece, we think won’t grow. And so we’re not making a call on which is the stronger trend. And I don’t know if we know. So we’ll see how the year plays out from that perspective. And Gary, on the show.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Chris Caso from Wolfe Research. Your question please.

Brice Hill:

Hi Chris, thanks for the question. When we look at the market currently, we’re seeing improvements in inventories, and we’re seeing improvements in utilization. So it’s starting to pick up. That’s pretty much across – that is across the entire market on the utilization side. And then what we’re hearing from customers is optimism, generally speaking, for 2025. We would echo comments we’ve heard from others that the semiconductor end market for devices is expected to be growing. And it’s an investment cycle on the leading edge. We’re expecting the memory markets to continue to improve. So 2025, we are optimistic about the direction for 2025.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Krish Sankar from TD Cowen. Your question please.

Gary Dickerson:

Yes. Chris, one thing I would say that for all of these inflections, it’s a tremendous advantage for us to have that broad portfolio. Again, when you think about – one of the examples I’ve used many times is, your processor chip and your smartphone with 15 billion transistors and 60 miles of wiring, which is kind of mind-boggling, when you think about how do we do that? How do we create something like that. There are over 1,500 steps in building that type of chip. And when you’re developing these new technologies, like gate-all-around, like backside power or new DRAM technologies or any of these packaging technologies, the ability to combine and co-optimize these steps is an enormous advantage, enormous that 60 miles of wiring, we have one platform that combines seven technologies under vacuum, to enable that those 60 miles long, very thin wires to move the data at super high speeds, very low resistance and very low power. So it’s completely unique. And that’s about one-third of our portfolio are those integrated solutions. We also have clear leadership in eBeam technology. I talked about our cold field emission electron optics. And that enables us to see those structures, when you’re building gate-all-around, and you want to look at the width of those nanosheets, again, we have unique technology that enables us to learn faster and then we can co-optimize all of those technologies. So as we’re driving our innovation with customers, we’re deeper, we’re earlier, we can see four generations out, relative to those technologies. So super, super deep connectivity. That’s why also I think EPIC is going to be a game changer in how we innovate, the way we innovate. We talked about the relationship with Larry [ph] for innovation and edge computing and ICAPs, all of those things, then we have our advanced packaging lab in Singapore that is also a full flow lab, where customers are working on innovation and new architectures. So Chris, I think that gives us a tremendous advantage. We can see what’s needed earlier. And then the ability to co-optimize all of that gives us a tremendous advantage.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Atif Malik from Citi. Your question please.

Brice Hill:

Thanks, Atif. Appreciate the question. So yes, our gross margin reported in Q1 was 47.9%. We think that we’ve modeled what it would be without the higher China mix, and our view is the underlying gross margin is approximately 46.7% at this point. So as we go through the course of the year, we expect that gross margin to come down from 47.9%, to a more normal amount. At the same time, where we are underneath that, the 46.7% will continue to improve slowly, if that makes sense. So, if you normalize Q1 immediately, you’d be at 46.7%. We expect that to improve through the course of the year. And then we’re not changing our goals. Our goal is 48% to 48.5% for 2025. That’s still where we’re targeting as we work on pricing improvements and continue to work on our cost road map.

Unidentified Analyst:

Thank you.

Srini Pajjuri:

Thank you. Hi guys. Gary, I have a question on your HBM comment. I think you said HBM accounted for about 5% of industry output. If you can clarify if that’s wafer output or if that bids, but my question is, as we look out to the next few years I think you’re forecasting about 50% growth for this business. So, it’s a little tricky to understand for us as to how much of DRAM WFE is going to HBM right now? And how do you see that evolving? I mean if the market grows 50%, should we expect I guess the equipment spending also to grow 50%? Or do you think it’s going to grow faster than that?

Srini Pajjuri:

Thank you.

Toshiya Hari:

Hi. Thank you so much for taking the question. I had a two-part question. The first one is on the conventional DRAM part of your business. And the second part is on the NAND business. So the bullishness in terms of HBM, we understand. I’m hoping to better understand what your customers are doing, what they’re telling you, Gary, in terms of their plans on the conventional DRAM side are things still very muted? And are they disciplined from a supply perspective? Or are you seeing a pickup in your conventional DRAM business, as well to the extent you have visibility there? And then I guess a similar question on the NAND side. It’s been a soft market for everyone. I guess there’s hope that at least node transitions or layer count increases will resume this year. Are you starting to see early signs of a pickup? Or are things pretty soft there? Thank you.

Gary Dickerson:

Yes. Toshiya, relative to Applied in DRAM as I talked about earlier, we’ve gained more than 10 points of overall DRAM WFE share, over the last 10 years. And then if you look at the technologies for DRAM going forward, periphery moving to higher speed IO, enabled by our leadership logic products, capacitor scaling, we’re achieving patterning share gains. And I’ve talked about very strong position in advanced packaging, including high bandwidth memory; we’re really well positioned there to continue our outperformance in DRAM. And as Brice said or I said earlier also, we think that business is going to remain very healthy for us. NAND for Applied, we see the revenue up a fair percentage in 2024 versus 2023, but the total amount is still far below 2022. So that’s a little bit more color.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Harlan Sur from JPMorgan. Your question please.

Brice Hill:

Okay, Harlan, I’ll make a comment there. I do think those schedule changes that have been in the news, we’re up-to-date on those. So our outlook is consistent with any of those discussions and schedule changes that you’re talking about. On the CHIPS Act, we’ve recently seen news reports about the government beginning to accelerate that process. We’re in the process ourselves of preparing our application on the R&D side and expecting that to open soon. So I think the answer to your question is, yes, it is affecting schedules, but we don’t expect it will change the ultimate destination of those projects.

Brice Hill:

Yes.

Joe Quatrochi:

Yes. Thanks for taking the question. I was wondering if you could help us quantify how much your ICAPS business grew in calendar 2023. And then as we think about the foundry-logic business for 2024, do you think the recovery in leading-edge can offset the decline in ICAPS?

Gary Dickerson:

Yes, Joe, just let me add. I think our perspective hasn’t changed at all, relative to how we see the market. So we still see semiconductors at $1 trillion by 2030. And if you look at – there’s some powerful drivers in the digital transformation of every industry. AI, certainly, there’s a lot of focus there. And AI server has 8 times more foundry-logic content and eight times more DRAM compute memory content. So as Brice said earlier, and I think as you’ve heard from others, I think there’s a pretty positive perspective on 2025. And I think longer term we have a very positive perspective relative to semiconductor growth, equipment growing as faster, faster and Applied outgrowing the equipment market continuing to outgrow, as we have for the last five years. So I think quarter-to-quarter or half-to-half, frankly, we don’t focus as much on that, as we do this secular growth that we see in this industry and the great opportunities Applied has, as I’ve talked about, relative to the major inflections. So anyway, that’s the way we think about it.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Brice Hill:

Okay, Tim. Thank you. So, on the 2023 WFE, we’ve been careful not to engage in the discussion about that. We just shared what our view of Applied’s performance in our view of that market. And for us, 2023 was a strong year. We talked about ICAPS strength. We talked about DRAM strength, Packaging strength, et cetera. And so we’ll just have to wait and see what the third parties say about the size of the market. For us, we saw a strong market. On the China WFE we agree. We don’t see stockpiling. There are a number of new customers. So I don’t know if it’s exactly the partition that you described, in terms of leading and public companies versus not. But, we do think there are a large number of projects that are under investment, where we see over the next four years, added wafer start capacity, planned wafer start capacity that market will be a strong market for us across the planning horizon. And so I think it is a mix. You’ve got real demand there. When we look at the macro, we compare the amount of capacity put in place to local China consumption, and we think they’re still behind the amount of local China consumption. So we think the investments are rational. And actually, the utilizations look okay. They’re lower than rest of the world generally speaking, but they’re improving, and we expect yields to be improving also over time. And then I know, Gary, you’re asking Gary, about the free lunch. We think you’re right from the perspective of no capacity, we’re planning for all of the tools that we sell, whether it’s to China or whether it’s to a government incentivized project. None of these things, we think, increase the amount of equipment installed sort of abnormally such that it’s not going to be used and not going to serve an end market. So we don’t believe that China demand is an end line free launch. We don’t believe the government incentives are a free lunch from that perspective, it’s just affecting a location of needed equipment. Thank you.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Joseph Moore from Morgan Stanley. Your question please.

Brice Hill:

Okay. Thanks, Joe. So on the DRAM, I think going back to that Q4, the first quarter, we saw elevated DRAM from the China demand. That was the approximation we used for the impact of that. So you’re right, it doesn’t – it’s not going to exactly describe every single quarter, but I think that was a good estimate of the incremental that we’re seeing. So we’ll end up with three straight quarters of incremental DRAM shipping to customers in China for those allowed technologies. And Gary, on the...

Joseph Moore:

Okay. That’s helpful. Thank you.

Brian Chin:

Hi there. Good afternoon. Thanks for letting [ph] us ask a question here. Just curious, in route to Applied doing better than the industry over the full year. In terms of the handshake that occurs maybe around midyear, but between some digestion and ICAPS and some pickup in advanced foundry-logic – but the current timing around this suggest maybe a bigger dip in revenue in the July quarter?

Brian Chin:

Okay. Fair enough. Thanks.

Charles Shi:

Hi. Thanks for taking my question. I have a long-term question for leading-edge foundry-logic. So you guys talked a lot about the Material engineering potentially driving outperformance. If I look at the back in the last 10 years, I mean, I think the back half of the last decade, I mean, between 2015 and 2019 because the manufacturers kind of slow to jump on to EUV, there was a lot more adoption of multi-pattern. – actually led to like outperformance of the depth [ph] and edge equipment suppliers like Applied Materials, but the last five years because of the EUV adoption seems to be that trend has reversed a little bit. But looking out for the next five years, I know there are recent discussions about maybe high end EUV may not actually get adopted before 2030. Does that – does Applied think that may lead to more of the multi-patterning EUV again and that could actually drive up the material engineering intensity again? And any thoughts would be helpful. Thank you.

Charles Shi:

Thank you.

Operator:

Certainly one moment for our final question for today then. And our final question for today comes from the line of Thomas O’Malley from Barclays. Your question please.

Brice Hill:

Sure, Tom. It’s Brice. Typically, it’s greenfield. So I think that when companies start the first part of a process, you’re typically putting in greenfield and you’ll shift some of your reused equipment later if you’re able to do that. So that would be my expectation. Thank you.

Michael Sullivan:

Okay. Thanks, Tom. And appreciate that question. Brice, how would you like to give us your closing thoughts for today?

Michael Sullivan:

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

Operator:

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.

Gary Dickerson:

Thank you, Mike. Before we begin, I'd like to speak briefly about Israel. As many of you know, Applied Materials has had a significant presence in Israel for nearly 30 years. We were shocked by the terrorist attacks of October 7 and the outbreak of war with its immeasurable suffering and loss. Our team in Israel is proving their resilience at this dangerous time and Applied Materials is committed to do our part to help our families stay safe until more peaceful conditions return. Now turning to our results. We delivered a strong finish to fiscal 2023 with record earnings in our fourth quarter and record revenue earnings and cash flow for the year as a whole. I would like to recognize the hard work and commitment of our global team to deliver these outstanding results. As this is our year end call, I'll begin my prepared remarks by reviewing our performance and key accomplishments over the past 12 months. I'll then talk about our longer-term growth thesis for the industry and Applied before concluding with our outlook and priorities for 2024. While semiconductor and wafer fabrication equipment spending were both down in 2023, Applied was able to demonstrate the strength of our broad portfolio, as well as the central role we play enabling major industry inflections. Our Semiconductor Systems business delivered mid-single digit growth for the fiscal year and remains on track for growth in calendar 2023 which will be the fifth consecutive year that we've outperformed the wafer fab equipment market. We believe we can sustain this outperformance over the coming years, thanks to the leadership positions we've established at the major technology inflections that will enable our customers' roadmaps. In the past 12 months, many of our business units delivered new records and major milestones, including Etch where we passed 10,000 shipments of our Sym3 chamber. We also released new products and secured incremental production tool of record positions and Gate All Around, Backside Power Delivery, patterning advanced DRAM and High-Bandwidth Memory and heterogeneous integration. At the same time, we strengthened our ICAPS business that serves IoT, Communications, Auto, Power and Sensor customers with new products and application wins in etch, epitaxy, implant as well as metrology and inspection. In Services, we delivered low-single digit revenue growth in fiscal 2023, overcoming headwinds, including lower fab utilization rates and trade restrictions. In this period, our total installed base increased 5%. In fact, our installed base of process chambers is now more than twice as big as our nearest competitor. In addition, there are more than 14,000 tools that are not chamber based including CMP, implant, and metrology and inspection. We grew the number of tools under long-term subscription agreements which now generate 63% of our total parts and service revenues. We also maintained the renewal rate of these subscriptions at 90%. In 2023, we continued to focus on our operations and supply chain, and we've made significant and sustainable improvements. Compared to this time last year, we are providing customers with better on-time delivery and shipment quality, while normalizing our inventory levels. More importantly, our operations are ready to scale as the industry grows over the years to come. Across the company, we're in a great position to enable our customer success and profitably grow Applied Materials as this next era of industry expansion takes shape. Looking to the future, there are four key components of our growth thesis. First, we believe that semiconductors will outgrow GDP as a digital transformation of the global economy progresses. Second, we expect the market for wafer fab equipment to grow as fast or faster than the market for semiconductors. This is because the industry roadmap is becoming more complex and chipmakers need to deploy more technology to move from one node to the next. Third, we believe that Applied will outperform wafer fab equipment because the key technology inflections are enabled by materials science and materials engineering where Applied has the broadest, most connected and most enabling portfolio of solutions. And fourth, we believe we can grow our service business as fast or faster than our equipment business by providing customers with advanced service solutions that accelerate technology transfer from R&D to high volume manufacturing and optimize device performance, yield, and cost in their fabs. By identifying major industry inflections early and making strategic multiyear investments in our product portfolio and capabilities, Applied Materials is best positioned to benefit from this exciting period of industry innovation and growth. We have by far the broadest portfolio of unit process technology to address our customers' high value problems in transistor, interconnect, 3D memory, specialty devices, and heterogeneous integration. We're able to combine these technologies in unique ways to create co-optimized and integrated solutions, and we are seeing strong pull from our customers to work on higher value module and device integration problems. At no time in our history have we been closer to our customers. We have built a unique platform for a collaborative innovation and commercialization of next-generation technologies. We will significantly expand this collaboration platform with EPIC, enabling Applied and our partners to innovate the way we innovate. And our advanced technology enabled service offerings are seen by customers as increasingly valuable, especially during technology transfer and fab ramp. These advanced services also provide growing subscription revenue streams for Applied. Moving to our near-term outlook and priorities for the year ahead. While we are mindful of the complex macroeconomic and geopolitical environment, we see demand for Applied products remaining robust with some changes within the mix. In 2024, we expect demand from our leading edge foundry logic customers to be stronger year-on-year, underpinned by higher PC, cloud, and AI data center spending as well as the initial build-out of Gate-All-Around nodes. We see demand for our ICAPS business being lower, mainly due to softness in the industrial automation and automotive end-markets. In DRAM, both pricing and utilization are improving for our customers and we see demand for Applied's products remaining strong. And we believe NAND spending will be up year-on-year, but still far below 2022 and less than 10% of wafer fab equipment spending overall. We expect NAND to remain a lower percentage of the wafer fab equipment mix moving forward. In terms of the global trade environment, the October 2023 export control rule changes in the U.S. were primarily focused on alignment with other countries. The rules are complex and while we are working with the government to clarify certain details, we see no incremental material impact to Applied at this time. As I look ahead, I strongly believe that Applied Materials has the right capabilities, strategy and partnerships. In fiscal 2024, our major focus areas include driving R&D programs to further differentiate our portfolio and extend our leadership at the key inflections that enable future industry growth, continuing to make operational and supply chain improvements to better serve customers, capture economies of scale and drive productivity across the enterprise, and ensuring that as we scale the company, we continue to reduce our environmental impact in-line with Applied's collaborative Net Zero playbook as announced earlier this year. Before I hand over to Brice, let me summarize. In fiscal 2023, Applied grew our semiconductor equipment and service businesses even though our markets were down year-on-year. For calendar 2023, we were on track to outperform the wafer fab equipment market for the fifth year in a row. We believe this outperformance is sustainable, thanks to our strong positions at all the key industry inflections, the strength of our customer collaborations and growing demand for our advanced services. And we remain positive about our long-term growth opportunities, where we expect semiconductors to grow faster than GDP, wafer fab equipment to grow as fast or faster than semiconductors, Applied to outperform the wafer fab equipment market and our Service business to grow as fast or faster than equipment sales. Now, I'll hand over to Brice.

Michael Sullivan:

Thanks, Brice. 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 requeue, and we'll do our best to come back to you later in the session. Operator, let's please begin.

Stacy Rasgon:

Hi, guys. Thanks for taking my question. I'm sure you saw the news report that came out pretty much coincident with your earnings release from Reuters that talked about a potential investigation into your China shipments to SNEC. It also mentioned though, that you've already disclosed on October -- in October '22, a potential subpoena. I was just wondering, can you tell us like what is going on here? What did you actually disclose around potential legal issues related to your shipments in China around the export controls at this point? And I mean, I don't know whether you can comment on this report or not, but any comment you might have on the news article, would be helpful. I don't think you had much time to put it in the script.

Stacy Rasgon:

So there's nothing new though. This is all related to whatever was already going on?

Stacy Rasgon:

Got it. Thank you.

Vivek Arya:

Well, thanks for taking my question. You mentioned that you expect China demand to stay healthy. And I'm trying to understand what that means because you did have these incremental DRAM shipments. So, I guess the first specific question is, what are you assuming for those DRAM shipments in your January quarter outlook? And should we understand from your China strength comment that your China sales conceptually could stay at least flattish next year or could they even grow? Just high level, what does, stay strong mean to you as it comes to the sales impact in fiscal '24?

Gary Dickerson:

Hi, Vivek. This is Gary. Just also what Brice said on the prepared remarks was for the full year China was 27% and actually it's down a little bit. But really pretty much same zip code as it was in the previous year. And as we go through the year, we would think it gets more back to the historical averages.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Chris Caso from Wolfe Research. Your question please.

Brice Hill:

Okay. Thanks, Chris. On the second part, I think the reason China comes back to its normal average is around 30%. It's just because the elevated DRAM shipments will normalize after Q1. So we had high DRAM in Q4. We expect that in Q1 and that should slow down and after that it will be, mostly ICAPS business again. And then, thinking of ICAPS In general, what I would say again is, we had significant growth in '22, significant even higher growth in '23. So when we think long-term, we're expecting mid to high-single digits of growth for ICAPS across several years. And to your point, looking right now this year, Q1 is actually a strong guide for ICAPS, but we do see lower utilization. We have seen some push-outs from different customers as they re-time some of their fab projects. And we did see the lower utilization in Q4. So we do think that Q -- our '24 will be a strong year for ICAPS but may not be as strong as '23, but again it's, it's much higher than it was in '22 because of the growth cycle that has gone through.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question please.

Gary Dickerson:

Hi, Toshiya. Yeah. I would say that relative to Applied's performance, I'm very optimistic. In leading foundry logic, we're really well-positioned for the major inflections that our customers were ramping Gate-All-Around and Backside Power Delivery. Gate-All-Around, we'll see some revenue in '24, but that's going to be ramping more significantly in the future years. And Backside Power, we'll see some revenue also in '24, but also a significant ramp in the coming years. And each one of those inflections is a billion dollar incremental opportunity for Applied and we can capture more. We're on track to capture more than 50% of the overall spend for those major inflections. So really good position in foundry logic for Applied overall, as we said in the prepared remarks. We think that business will be healthy in '24. DRAM is another case where we're really well positioned for the major inflections. We've gained 10 points of overall DRAM share in the last ten years. And again, going forward, we feel like we're well positioned. We have design wins for those future inflections in DRAM, and we see opportunities to continue to drive share there. In packaging, that business is a billion dollars for us today and we're in very good position for all of the different architecture inflections in packaging. And there again, we have an opportunity to gain over 50% share in packaging inflections as that goes forward. So all of those areas that we talked about, the leading edge foundry logic, DRAM, packaging, all of those areas are very strong for us. And as we said, ICAPS will be weaker in '24, but those opportunities, those markets will offset some of the weakness in ICAPS. And Brice, I don't know if you want to add anything on the overall market.

Toshiya Hari:

Very helpful. Thank you.

Steven Chin:

Hi. Thanks for taking my question. This is Steven calling on behalf of Krish. I guess a question I have is on gross margins. Just given the comments about normalization of China revenues in the coming quarters and also sort of the ICAPS dynamics, what are sort of the slightly longer term or medium term implications to gross margins if the mix of China goes down? Thank you.

Steven Chin:

Great. Thank you so much.

Harlan Sur:

Good afternoon. Thanks for taking my question. The team services business continues to drive strong year-over-year trends. Great to see the subscription attached continuing to rise. Utilizations are still depressed across your customer base, but have they stabilized, especially across advanced foundry logic and memory? And then just as a quick one, operating margin in AGS are still about 200 basis points below the 30%. 31% that you drove for six consecutive quarters through fiscal Q3 of last year. Are inflationary pressures still the biggest factor or is it mix related as your 200-millimeter ICAP shipments continue to remain strong and any line of sight on getting back into that sort of low 30% range on AGS.

Harlan Sur:

Great color. Thank you.

Srini Pajjuri:

Thank you. My question is on ICAPS as well. Gary, I think in the past you talked about ICAPs being about half of your business, and given the slowdown, you're expecting a couple of things, I guess you talked about China slowing down a bit in the short term. How do you see the non-China ICAPS business over the next 12 months? And where do you see ICAPS versus the other business mix, I guess, exiting, let's say fiscal '24. Thank you.

Brice Hill:

Yeah. I'll just add on, just, Srini, just a reminder for investors here. Our longer term view is mid to high single digits for ICAPS as well as the whole semi component, but mid to high single digits. And we do expect that to be consistent for China. We do expect that to be consistent for non-China. And we saw -- as we communicated in our prior quarter, we did see several geographies growing faster than China. So this is definitely a global market, not just a China market. And China isn't even, half of the market, as we communicated. And then as far as the slowness goes, or, any lighter year, what I would say is our guide in Q1 includes an ICAPS that's very strong and continues to be very strong. So the way we're thinking about it is '22 was very strong, '23 was even stronger. We may take a breath here with lower utilization, but we expect this market to continue to grow.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Brice Hill:

Hi, Tim. Thanks for the question. So for '23, we've heard all of those numbers also, and we just feel it's best for us to report what we see from our seat. And for us, '23 was a growth year. We highlighted as we went through the last few quarters how strong DRAM and ICAPS were and how, having exposure to those two markets and a leadership position in those markets helped us offset weakness that were in some of the other markets, NAND and leading logic primarily. So definitely everybody can do the math. They can see what our numbers will be with the guide. And that should help with your calculation of what the overall market would be. And then for '24, we're not calling the total. Again, we're trying to characterize what we're seeing in each market. We do think DRAM will continue to be strong. We think NAND will come up off of a, low position. We think leading logic will grow through the year, especially as Gate-All-Around begins to ship. And we think ICAPS, it's strong in Q1 still, but ICAPS may take a breath with lower utilization. So we'll have to see how that plays out. And then packaging was strong in '23 and we expect that to continue.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Joe Quatrochi from Wells Fargo. Your question please.

Brice Hill:

What was the second part? Joe, can you repeat the second part?

Brice Hill:

Okay. So on the first -- on the first part. I think we're still hearing different estimates of what semiconductors might be in 2023 from a growth perspective. What we've been saying from an equipment perspective is the growth was very high. So we described that in '22 at 40% plus and we've said it was faster in '23 from an equipment perspective. So, the actual semiconductor is obviously not growing that fast. But the equipment market, in preparing for the growth going forward, that's the approximate rate that we see. And then on the leading logic side, and offsetting ICAPS, again, our Q1 guidance, actually ICAPS is very strong, continues to be strong in our Q1 from a sales perspective. We do see lower utilization. We have seen some pushouts. So we're expecting that it won't be as strong a year as it was in '23, although still very strong. And where we'll see some offset is growing; leading logic, because leading logic has been lower, the past few quarters and we expect that to pick up through the year as new node investments, especially with Gate-All-Around start to ship in earnest.

Joe Quatrochi:

Thank you.

Joseph Moore:

Great. Thank you. You've talked about seeing some of these trends in ICAPS that have you thinking that there might be some deceleration. And you talked about China being good in DRAM and DRAM coming down. The China portion of ICAPS, should we be thinking about the utilization of those foundries? To the extent that we've seen that, it was already low and they were spending a lot, the utilization is coming down, they still seem to be spending a lot. Do you see that as a lead indicator for your part of the business?

Gary Dickerson:

Yeah, Joe. This is Gary. Also, as Brice said, if you look at the efficiency of the spending, it's going to be less, especially with those new customers for many years. So the wafer starts versus the output, the yields are going to be much less from a device standpoint. So again, that's going to impact the overall output. And we think, again, the gap there with their domestic demand will keep that market healthy for a number of years.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Sidney Ho from Deutsche Bank. Your question please.

Brice Hill:

Yeah. Thanks for the question, Sidney. So, we do think the DRAM business was strong this year, partially strong because of some of the shipments to China customers, where the process they're running was recently clarified to be within the rules, within the allowed trade rules. So that's a partial explanation. But I think we -- when we think of that market, we think that it actually looks like a normal year even without those China shipments that the DRAM market was fairly strong from an equipment perspective. And that matches, recent years where a lot of the spending is technology upgrades, not necessarily new capacity. And we expect that to continue over time.

Sidney Ho:

Thank you.

Brian Chin:

Hi, there. Good afternoon. Thanks for letting us ask a question. One of your peers recently stated that AI could account for 6 billion of WFE next year. I think more than double the contribution of this year. I know it's difficult to benchmark against these figures, but can you provide a reference point on how you see AI augmenting WFE spending this year, next year, or even beyond, and just kind of maybe a two-parter, but just a clarification, but advanced foundry logic spending, it's coolly dipped in calendar second half. But tying in your earlier comments, it sounds like you expect foundry logic to improve off these lower levels in calendar first half of next year. Is that correct?

Brian Chin:

Thanks. Appreciate it. Thank you.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Charles Shi from Needham & Company. Your question please.

Brice Hill:

Okay. Thanks, Charles. It's hard to -- we probably won't compare with anybody else's comments, but from our perspective, it has been growing. One of the reasons it's been growing is because ICAPS, that particular business, the mature product technologies, as we've described before, there used to be available, used facilities and available used equipment, and it's really no longer the case. The industry is growing, and without that, just new investments have to be made in wafer starts and capacity, and that's raised the overall intensity level. When we think to the other types of equipment processes, DRAM, NAND, and leading logic, we expect those to be more intensive with more steps from an equipment perspective, requiring new capabilities and new technologies. And that's actually what our R&D is engaged in. So it's, more than intuition that we expect that intensity to go up over time.

Operator:

Thank you. One moment for our next question.

Operator:

Certainly. Our next question is a follow-up question from the line of Stacy Rasgon from Bernstein Research. Your question please.

Brice Hill:

Hi, Stacy. It's Brice. Yeah, we didn't make a call on that. You kind of heard probably the components. I know probably everybody wants us to make a call, but what we're saying is, we have a very strong Q1 still in ICAPS. The dynamics in Q1, assuming things play out as we're forecasting, will be similar to Q4. You'll have a strong DRAM market. You'll have a strong ICAPS market. But we know that there have been some pushouts and there is lower utilization in ICAPS. So we're expecting that market to not be the same, as strong as it was in '23. When we flip and look at leading logic, leading logic is weak in Q4 and it's weak in Q1 also that same dynamic. And we know that new technologies will be ramping, including Gate-All-Around. So we're expecting that to, help throughout the year. Whether that's bigger or smaller than, whatever happens with ICAPS, we can't tell yet, but we'll just have to let that play out.

Brice Hill:

Yeah. I don't think you can make -- yeah, it's not easy to make a call at this point.

Brice Hill:

Thank you.

Jed Dorsheimer:

Hi, thanks, and thanks for letting me squeeze one in here. I just -- quick two parts. I just want to confirm the pushouts that you started to see in ICAPS. Do you -- is -- can you comment on the end market? Was that auto related? And then second, the investigation. I know you don't want to get into any detail or can't there, but it seems like that's also in the ICAPS. Can you confirm those two? Thanks.

Jed Dorsheimer:

Great. That's helpful. Thank you.

Michael Sullivan:

Okay. Thanks, Jed, for your question. And Brice, with that, would you like to give us your closing thoughts?

Michael Sullivan:

All right. Great. Thanks, Brice. And we would like to thank everybody for joining us today. A replay of today's call is going to be available on the IR page of our website by 5 o'clock Pacific Time. Thank you for your continued interest in Applied Materials.

Operator:

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.

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's strategy and how this is enabling us to outgrow the industry this year while also positioning us for sustained 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 datasets 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 PPACt playbook has five key elements

Michael Sullivan:

Thanks, Brice. 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 re-queue and we'll do our best to come back to you later in this session. Operator, let's please begin.

Stacy Rasgon:

Hi, guys. Thanks for taking my question. I wanted to ask about the DRAM in the quarter and in the guide. 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 is 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 ICAPS piece in China right now.

Gary Dickerson:

Stacy, it's Gary. I'd add...

Gary Dickerson:

Yes, maybe just, let me add some color and then you can ask the follow-on 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. And then, you have another question, Stacy?

Stacy Rasgon:

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

Stacy Rasgon:

Got it. Thank you so much.

Operator:

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

Brice Hill:

Okay. Thanks, C.J. 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 unserved orders in '22? We think that's about $0.5 billion to $1 billion. All of that was served in the first half of the year. So, what you're seeing from us in '23 besides that $0.5 billion to $1 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 previously booked business that we see now or going forward. And, as far as sustainability, that's one question we get regularly. The second question that we get regularly is just about ICAPS and the sustainability from China. And well, that's the most the largest country in ICAPS 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, we're not going to give a specific forecast yet for '24 or for the January quarter.

Michael Sullivan:

Yeah. Thanks, C.J.

Vivek Arya:

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?

Vivek Arya:

Okay. Thank you.

Operator:

Thank you. Our next question comes from the line of Krish Sankar of Cowen.

Gary Dickerson:

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 the stack DRAM. The great thing for Applied is that we have the broadest portfolio to enable all different types of packaging. CMP, PVD, CVD, etch and plating. So 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 we have talked about, it's a $1 billion 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're still believe that's on track. And then Gate-All-Around, the other question that you asked, we still see that as about $1 billion opportunity for 100,000 wafer starts per month. In FinFET, we had close to 50% share of that overall FinFET 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 size that around $1 billion is basically still on track. And relative to ramping Gate-All-Around, we believe that is toward the end of 2024. Yeah. And then, 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.

Krish Sankar:

Great. Thank you, Gary. Thank you.

Toshiya Hari:

Hi. Good afternoon, and thank you so much for taking the question. I had a follow-up on your ICAPS business, maybe for Brice. 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, 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 the U.S., Europe and Japan, where your customers, yes, they're strategic, but they also care about near-term profitability and returns. With some of the end markets slowing, is there fear that the non-China business within ICAPS could slow going forward? Thank you.

Michael Sullivan:

Different geos and profitability.

Brice Hill:

Good. And, Toshiya, 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, 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 whatever the current demand function is.

Brice Hill:

Yeah.

Harlan Sur:

Good afternoon. Thanks for taking my question. Team has been doing very well in process control. It's about 10% to 12% of your systems business. I think it grew above 55%, 60% faster than your overall systems business last year. Gary, you talked about strong technology inflections and benefits across the wafer equipment portfolio, but I'm assuming this is also pulling strong requirements for more and better process controls. 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 systems business this year?

Harlan Sur:

Great insights. Thank you.

Timothy Arcuri:

Thanks a lot. I had a two-part question. First of all, Brice, can you give us a sense of, 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 the part two of the question is, how do you handicap the potential that this China [DRAMs pull in] (ph)? I mean, we have Micron that's 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 $2 billion to $2.5 billion worth of extra WFE that's just in that one quarter. So, how do you handicap sort of how you run 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.

Timothy Arcuri:

Okay, Brice. Thank you so much.

Operator:

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

Gary Dickerson:

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 begin 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 tell you 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.

Joseph Moore:

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 I mean, are you still -- 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?

Gary Dickerson:

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, and we have a high confidence we're going to be able to achieve that.

Operator:

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

Brice Hill:

[Audit Starts] Hi, Brian, thanks for the question. We certainly have. When we think about the WFE 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've heard different peers talking about a high growth rate bearing between 30% and 50% for that workload and the amount of capacity. So, if you view 5% as relatively small amount, we do think that it's growing rapidly and it’ll 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 -- IoT wafer starts and WFE will also grow at an elevated rate.

Brice Hill:

That's right.

Brice Hill:

Yeah. There's still a lot of movement underneath the macro number in 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 strength in DRAM, both Q3 and Q4, our outlook is really what's offsetting that.

Brice Hill:

Thank, Brian.

Timm Schulze-Melander:

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 for 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, is 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 multiyear view, please? Thank you.

Timm Schulze-Melander:

Super helpful. Thank you.

Charles Shi:

Hey, thanks for taking my question. I want to ask, your largest customer in Taiwan talked about CapEx leveling off on a dollar basis. Wonder what's the impact that you might 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 WFE maybe in '24 by segment, meaning leading-edge, foundry logic, ICAPS, DRAM and NAND? Thank you.

Gary Dickerson:

Yes, 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 from -- for each technology node. I think that gets even better going forward.

Operator:

Yes, sir. Please standby. Our final question comes from the line of Sidney Ho of Deutsche Bank.

Gary Dickerson:

Yes. 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 in the latter part of '24. So, it's not going to be a significant driver in '24, but certainly going forward, our opportunity there is significant.

Michael Sullivan:

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

Michael Sullivan:

Okay. Great. Thanks, Brice. 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 5:00 Pacific Time today, and we'd like to thank you for your continued interest in Applied Materials.

Operator:

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.

Gary Dickerson:

Thank you, Mike. Applied Materials delivered strong results in our second fiscal quarter, with revenues in the high-end of our guidance range. Across the business our teams are executing well, successfully managing a dynamic near-term environment, making progress with our longer-term strategic initiatives, and introducing enabling new products and solutions for our customers. Despite macro headwinds, our outlook remains favorable, and we expect to outperform our markets in 2023 thanks to our balanced market exposure, our strong position at key technology inflections which is driving demand for our differentiated products, especially in metal deposition, CVD, etch, implant, thermal processing, and eBeam, and our growing service business which is increasingly subscription-based. In my prepared remarks today, I'll cover our perspective on the market both the near-term dynamics and our longer term, secular growth thesis, how Applied is positioned to outgrow the industry this year and over the longer-term, and finally, the investments we are making to create more value for our customers and productively scale the company. In 2023, challenging and evolving macro conditions are impacting the semiconductor industry both negatively and positively. Demand that is directly driven by consumer electronics is clearly weak, while demand driven by inflections in technology and strategic regional supply-chain investments remains robust. This contrast can be seen in our customers' investment levels. Weakness in PCs and smartphones is a key factor for memory customers who have significantly reduced their investments in 2023. Measured as a percentage of total wafer fab equipment, memory spending is tracking at its lowest level in more than a decade. In leading-edge foundry-logic, we also have seen customers trimming their spending plans for the year. We see these changes as timing adjustments, as these companies remain fully committed to their long-term roadmaps to win the race for technology leadership in this market. Push-outs in leading-edge investments are being offset by increased strength from customers who serve the IoT, Communications, Automotive, Power, and Sensors markets. Over the past quarter, we've revised our 2023 ICAPS forecast upwards with demand being driven by two interconnected factors. First, ICAPS customers are delivering critically enabling technology for large global inflections that will play out over the next decade. These include clean energy, electric vehicles, and industrial automation. These inflections are driving significant innovation. At Applied, we have released more than 20 major new ICAPS products, since we formed our ICAPS group four years ago. Second, there is a clear trend towards regionalization of supply chains as countries seek to build resilient local capacity to support industry verticals that are central to their economies. We currently see around $400 billion of government incentives being deployed globally over the next five years, a significant portion of which will be directed towards ICAPS markets. While China currently leads in ICAPS spending, we see other countries increasing their investments at a higher rate. In fact, the fastest growing regions for our ICAPS business in 2023 are the U.S., Europe, and Japan. Looking beyond 2023, our long-term growth thesis for the industry remains unchanged. Semiconductors are the foundation of the digital economy, which is driving demand and puts the industry on a path to become a $1 trillion market by the end of the decade. At the same time, chip technology complexity is increasing significantly as traditional 2D scaling slows and the industry transitions to a new PPACt playbook to drive improved performance, power, area-cost and time-to-market. Increasing complexity means that wafer fab equipment can grow at a higher rate than semiconductor revenues and then, within equipment spending, major technology inflections are increasingly enabled by materials engineering, expanding the available market for Applied Materials. I'll highlight a few examples of how major materials engineering inflections contribute to our growth. First, Gate-All-Around transistors are a great example of a new 3D device structure that is enabled by materials engineering in areas where Applied has leadership products including epi and selective removal. In addition, we have developed differentiated conductor etch solutions specifically for Gate-All-Around applications. We expect shipments of our Gate-All-Around products to begin ramping in 2024 as leading customers move into high volume production. For Applied, this inflection creates an incremental opportunity of around $1 billion for every 100,000 wafer starts of capacity, and we expect to gain 5 points of transistor market share in the overall transition from FinFET to Gate-All-Around. Second, in wiring, we are seeing significant innovation in new materials. Adoption of new low-resistance metals for contact and interconnect enabled us to grow our PVD revenues at 3x the rate of wafer fab equipment in 2022. High-speed data connectivity remains a key focus for all of our customers fueling further growth at future nodes. Third, Applied technology is providing our customers with new tools to drive their scaling roadmap. Recently, we launched Sculpta, a breakthrough pattern-shaping technology which provides a simpler, faster, and a more cost-effective alternative to EUV double patterning. It decreases customers' capital cost by about $250 million for each layer of adoption per 100,000 wafer starts. We are already shipping repeat systems and expect this business to grow to multiple hundreds of millions of dollars of annual revenue in the next several years. The final example is advanced packaging. While we are still in the early phases of industry adoption, this inflection is already a great growth area for us. Our packaging revenue has doubled in the past three years to over $1 billion. We have strong leadership positions in key enabling technologies including Through-Silicon-Via, micro-bumping and hybrid bonding. We believe we can double revenues again in the next few years with further adoption of 3D multi-die packaging. The increasingly complex solutions our customers are deploying to move from one technology node to the next, are also a key growth driver for our service business. Customers are seeing value in our solutions to support their R&D, rapidly transfer and ramp new technologies, and drive device performance, yield, output and cost in high-volume manufacturing. Our service business is on track to grow in 2023 even with lower utilization rates in certain nodes and after absorbing the impact of U.S. export control rules. 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%. Given our confidence in the trajectory of the industry and Applied Materials, we are taking actions and making associated investments to support our growth, accelerate our customers roadmaps and drive productivity and efficiency as the industry scales. On May 22, we will formally announce a major strategic investment in a new high-velocity innovation platform focused on next-generation equipment and process technologies. As innovation in the industry is increasingly driven by new materials, structures and devices, our goal is to change the way we collaborate with customers, universities, suppliers and other partners to bring new manufacturing technologies to market faster and optimize the overall economic returns. We'll look forward to sharing more details next week. Before I hand over to Brice, let me quickly summarize. While 2023 is a challenging year for the economy and areas of the semiconductor market, Applied's business performance remains resilient thanks to our broad exposure to secular trends, strong product positions at key technology inflections, and our growing service business. Our longer-term outlook is very positive as semiconductors become a larger and more strategically important market globally, and industry trends create outsized opportunities for Applied. To position ourselves for the opportunities ahead, we are making strategic investments in R&D and infrastructure while driving improvements in productivity and speed across the organization. Now Brice, it's over to you.

Michael Sullivan:

Thanks, Brice. 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 requeue and we'll do our best to come back to you later in the session. Operator, let's please begin.

Christopher Muse:

Yes. Good afternoon. Thank you for taking the question. So I was hoping you could speak to the sustainability of spending for lagging edge in China. There are many players that I think we're all aware of, like SMIC, Huahong, Huali et cetera. But it sure sounds like there are 20, 30 emerging new players that are in their first three rounds of DC funding. And the question we get often is, how sustainable is that spending beyond 2023? So we'd love to hear the visibility that you have to their build plans and how you're thinking about that spending beyond this year? Thank you.

Gary Dickerson:

No. Thank you.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question, please.

Brice Hill:

Yes. Thanks, Stacy. It is the largest country in the ICAPS space, but I think there are three other countries that are growing faster. And it's not because it's a lot small numbers. They're pretty significant. So if you think of North America, China, Europe, people will recognize a lot of the investments that are being made in the mature technologies in those spaces. So China is not the fastest grower, but they're the largest country. And when we look across the world and we look at all those investments, there are government stimulus programs that help encourage the customers to make those investments. But we believe there's real demand behind that. When we look at utilization in the ICAPS space, we see utilization to be in a healthy range. So this looks like an ongoing trend when we think forward. If we look back to 2022, we had 40 plus percent growth rate in ICAPS. It's only accelerated this year. And our view from all the accounts is that it won't grow at the same rate. It won't accelerate at the same rate, but that demand is stable. We expect over the coming years that that market will stay about the same size.

Michael Sullivan:

Thank you, Stacy.

Vivek Arya:

Thank you for the question. Maybe kind of two very related ones. What's your backlog in Semi Systems? And where does it get to exiting the year? And then a number of your peers have suggested that the second half of the calendar year, so essentially your Q4 and Q1 could be better than the first half. Is that similar to the trends Applied is seeing? Or what would create that difference between you and your peer group?

Michael Sullivan:

Thank you, Vivek.

Krish Sankar:

Hi. Thanks for taking the question. I had a big picture, and a quick clarification for Brice too. One is for Gary. When you look at all these leading-edge spending and all the regionalization, it seems like, is it all tied to really CHIPS Act funding or other factors in play like a permitting orders might be that's causing some relative delay in those leading-edge investments? And Brice, did you say anything about some of the China export control recovery that some of your peers have spoken about in the back half? Thank you.

Brice Hill:

Thanks, Gary. And Krish, on the China export controls, we see the same thing as our peers do. We'll be able to ship to some factories in the second half that were clarified recently.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Atif Malik from Citi. Your question, please.

Gary Dickerson:

Yes. Thanks for the question. So I would say Gate All Around, there's both higher process complexity of existing steps plus addition of new steps. And we've said that's again a $1 billion opportunity for Applied, and we're really in a great position because the steps that are growing, the increased complexity is in areas where we have very, very strong products and technology. And again, we're deeply engaged with every single one of those companies. So in any of those areas for deposition, selective removal, we have very good visibility relative to overall competitive positions and not just in the first generation of Gate All Around, but subsequent generations. And so again, I think we still see the same thing relative to the size of the market and the share gains really are relative to FinFET. So what customers were spending for the – we're spending as a percentage of total transistor from FinFET to Gate All Around. That's where the 5 points of share comes from. And then relative to the road maps going forward, what I would say is that we definitely see an increasing relative contribution in materials engineering. So if you look at certainly the transistor innovation, wiring resistance is one of the biggest issues in the whole industry. That's an area that's growing very fast. I talked about the MVP growth earlier. So again, that wiring is a really great opportunity for us. Backside power distribution will be coming. There you can get up to 30% area savings without changing the feature size and also improvements in power and performance. In the future, you'll see people stacking nanosheets for another transistor technology in future nodes. So again, more and more of those dollars are moving to materials engineering as we go forward.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Mark Lipacis from Jefferies. Your question, please.

Gary Dickerson:

So Mark, just – thanks for the question, but I just want to understand, are you talking about within ICAPS or are you talking beyond ICAPS.

Gary Dickerson:

Okay. Yes. Thanks, Mark. I would say two things. One, as customers are going forward, I mentioned this on the previous question. Materials engineering, I think if you look at the percentage of spending going forward, just really tremendous – everybody knows that 2D Moore's Law scaling is challenged. And so the innovations in – transistor innovations in wiring, innovations and memory technologies, all of those areas – and I mentioned the increase in the number of steps and the increase in complexity from one technology node to the next, we're in a really great position, again, relative to what's going to drive our customers' road maps in the future. And there's tremendous innovations that will bring there. Sculpta was one example of another way that you can achieve area scaling at a much, much lower cost with this directional etch technology and there's many material modification steps, double-digit numbers going from one technology node to the next that are growing, those are areas where we have extremely high share. And we're innovating to drive performance and power and cost for customers. So that would be one area I would say. The other one that I'm pretty excited about longer term is packaging and all the innovation is going to happen going from system-on-chip to system and package. I think that's going to be a tremendous inflection. That's about a $1 billion business for us today. I mentioned earlier that we could see that doubling in the next few years. I think that – and there's – we have a very strong position in the served markets that we have today. We have pretty high share. And there are other areas we're focused on. We mentioned hybrid bonding as one, but there are others that we're focused on that will create really big opportunities. So that would be the other area. I think that, that whole movement to chiplets and heterogeneous integration.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question, please.

Brice Hill:

Yes. Hi, Toshiya, it's Brice. I'll just say a couple of things, and Gary can add on that. So on the memory side, we do think it's at sort of historical lows. We've thought about our long-term balance of memory and logic over time. We do think the market from an equipment perspective should be about one-third memory and two-thirds logic and that two-thirds would be split between relatively evenly between ICAPS and leading-edge. So on the memory, we do think it's at a low. However, in the quarter, we monitor pricing, we monitor utilization, we monitor inventories. Those are still moving in the wrong direction in this past quarter. So it hasn't quite turned yet, but we do think with the ICAPS business growing and with an outlook, long-term outlook strong for leading-edge, we do think memory will have to turn around. It's hard to call the exact moment, but we expect that to happen. And then Korea, I think it's just good shipments in the quarter. I don't think it portends anything unique from a trend perspective. We do still see weakness in the market.

Michael Sullivan:

Great. Thank you, Toshiya.

Harlan Sur:

Yes. Good afternoon. Thanks for taking my question. Typically, doing periods of spending weakness, you start off with the first couple of quarters, driving a lot of customer push-outs rescheduling, cancellation activity, then that activity stabilizes and your shipments soon follow that stable trend. I know last earnings, you were still seeing quite a bit of rescheduling and push-out activity on the backlog. Has this activity stabilized?

Michael Sullivan:

Thanks, Harlan.

Timothy Arcuri:

Thanks a lot. Hi. I just kind of wanted to go back to this China lagging-edge topic. And you guys do such good demand modeling. And I'm kind of wondering what you think the underlying demand that's kind of backing all this. The kind of easy conclusion is that this just all kind of coincided with the leading-edge bands, and so they're just pivoting to pouring money into a lagging-edge. So when you think about the demand backing this, was this just demand that like wasn't being met by the U.S. and the European chip guys? I asked because EV is not new and penetration is actually pretty high in China already, and it haven't been great anyway. So that's the first part of the question. And then also, is that really like this year WFE thing? Or is it all more going to be part of next year's WFE? Thanks.

Gary Dickerson:

Yes, Tim, this is Gary. One other thing I would say is – and we do, as you said, a lot of modeling of each one of those vertical markets within ICAPS. We look at fab utilization, wafer starts, all of those things. The one other thing, I would say is that we look at good chips out for each one of these different factories. And so when you look at yield as another factor that's – when we look at the overall market, it's roughly in line with what we see relative to our assumptions of the growth rates in those different segments. But again, I would look at also the good chips out.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Joe Quatrochi from Wells Fargo. Your question, please.

Brice Hill:

Yes, I can start, Joe. The capital intensity, since it's mostly ICAPS, what we see in ICAPS is the capital intensity is sort of like leading logic was five or eight years ago. So that whole discussion about there being a lack of reuse, especially in China, those are mostly greenfield sites. They are new equipment sets. So the capital intensity is fairly high. And we think that's consistent by the way with most of the ICAPS additions going on across the globe. And that's a major factor as to why overall intensity as we measure intense WFE intensity to semiconductors is going up over time as the fact that ICAPS is so much higher.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Sidney Ho from Deutsche Bank. Your question, please.

Gary Dickerson:

Yes. Thanks for the question. So AGS, if you look at the way that business breaks out – about 85% is spares and service. And a significant percentage over 60% is long-term agreements, subscription types of agreements with a length of 2.6 years. We're still seeing very, very high renewal rates. So one thing that helps us in this type of market environment is a lot of that business is still based on those longer-term agreements. So that's helping giving us a level of stability in this type of a market. And then the other part of AGS, kind of mid-teens is the 200-millimeter business, that's really focused on ICAPS. And that business is very robust. So I would say that our business, again, relative to the agreements, pretty stable, continuing to grow, strong renewal rates. And then the 200-millimeter business is also very stable and growing in 2023. I don't know, Brice, if you want to add anything else?

Gary Dickerson:

Yes. And I guess the other thing I would add is that we – certainly, we're growing this year. And we still we're still on track to this model that we had talked about a couple of years ago with low double-digit growth for AGS longer term.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Brian Chin from Stifel. Your question, please.

Brice Hill:

Yes. Thanks, Brian. Without getting specific about trends quarter-over-quarter, it has been gradually increasing. So – if we look back to, I think, Q3 of last year, Q3, Q4, Q1, Q2, I think we have an increased trend across each of those quarters. And so we're not going to guide the second half, but I don't think there's I don't think there was a front-loaded phenomenon in ICAPS.

Brian Chin:

Okay, great. Thank you.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Quinn Bolton from Needham. Your question, please.

Brice Hill:

Hi, Quinn, since it's a small number of customers, we're not going to be specific about the number, but we definitely see the same situation. We have factories that we will be able to ship to in the second half. And at least for Q3, that's in our guide.

Brice Hill:

Yes, it is larger. The growth has been significant, both last year and this year, as we talked about, and we think it's stable. And then the only thing we've really guided is long-term, we think foundry-logic is a little bit weakened this year. So we think that gets in more of a balance in the long-term on the logic side of WFE. So long-term, we would say it's relatively equal. This year, ICAPS is the largest market.

Brice Hill:

Thanks, Quinn.

Blayne Curtis:

Hey, thanks for letting me ask a question. Maybe just a follow-up on that last one. I was curious at the leading-edge. If you could just walk us through the extent of the pushouts and really just trying to figure out, you're still seeing quite low utilizations at the leading-edge. Some of the markets may recover in the second half. But I'm just kind of curious your visibility into when that leading-edge segment may rebound?

Gary Dickerson:

Yes, Blaine, I would say that a couple of things. One, the 3-nanometer, we still – everything that we see – that's going to be an important technology node. And so certainly, next year, we think that's going to be a meaningful contribution to revenue for Applied. And then as Brice said, for Gate-All-Around, we'll see the initial ramping of that spending in a meaningful way also in 2024.

Brice Hill:

Thanks, Blayne.

Vijay Rakesh:

Yes. Hi, Gary and Brice. Just a quick question on the government funding. I know you mentioned $400 billion. How much do you expect that to add to global WFE if you look at 2023 or second half, 2023 or 2024?

Vijay Rakesh:

Got it. And then on the China side, would it be fair to assume that next year ICAPS continue to hold up, but might be memory spending could be down again year-on-year for China?

Vijay Rakesh:

Got it. Thank you.

Mehdi Hosseini:

Thanks for giving me a chance. Two questions. For Brice, I'm just trying to better think about earnings given opportunities with ICAPS and other areas. And in that context, should I assume that like if I were to use FY2022, WFE was close to $100 billion. And you guys did almost 793quarter in earnings. In looking forward, can you hit those kind of revenue targets without having WFE well above 90 billion? And then for Gary, I understand the government incentives so that is very good for the equipment industry. But in the longer term, don't you think that these subsidies could make the cycles actually more volatile? And perhaps I could reference what happened the past few years, demand got pulled in? And then we had some correction in SEMICON? And I just want to understand how you think about the subsidies in the context of form of the cycle or shape of the cycles and volatilities?

Gary Dickerson:

Yes. I think that Brice talked about 3% to 7% Mehdi incremental spending over the next several years. Certainly, there's a tremendous amount of competition between different geographies. But customers, we think, will invest based on where they see the demand – so the timing of those investments, I don't think they're going to be significantly different than the way they thought about it in the past. The one thing I would say that should be a benefit is that as these companies move into new regions and they're starting up new factories, the initial efficiency of those factories is going to be lower. For sure, as they're moving into the new locations, and that's also incremental help for our service business because they don't have all the trained personnel and all of the infrastructure in place in those new locations. So anyway, that's the way we think about it.

Operator:

Certainly then our final question for today is a follow-up question from the line of Stacy Rasgon from Bernstein Research. Your question, please.

Gary Dickerson:

Yes. Stacy, thanks for the question. So what I would say is that one of the most important factors for any company is the time to innovation, time to commercialization and innovation success rate. So we've been – and as you know, it takes many, many years from concept to high-volume manufacturing. And that's somewhat of a serial process. And so working with some of our largest customers, we think there's opportunities to drive some of those steps in parallel and significantly accelerate time to innovation. So that's what we're going to be talking about next week. It's really exciting. Again, I definitely do think there's opportunities there. And I do believe that materials inflections, new structures, some of the things I've talked about that's going to be a bigger and bigger percentage of gains. Some of our big customers talk about design technology co-optimization, becoming a much bigger part of their roadmap for energy-efficient computing. So I think, Stacy, we'll cover more of this next week, but we have been working with our largest customers on some of these concepts. And I definitely think there's ways to accelerate innovation. And as you know, if you think about how much money companies spend on each R&D dollars on each technology node, there's a tremendous opportunity for economic optimization, both on cost and then value creation. Anyway, we'll cover more of that next week. And then we will also cover this at the SEMICON event that Mike talked about earlier.

Gary Dickerson:

I'd say it's more than that. The concepts, certainly, the scale of what we're talking about is pretty significantly bigger than what we're doing today. And the concept of how we're going to work through the entire ecosystem, I think, are pretty exciting.

Brice Hill:

Thank you, Mike. My takeaway today is while there are areas of weakness in our markets this year, Applied is making good operating progress and outperforming the markets, thanks to our unique breadth and diversity. We're confident about the industry's long-term growth opportunity, and we're in a great position to make significant investments in our future and increase cash returns to shareholders. On Monday, we look forward to detailing the strategic investment we're making to collaborate closely and productively with our customers that Gary just described. Gary will see many of you at the Bernstein Conference in New York on June 1, and I hope to see you at the BofA conference in San Francisco, June 7. Mike, please go ahead and close the call.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

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.

Gary Dickerson:

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. Brice will provide more details about this when he shares our guidance. In my prepared remarks, I will cover three main topics

Michael Sullivan:

Thanks, Brice. 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 requeue and we’ll do our best to come back to you later in the session. Operator, let’s please begin.

C.J. Muse:

I guess I was hoping to get a little more color on the backlog side of things. 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.

Gary Dickerson:

Yes. C.J., one other thing I would add is that the largest part of our backlog is with our leadership products, especially MDP and implants. So again, that gives us strength as we go forward.

Operator:

And our next question coming from the line of Stacy Rasgon with Bernstein.

Brice Hill:

Hi Stacy. Thanks for the question. 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 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 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 are enough to have somebody install equipment and 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, 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.

Operator:

And our next question coming from the line of Vivek Arya with Bank of America.

Brice Hill:

Thanks for the question, Vivek. We’re fairly confident that we’re current 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 it’s turning yet, at least from our perspective, but we’re confident we’re current with the customers, Vivek.

Krish Sankar:

Brice, maybe just one for you. I notice you did not quantify WFE for this year, and I understand you’re probably better than the industry because of the ICAPS strength. But it seems like the range is anywhere from 70 to 75 and some people talk about $80 billion in WFE this year. But just hypothetically speaking, if WFE is down 20 or so more percent since you’re going to outperform, is it fair to assume your revenue growth to be down more like low to mid-teens? And kind of how to think about the earnings power in that scenario given that you’re trying to be disciplined on OpEx? Thanks.

Operator:

Next question coming from the line of Atif Malik with Citi.

Brice Hill:

Okay. Thanks, Atif. Yes. I think that we’ve characterized foundry logic as two-thirds of the business last year. Memory is 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 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.

Operator:

And our next question coming from the line of Toshiya Hari with Goldman Sachs.

Gary Dickerson:

Okay. Let me cover the -- first question is on the doubling of ICAPS. That’s specifically implant in ‘23 versus ‘22. And part of was just the supply chain challenges that we had in ‘22 that limited our output. So, that’s what’s happening there in -- with ICAP. And Brice, do you want to cover the DRAM NAND question?

Operator:

And our next question coming from the line of Timothy Arcuri from UBS.

Brice Hill:

Yes. I think -- thanks, Tim, for the question. So 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 ICAPS side. So from a mix perspective, I think that’s where a lot of strength in the orders is coming from. And Gary highlighted the growth of implant. So certainly not -- the growth of total ICAPS 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. So, that gives you some of the perspective. Most of this is in the semi business. Some of it’s in 200-millimeter, which comes in the AGS space. And what I would say is, yes, it does tie back to the long lead times in 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 -- 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.

Brice Hill:

I’m looking at the data, Tim, to see if I can see this. Can you see it? Yes, sir.

Gary Dickerson:

Yes, maybe one thing I would add that just kind of gets back to a lot of the questions. We do have strength in many of these 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-nanometer. So, those areas are also helping us in relative performance.

Harlan Sur:

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 road maps. Typically in downturns, we wouldn’t see your customers pulling back on tech migrations, capacity add, 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 road maps.

Gary Dickerson:

Yes. 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 ‘24, we would share that perspective. What I would say is that we are -- we also believe that foundry logic will remain strong going forward. 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 Europe, Japan, a number of different areas, potentially in India. That could add a few billion dollars per year in additional investment. And again, the profile of higher foundry logic versus memory, we think that’s going to sustain for a number of years going into the future.

Joe Quatrochi:

I wanted to ask about the backlog fulfillment 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 slowing from your customers. I guess, how do we split that out in terms of understanding what’s driving backlog there?

Joe Quatrochi:

Yes. 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?

Operator:

Our next question coming from the line of Sidney Ho with Deutsche Bank.

Brice Hill:

Okay. I’ll start on that one, on the leading-edge. So I think it’s pretty straightforward. The largest leading-edge customers 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 pushouts or cancellations of some tools related to those customers. And I think it’s pretty straightforward. They have lower utilization and they have the ability to reuse some of that equipment into their next ramp. And then, I don’t think we typically comment on the timing of the other nodes. But Gary, do you want to make a comment about 3-nanometer?

Operator:

And our next question coming from the line of Quinn Bolton from Needham.

Brice Hill:

Yes. Thanks, Quinn. The strength in ICAPS is broad-based. So, it is growing worldwide, but China is the largest country, and 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. That’s where most of that investment is.

Operator:

And our next question coming from the line of Mehdi Hosseini with Susquehanna.

Brice Hill:

Yes. Thanks, Mehdi. I’ll take the -- 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 exactly all in Q3, but we think we’ll get it most in Q3 based on our current assumptions. And then, 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.

Mehdi Hosseini:

Yes, I’m just trying to understand how big is ion implant within ICAPS.

Operator:

And our next question coming from the line of Brian Chin with Stifel.

Brice Hill:

Yes. 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, we’re seeing significant strength accelerating demand from our ICAPS customers that’s filling in blanks that we get on the memory or leading logic side. And so to the extent that that -- 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 is fair. And just going back to those end markets, we do think it’s sustainable. We don’t think the strength 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 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 -- larger companies in the ICAPS space talking about these investments. So I think you’ll see it pretty much across the globe.

Michael Sullivan:

Thank you. And operator, we have time for two more questions, please.

Blayne Curtis:

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 has 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. Can you just clarify how much it has? And just walk us through kind of last couple of months in leading-edge foundry.

Operator:

And our next question coming from the line of Vijay Rakesh with Mizuho Group.

Brice Hill:

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, it depends on how things go. The macroeconomic factors are also important if there’s -- 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 signals in the market, and we don’t think there’s impending changes. It will just depend on which way the underlying demand goes.

Brice Hill:

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 mostly an ICAPS businesses at this point, and we’re expecting strong growth there. So, I won’t call a trough, but if you ask, are the effects of the trade rules, have we absorbed those effects, I think the answer is yes.

Brice Hill:

Thanks, Mike. Absolutely. So today, we emphasized 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.

Operator:

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Operator:

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’d now turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.

Gary Dickerson :

Thank you, Mike. Applied Materials delivered a strong finish to our fiscal year with record quarterly performance. Throughout 2022, the company has demonstrated solid execution while navigating COVID-related restrictions, supply chain shortages, and a challenging geopolitical and macroeconomic environment. I would like to recognize the hard work and commitment of our global team and our suppliers who are doing everything possible to meet our customers' needs. As this is our year-end call, I'll begin my prepared remarks with a quick review of our performance and progress over the past 12 months. I'll then give our latest outlook for 2023 before describing our longer-term growth thesis for the industry and Applied. After that, Brice will provide more color on our financial performance and key areas of operational focus. Like many others in the technology sector, our performance and priorities in 2022 have been shaped by an unprecedented set of challenges. Our top priority has been mitigating supply chain constraints that prevented us from fully meeting customer demand. In Q4, we made incremental progress, and we expect to continue closing supply gaps over the next few quarters. As well as finding creative short-term solutions, our team has been addressing root causes and building a more resilient, scalable supply chain and stronger strategic relationships with our suppliers. In addition, we are strengthening our own manufacturing, logistics and supply chain management. While I'm pleased with the recent improvements in supply chain performance, we are still supply chain limited across a number of key product lines and our backlog grew in Q4. The biggest supply constraints are in our metal deposition business, where customer demand is very strong. This is our largest business unit and where we have highly differentiated solutions for advanced foundry/logic and DRAM. The market for these products, which enable next-generation wiring, is expanding considerably. In addition to supply shortages, we're also navigating a difficult geopolitical environment as reflected in the new export control regulations enacted by the U.S. government on October 7. These new rules are complex and cover a broad range of semiconductor technology that includes wafer fabrication equipment and related parts and services. We have taken all the necessary actions to comply with these new rules, including suspending shipments and support where required. We estimate that the unmitigated impact to our fiscal 2023 revenues could be up to $2.5 billion. We believe the actual impact can be reduced to $1.5 billion to $2 billion. This will depend in part on how quickly the government provides licenses and approvals as well as how impacted companies refocus their investments. We are also mindful of the macroeconomic headwinds, including inflation and softening consumer demand. To offset the inflationary cost increases we are facing, we are driving multiple initiatives that include reengineering our products and implementing price adjustments. While it's too early to forecast 2023 with any precision, I can describe what we're currently seeing in the market and hearing from our customers. Starting with memory, spending is expected to be down year-on-year as weakness in consumer electronics and PCs prompts some customers to defer capacity additions. In leading-edge foundry/logic, demand looks strong, with customers racing for leadership and driving major technology inflections that determine their relative competitive positions. In ICAPS, chips for the IoT, communications, auto, power and sensor markets, demand is mixed. Consumer-driven markets are clearly softer, while the automotive, industrial and power markets remain robust. Those investments are underpinned by large inflections, including the transition to electric vehicles, accelerated adoption of industrial automation and growing demand for renewable energy solutions, especially in Europe. While all of this adds up to an expected pullback in overall wafer fab equipment spending next year, we believe that Applied's business will be more resilient than the underlying market for three key reasons. First, we have a significant backlog, the highest in our history, measured on both an absolute and percentage of revenue basis; second, demand for some of our most differentiated product lines where we have uniquely enabling technology remains much higher than our capacity to fulfill that demand; and third, our service business is positioned for steady growth with an increasingly large portion of this business being converted to subscriptions. Over the past 12 months, our installed base of systems grew 8% and the number of tools under comprehensive long-term service contracts grew 16%. The renewal rate for these agreements is well over 90%, which demonstrates the value customers see in our subscription services. Looking further ahead, our long-term growth thesis for the industry and Applied Materials has not changed. Semiconductors are the foundation of digital transformation that will touch almost every sector of the economy over the coming years. This puts the semiconductor industry on a path to a $1 trillion market by the end of the decade. And while every year will not be an up year, the overall trajectory is clear. We also like where Applied Materials plays within the ecosystem. As technology complexity is increasing, we expect equipment intensity to remain at today's levels or rise further. This means wafer fab equipment is likely to grow faster than the overall semiconductor market. Within equipment spending, major technology inflections are enabled by materials engineering, shifting more dollars to Applied's available markets over time. We think about the industry's future road map in terms of power, performance, area cost and time to market. The PPACt playbook has five pillars

Michael Sullivan:

Thanks, Brice. To help us reach as many people as we can, please ask just 1 question on today's call. If you have another question, please requeue and we'll do our best to come back to you later in the session. Operator, let's please begin.

C.J. Muse:

Yes. I was hoping to clarify one thing first on China. And really, the question is, what changed between October 12 with your press release and then October 30, where it looks like there really wasn't much of an impact at all? And then my -- I guess, real question is, as you think about calendar '23 WFE, it sounds like companies are providing kind of a top-down view that things for WFE are -- look weak and declining. However, every company bottoms up based on deferred revenues and backlogs are much more optimistic on the outlook. So can you kind of talk through the moving parts there? And what kind of range or outcome you see today for year-over-year silicon declines in calendar '23?

Gary Dickerson:

Yes. C.J., this is Gary. As Brice said, the -- we can certainly give a perspective on our business. We're not going to guide on overall WFE for '23. But we're in a very strong position. If you look at the kind of profile of the business, it's more weighted towards foundry/logic versus memory. And we have some very strong products where we have significant backlog, and we're still working to close the supply-demand gaps in those areas. So from Applied's standpoint, as you know, it's all about the race for power and performance for all of our customers, and we're really well positioned with leading products and those big inflections. And again, our #1 focus is on closing the supply chain gaps.

Stacy Rasgon:

I wanted to ask you about the mitigated versus unmitigated impact from China. So you gave the numbers, $2.5 billion, and hoping to bring that down to like $1.5 billion. But I gathered a big element of that was getting licenses. Where do you expect those licenses to be gotten? Is that only to the multinational? Do you guys expect licenses to be given to some of the Chinese folks? I mean, how -- how could that happen? What is the mechanism by which you come in at the unmitigated number versus the -- coming to the mitigated number versus the unmitigated number?

Stacy Rasgon :

Does that include multinationals, too?

Stacy Rasgon :

I'm sorry. Does that include multinationals, too? Or is that just the local Chinese guys…?

Stacy Rasgon :

So just local semis, okay.

Stacy Rasgon :

What would that mean though? Would that suck up like supply that would have ordinarily gotten built by somebody else though? Because otherwise, you're just adding like lagging-edge supply into a vacuum, essentially. How do we think about like the second order effects here?

Stacy Rasgon :

Got it. And I guess just one last one. Right now, I guess, you're running at the unmitigated level. When do you think it’d be at the mitigated level? Like, how likely do you think it will be that you end up at the mitigated level at some point?

Operator:

And our next question comes from the line of Vivek Arya with Bank of America.

Brice Hill :

Okay. Thanks, Vivek. So we're not giving a guide for Q2. We are highlighting the record backlog and the fact that we're constrained and the fact that in several equipment lines, we're behind on customer orders. So we're going to try to increase output. And I'd say that comment is true for both Q1 and Q2. So that's as much shaping as we're providing for Q2. On the memory side, just to kind of click back and think about the overall demand environment, we positioned last quarter that we had a significant amount more demand than we have the ability to supply for '23. What did happen during the course of this quarter is there is a significant amount of pushouts and reductions in that demand. Now you can see the end result. We still had solid bookings in Q4. We still -- we created a record backlog that's now disclosed. So I would say that some of those pushouts and some of those reductions were definitely in the memory space. And I wouldn't -- I'm not going to characterize what percentage it was, but I would say that that's the most affected area in the business in terms of pushouts and reductions for '23.

Brice Hill :

Yes. Sorry, I can't quantify exactly what it is. I'll just say that, that is what -- it's biased, the reductions were biased in that area.

Krish Sankar :

Brice or Gary, I just wanted to find out, you mentioned how lagging edge is still pretty strong, especially auto analog in China. And I wonder like do you ever think that auto analog could be the next to drop? But in other words, if memory is going to be down next year, but lagging edge holds up, what is the risk that lagging edge rolls over in 2024 and you have two years of lackluster WFE?

Gary Dickerson :

Yes. Krish, the other thing I would add is that we're -- we've made a change in our organization more than three years ago, forming our ICAPS group. And we have just very, very deep engagements with our customers, both on a technical and a support side of our business. And we have the broadest set of innovative products for ICAPS. If I look at where we're at today, those are some of the areas that -- where we have a significant backlog. MDP and implant in FY '23 are very, very strong for us. Those are areas where we have significant demand from customers. And ICAPS is similar in that to the -- all of the -- the rest of our business. This is always a race for all of these customers relative to power, performance and cost. And ICAPS is really materials enabled. We have a really strong team there. We have a great pipeline of products I will guarantee you every year we’ll not be up. That's for sure. We're not going to guide '24, but we are in a very good position in ICAPS relative to enabling technology for future inflections.

Mark Lipacis :

Gary, maybe for you. It seems like the consensus for WFE this year is somewhere in the $65 billion to $75 billion range. And I'm not asking you to give a guidance or an outlook for next year. But I'm wondering in the scenario where that is proven to be too cautious of an outlook for next year. Based on the conversations that you have with your customers, would you say that, that would be because lead times are long and customers just -- they don't want to cancel orders or there's new secular drivers, like bigger chips or advanced packaging or trailing node, like some of the things you've talked about or just competition at the leading edge is driving people to invest more, enabled by subsidies? What are your customers suggesting to you or what -- I mean, your backlog grew even as memory came down, like what do you think are the biggest drivers into next year, regardless of whatever the end number is? And what could surprise on the upside?

Brice Hill :

No. I would just comment that the -- that we highlighted that we still have to catch up to customer demand in several areas. So that adds some momentum into '23. And then the other piece is just it seems clear that productivity to drive productivity in the world, a lot of these things, like in the energy market, data center market, et cetera, still have resilient demand.

Atif Malik :

Gary, I have a question on long-term impact of China restrictions to both domestic and multinational spend. If I look at China spending over the last five years, it has outgrown WFE by 3x to 4x. What replaces this in terms of pending capital intensity and above-average profitability for you?

Operator:

And our next question comes from the line of Toshi Hari with Goldman Sachs.

Brice Hill :

Thanks, Toshi. Thank you. Yes, a couple of drivers here. You'll see in our outlook for Q1 that we have a down quarter for AGS, which is unusual. And the reason is we've got a full quarter impact, approximately $100 million for the reduction of the China customers that we won't be able to serve for the rest of the year. So that's definitely a headwind in Q1. But you hit the nail on the head with respect to the dynamics thereafter. Every time we ship a tool, it grows our installed base of equipment. We grew the installed base 8% last year. Beyond -- or after that, our ability to provide services and put those services on subscription agreements, we typically outgrow the installed base and we did last year. So that is the driver for the reason the services business is sticky. We have more equipment to serve. The equipment becomes more intensive in terms of service needs. And over time, that grows the business. Now to your point, a portion of the business is transactional. We do see lower utilization this quarter and next quarter. What we would point to -- what we have pointed to is, even in '19, where there was lower utilization, we still grew the services business. And besides the headwind of China that I pointed out, we expect that to be the dynamic this year and going forward.

Operator:

And our next question comes from the line of Harlan Sur with JPMorgan.

Brice Hill :

Yes. Harlan, it's -- thank you. So one thing I would call out is we did have lower gross margins and operating margins in Q4, and that's largely due to looking at the specific inventory we had for China customers that will have to either reposition or move somewhere else or scrap. But to your point on operating profit, one of the plans the business has there is to improve the amount of repair that we do for products that we bring back to customers. And so that helps us lower the cost and cost of goods sold with customers. And that's one of the ways that we improve our gross margins and the ultimate profit of that business. The other is just increased efficiency. As we demonstrate more and more capability with the customers, and we provide more services with the same spending profile, then that helps us maintain the profitability. Those are the two key drivers.

Joe Quatrochi :

I wanted to ask about the gross margin impact from the China restriction. Can you talk about what's driving that 1 percentage point impact? And then how do we think about what you could potentially recapture in the mitigated scenario that you outlined?

Operator:

And our next question comes from the line of Timothy Arcuri with UBS Securities.

Brice Hill :

Tim, I'll jump in for a second here, just because I have the picture of the graph in my mind that we use. So -- we do think intensity is gradually increasing, and it's because of the reasons Gary described. A lot of steps in the process are becoming more complex and require more equipment, and we see that. And then when we think about China and ICAPS specifically, in the past, there's been a lot of reuse of existing fabs and existing process tools. And that allowed for a low intensity. And that's not been what's happening in the past few years and with recent additions. We've talked about the number of factory projects that we see. So as capacity gets added, even in the ICAPS space, what you see is an intensity level that's more like what we were experiencing on the leading-edge just a few years ago. And that's also serving to raise the overall average of intensity. So we're pretty confident that intensity will continue to rise.

Operator:

And our next question comes from the line of Joseph Moore with Morgan Stanley.

Gary Dickerson:

Yes, Joe, this is Gary. Thanks for the question. The multinationals are not impacted today. Relative to their strategies, we'd really rather have them comment on that. So again, just today, they're not impacted. How they position their businesses geographically, that's really up to them.

Sidney Ho:

I want to follow up on the earlier question on the longer-term WFE. As you think about the growth of WFE in the next, call it, three to five years, how do you think about the mix between the different type of tools, that how that could change? Meaning, deposition and edge versus litho versus process control, as you talk to your customers about the roadmap and technology inflections. And I also want to ask about -- I assume your served addressable market will continue to expand, but maybe help us understand how much would that grow?

Brice Hill :

No. Good. Thanks.

Quinn Bolton:

Just had a question with the Chips Act applications expected to be received or submitted beginning sort of the February timeframe. I'm wondering as you look at your '23 WFE outlook, do you expect to see any benefits from Chips Act spending in '23? Or do you think it's really more of a '24 and beyond before it hits WFE spending?

Gary Dickerson :

Quinn, one thing I'd add is that those investments are time bound. And so as Brice said, not so much in '23, starting in but there are -- there is timing associated with those incentives.

Operator:

And our next question comes from the line of Pierre Ferragu with New Street.

Gary Dickerson :

Pierre, this is Gary. Thanks for the question. So I will say that we're 100% certain that all of these markets will not be up every year. But what we do see, if you think about pick a number, in terms of edge computing devices by 2030. These technologies are becoming much, much more pervasive. They're really -- if you think about industrial automation or gas to smart electric vehicles, a number of different inflections, a lot of these ICAPS technologies are going to grow at a fair compound annual growth rate. And I think that's what other people are seeing also. So how that -- what the shape of that looks like every single year, we're not going to forecast that. But we do think that, that business is going to see healthy growth. And that's why also we formed the ICAPS organization three years ago. We saw that, that market was going to be significant from a growth perspective and pulled together all of our different technologies. So again, if I look across all of those segments within ICAPS, we think over the longer term, there will be significant compound annual growth rates. We have very, very strong positions in enabling some of those technology inflections in ICAP, but we're not going to give a specific profile on a year-by-year basis.

David O'Connor :

Great. Follow-up on the backlog to a previous question. Gary or Brice, how should we think about the time frame of getting the backlog back to a kind of more normalized level or -- when do you expect to get caught up on demand for those products that are running pretty hot on the PPACt side?

Michael Sullivan :

Yes. Thanks, David, for your question. And Brice, would you like to give us your closing thoughts today?

Michael Sullivan :

Okay. Great, Brice. So we'd like to thank everybody for joining us today. A replay of the call is going to be available on our website by 5:00 Pacific Time. And we would like to thank you for your continued interest in Applied Materials.

Operator:

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 will now turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.

Gary Dickerson:

Thank you, Mike. In our third fiscal quarter, Applied Materials delivered results at the high end of our guidance range and record quarterly revenues. The actions we have been taking to mitigate supply chain challenges are beginning to have an impact and we expect steady incremental improvements from here. Resolving supply issues has required new levels of collaboration between our global teams, suppliers and customers. While all of this hard work is yielding results, global supply chains remain stretched. Demand for Applied’s products is still higher than our ability to fulfill it and our backlog continues to grow. In addition, our relentless focus on meeting customer’s needs in this very difficult environment has created margin headwinds that we are working hard to overcome. We are driving actions to reduce costs and improve value capture, including price adjustments. In my prepared remarks today, I will cover three key topics; first, our near-term outlook on supply and demand dynamics; second, our longer term view of the markets and the industry’s roadmap; and third, Applied Materials strategy, priorities and progress. After that, Brice, will provide more color on our financial performance in key areas of operational focus. Let me begin with our near-term perspective on the market. Due to large gaps between demand and supply, as well as equipment companies shipping partially finished systems and merging components in the field, overall 2022 wafer fab equipment spending is difficult to quantify with precision. Our best estimate is that it will land somewhere in the mid-$90 billion range. For Applied, the picture is clearer. If we use the midpoint of our fourth quarter guidance, we expect our wafer fab equipment revenues to be up approximately 15% for our fiscal year. As we look ahead to 2023, there are three major factors shaping our view of the market. First, memory spending is expected to be lower than in 2022, as macro uncertainty and weakness in consumer electronics and PCs causes these customers to defer some capacity additions. Second, leading-edge foundry/logic looks strong, with customers battling for leadership and racing to be first to implement major technology inflections. Third, ICAPS customers, who serve IoT, communications, auto, power and sensor markets, are reporting areas of strength and weakness. These customers serve broad and diverse applications. They are seeing softness in consumer-centric markets, which are being impacted by macroeconomic factors. Auto and industrial demand continues to be solid, because those investments are driven by large inflections, such as electric vehicles and industrial automation. In these areas, chip makers are securing long-term capacity agreements that underpin their capital spending plans. While it’s too early to provide a forecast for 2023, we believe our business will be more resilient than in the past if there is a demand pullback in certain areas of the market. We expect Applied to remain supply constrained for the next several quarters. We are working through our very substantial backlog of orders, which provides a buffer to in-year demand fluctuations, and in addition, customers are providing us with longer term visibility and commitments in response to their own customer’s actions to lock-in the strategic capacity they need. Although, we are confident in our ability to perform well in a range of market scenarios, we are mindful of the current macroeconomic trends. As a result, we are slowing down hiring, while ensuring we fully fund the R&D programs and strategic operational capabilities that support our long-term growth. Regionalization of supply chains is also something new for the industry. We expect this will provide a small positive tailwind for overall wafer fab equipment spending starting in late 2023. Also, because of the time-bound nature of government incentives in the U.S., Europe and Asia, we see a higher degree of certainty for these investments. Last week, I was in Washington, D.C. for the signing of the CHIPS Act and met with government officials and leaders from across the semiconductor and automotive ecosystems. I am happy to see the critical role that semiconductors play in the economy being recognized and acted upon. The need to build more resilient and flexible supply chains remains a key theme for these leaders and the CHIPS Act will enable many companies to accelerate their investments in strategic capacity. I am also excited about the potential to create a new high-velocity innovation platform in the United States to accelerate the development and commercialization of next-generation technologies. As I look further to the future, I feel very positive about the direction of the industry and our long-term opportunities at Applied. Consensus within the industry is that semiconductor revenues can reach $1 trillion before the end of the decade. That translates to a high single-digit compound annual growth rate from today. In parallel, the technology roadmap is becoming increasingly complex. As a result, we expect equipment intensity, the ratio of wafer fab equipment investment to semi revenues to remain at today’s level or increase over this period. Then the major technology roadmap inflections, including gate-all-around transistors, backside power distribution networks, new materials for interconnect and contact, and heterogeneous integration of chips and chiplets, are enabled by materials engineering, where Applied Materials is the leader and this shifts more dollars to our available market over time. We have invested ahead of these inflections to create a portfolio of differentiated solutions that positions us to outperform as these new technologies transition to volume manufacturing. Applied Materials strategy is built upon the breadth and strength of our technology and capabilities. This provides us with a unique ability to engineer, co-optimize and integrate solutions that address our customer’s highest value technology challenges. Co-optimized solutions, where we optimize adjacent process steps and Integrated Material Solutions or IMS, where we optimize a combination of process steps in a single system under vacuum are becoming an increasingly important part of our product portfolio. In our recent Master Class, we talked about a breakthrough IMS approach for tungsten-only contacts that are free of conventional barrier materials. This provides significant improvements in contact resistance and is critically enabling for smaller foundry/logic nodes. The number of process steps are growing as these customers migrate to this pure metal technology and these low resistance integrated solutions for contact and wiring represent new multibillion dollar revenue opportunities. Over the past two quarters, we have secured multiple tool of record positions at all leading customers. Our ability to co-optimize materials engineering solutions with novel inspection and metrology is also driving record performance in our Process Diagnostics and Control business. We expect PDC revenues to be up almost 40% in fiscal 2022 with broad-based customer adoption of our eBeam Metrology and new optical wafer inspection platforms. In the quarter, we also strengthened our ICAPS portfolio with a tuck-in acquisition. Picosun is a leader in batch ALD technology and we are delighted to welcome their talented team to the Applied Materials family. Turning to Service, AGS delivered record quarterly revenues despite headwinds for our transactional spares and 200-millimeter equipment businesses due to supply chain constraints. The subscription portion of AGS continues to demonstrate strength. Installed base tools under long-term service agreements grew 9% over the past 12 months. Our renewal rate for these agreements continues to be strong and is currently running at 93%. Before I hand the call over to Brice, I will quickly summarize. We are beginning to see gradual improvements in our supply chain, which enabled us to deliver record revenue for the quarter. We expect demand to remain higher than supply for the next several quarters and we are continuing to drive actions to close the gap. The changing macroeconomic environment is causing some customers to adjust the timing of their investments. However, we are confident that our business will be more resilient, thanks to strong pull for a uniquely enabling technology, our large backlog, longer term visibility from our customers and industry-wide investment in strategic regional capacity. Our long-term view of the market remains unchanged as multiple parallel secular trends drive the semiconductor and wafer fab equipment markets structurally higher. At the same time, large technology inflections that are enabled by our core capabilities in materials engineering create outsized growth opportunities for Applied Materials. Now, I will hand the call over to Brice.

Michael Sullivan:

Thanks, Brice. 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-queue and we will do our best to come back to you later in the session. Operator, let’s please begin.

C.J. Muse:

Yeah. Hi. Thanks. Thanks for taking the question. I guess a question for me would be in light of record backlog and extended lead times, and then some of the puts and takes around customers moving out production plans. How are you thinking about the timing of easing of supply constraints? How are you thinking about kind of internal tool production into 2023 and as part of that driving, I assume, gross margins higher throughout that time, would love to hear your thoughts around that?

Gary Dickerson:

Hey, C.J., this is Gary. I guess, also relative to supply chain, what we have been, certainly, the zero COVID lockdown in Shanghai, March 28, that set us back relative to overall supply chain. We are continuing to make incremental progress. And I just -- right now we see it still being incremental going forward. We are doing everything we can, making investments, adding manpower, but it’s more incremental, and I think the same thing is true on margins. I think last quarter we said that, we would see incremental progress from where we were and I think that’s really the direction both for supply chain and for margins is more incremental improvement throughout 2022 and going into 2023.

Operator:

Thank you. Our next question comes from Mark Lipacis of Jefferies. Your line is open.

Brice Hill:

Yeah. I know Gary is going to comment. I will just make a quick comment, Mark. When we go out and test the backlog with the customers, if they want to make changes a lot of times, that’s a mutually beneficial change. We have another customer that’s interested in taking the tool, because the demand is exceeding supply at this point. So the first thing we do is try to accommodate those changes. We are not trying to demand the customers stay on the schedule that they have, et cetera. So we try to be flexible. And that was really the point of going out and retesting and re-verifying all of the demand that we have across the customer base. So, Gary, you may want to add to that.

Mark Lipacis:

Very helpful. Thank you.

Vivek Arya:

I am trying to reconcile the two things, right? One, I think, Brice, you mentioned you are going to be increasing capacity over the next several quarters. But then from a demand perspective, I believe, Gary, you said that, memory could be down, I think, you have said kind of mixed views on ICAPS, but then leading-edge should be up. So my specific question is, based on -- I know you are not giving next year’s guidance per se, but based on what you see, are we looking at kind of a garden variety, flat to down 5%, 10% in terms of the spending environment or is it very different than that view? Just so that we have some baseline view of how you are thinking about the industry going into the next year given you do plan to increase supply?

Vivek Arya:

Okay.

Stacy Rasgon:

Question, I was wondering if you could comment separately on your memory and your foundry/logic backlog. So I assume the memory backlog is coming down given it’s weaker, but it sounds like your overall backlog is still increasing if your demand is still well exceeding supply. So is it a case of like your foundry backlog is increasing more than your memory backlog is shrinking or like how do I think about the different pieces of that?

Gary Dickerson:

Hey, Stacy. This is Gary. So also the foundry/logic is an increasing percentage of overall wafer fab equipment. So if you look at the percentages, foundry/logic is really around two-thirds of total wafer fab equipment. And so, certainly, the rates for competitiveness in high performance, you see that with companies making significant investments. ICAPS, you have seen a lot of announcements with companies making long-term investments in the ICAPS capacity. So, certainly, you see that in the increasing percentage of foundry/logic in the overall market. So, yeah, I think that, what Brice said and what you had also asking your question, certainly, foundry/logic is strong and that backlog still, unfortunately, we are not able to meet demand.

Operator:

Thank you. Our next question comes from Atif Malik of Citi. Your line is open.

Brice Hill:

Thanks, Atif. Yeah. First of all, we did get the same notice as our peers did on that. So that is sub-14-nanometer shipments to China customers, and it did not impact our July quarter and very small for October quarter, and that’s included in our guidance. So that part is clear. And we will work to make sure that we are in full compliance with all the changes on trade rules as we always have. So, but nothing significant in July or October periods. And then could you repeat the Display question…

Brice Hill:

Yeah.

Atif Malik:

Thank you. That helps.

Krish Sankar:

Brice, if overall WFE is down, say, 10% next year, how should we think about AMAT’s total revenues, including Semi and Services, given the strong backlog? And more importantly, how to think about the EPS, if you say WFE was down 10%? Brice, any color you could give there and how to think about revenue and operating leverage in that environment would be very helpful?

Krish Sankar:

Got it. Thanks a lot, Brice. Really appreciate it.

Operator:

Thank you. Our next question comes from Toshiya Hari, Goldman Sachs. Your line is open.

Gary Dickerson:

Yeah. Thank you, Toshiya. So on the CHIPS Act, first, I’d say, just I am very happy to see the CHIPS and Science Act pass and become law. That’s really positive to the United States and the overall industry. And then relative to the investment question that you asked, I would look at it as a small positive tailwind for overall wafer fab equipment spending and really timing-wise starting in late 2023. If you look at the investments, at least the ones that have been announced so far, it’s really in high performance logic, some ICAPS investments, those kinds of things. So as I mentioned earlier, again, two-thirds of wafer fab equipment is in that foundry/logic space today and so that’s going to be incrementally positive going into late 2023 and beyond. Those investments also are time bound. If you look at the incentives, there are certain time frames where the funding is available and investments have to be made. So that creates a higher degree of certainty. I would say, as those companies, I have talked to many of them and as they move to new locations, there is start-up costs and some incremental less efficiency, as they start those fabs and especially for our Service business, that’s an incremental positive. So I think you would see small incremental spending late 2023 and beyond, as all of those investments in those factories are starting up. Over time, Toshiya, I think, really as they -- it really depends on the scale of those factories, a bigger factory is more efficient than a smaller factory and so until they build them out, which will take many, many years, there will be a degree of less efficiency for some period of time. But, again, if you look at it in the grand scale of overall WFE, it’s not a huge tailwind, but it’s definitely a tailwind.

Operator:

Thank you. Our next question comes from Harlan Sur of JPMorgan. Your line is open.